Since yesterday, February 16, 2016, you might have seen headlines about the Dutch tax office stealing. Your initial thought would be of course: old news. Maybe not this time.
Box 3 income tax
What we experience every day all day, a lot of Dutch resident tax payers experience as well. The Box 3 world wide assets income tax rate is 1.2% over the economic value of the assets, but the gain you make is often the interest of 0,7%.
You have EUR 100.000 in the bank and you generate EUR 700 interest. While filing your income tax return you learn that you need to pay 1.2% tax, being EUR 1.200. That is 170% tax rate.
How did we come up with the 1.2% tax?
In 2001 when the Boxing system was being introduced the new method of taxing assets was assuming a 4% interest rate could be achieved and that is taxed at 30%. The famous words from the minister of finance at that time were: “ Please note, the 4% assumed interest will go up, if the market interest goes up as well.” At that time nobody could have known how low the interest could have been today.
That said, the Dutch Government should have decreased the assumed 4% interest to the current variable and then there would have been less discussion. But lower tax does not make our national budget match.
Dutch emigrants to Norway
A Dutch couple moved in 2007 to Norway to start a new live, but the home they own could not be sold in the Netherlands, as the market was fallen around that time. Every year they filed a Dutch income tax return for this property as property is taxed in the country where it is situated. The Dutch tax office charged 1.2% tax over the economic value minus a possible debt based on the principle of the property making money. But in a crumbling market the property lost significant in value.
The Dutch couple went to court and all courts denied their claim, basically because we agreed a couple of years ago that the power of creating legislation and executing legislation should be separated. That implies the Dutch Government can create legislation, but the court cannot state the legislation is not correct. And that is exactly what the advisor of the high court is now doing. He advises how the high court could take this case into verdict. His advise is to state that the Dutch Government has executed legislation that is in fact stealing from the tax payers. Of course his words are more delicate used that I put it now.
A lot of people involved in paying this Box 3 taxation have high hopes now, but I doubt a change will be made. A Government organization is a slow vehicle, by the time they solved this issue, the economic interest rates are back at 4% again in the market.
Orange Tax Services
We assist with the income tax returns, also the Box 3 taxation. Sometimes we are surprised by people having funds exceeding the threshold, hence taxed, and debt with for instance the credit card on the other side. If you know that debts are exempted from Box 3 till about EUR 2.700, if a small debt that is not cleared, makes you pay more tax then necessary.
Moreover, most people still think it is good to have a high mortgage on the Box 1 house, not repay that debt and keep money in the bank, taxed at 1.2%. In my opinion it is much better to repay the mortgage loan, because from every euro you pay to the bank, you only receive a marginal amount back from the tax office. So you are in fact losing money to the bank.
Now the interest rates are so low, the amount of mortgage interest paid per year barely exceeds the WOZ amount added to your income. That implies you have nearly no deduction. Maybe you think, who cares? Well we do, because the interest rate will go up, if you have every been taught about the liquidity trap. If the interest rate is that low, it can only go up. If it goes up, you suddenly realize how big your debt to the bank is. The low interest rates made your private spending go up. An increase of interest can make your life become uncomfortable. Therefore repaying on top of the rate you do now is a good thing.