Box 3 adjustment is being processed. The news articles you read about Box 3 are now effected in your 2021 income tax assessment and what a pleasure is the outcome.
What is the Box 3 adjustment?
In a nutshell the problem is as follows. The Dutch tax office adopted in 2001 a system where an assumed yield over assets was taken into account. That assumed interest was 4% and taxed at a rate of 30%. The famous 1.2% tax.
At the time of this introduction the minister of finance added with his finger in the air: if the interest rate goes up, this 4% assumed percentage will go up as well. Nobody at that moment could have expected that the interest rate would become negative in 2020. A consequent minister of finance would then have to adjust the 4% to a negative yield. Finger or not.
That never happened. Some civil servants working with the Government thought it would be clever to distinguish the cash in the bank from investments like stock, bonds, property. That clever idea was introduced in 2017 and caused the high court to rule this clever idea illegal.
Why is an assumed yield system in place in Box 3?
The question now rises, also with young politicians, is why we adopted the assumed yield system. The answer is rather simple, the Dutch were too create to show the actual yield. So creative that the Dutch Government could no longer fought the creativity and switched to assumed yield.
Now we have discussions if the assumed yield system is a correct system. The person who introduced the system was Mr Loek Stevens. Mr Stevens is still active in our Registered Tax Adviser organization. He emphasizes that if the system he provided was maintained properly, this discussion would not have taken place. With maintained properly he means the 4% yield instantly adjusted with reality.
How did the Dutch trick the actual yield in the tax return?
One of the tricks was to purchase a low interest bond for less than the EUR 1000 nominal value. Less, as the interest was low. Low such as 1% or 2%. Then you pay maybe EUR 600 for this EUR 1.000 nominal bond. If that bond is then paid back at EUR 1.000, the actual yield is 67%, but only the 1% or 2% is reported over the EUR 1.000 in the income tax return. And there were many more creative solutions not to pay wealth tax.
Going back to the system of actual yield being taxed is instant continuance of old tricks.
What is illegal about Box 3 taxation?
The rule is that tax is levied over an increase in value of assets. An increase caused by a yield, not by adding money earned via employment for instance. Regardless of the yield, the base value of the asset cannot be affected by taxation. And that is exactly what happened as per 2017.
The money in the bank did not yield 4% interest, still it was assumed it did and taxed accordingly. That implied the base of the asset was affected by taxation. That the high court ruled was illegal.
Has the high court ever ruled a law being illegal? Not ever, hence a surprise for us and the Dutch tax office.
What is being updated about Box 3?
The cash and cash in the bank is no longer assumed to have yielded 4%, but -0,01%. That makes a difference in the outcome of the tax return.
Even though everybody in the Netherlands claimed to be affected by the tax office charging too much tax. The truth is slightly different. On average a Dutch person has max EUR 30.000 in the bank, the tax free amount in Box 3 is EUR 50.000. Only 5% of the Dutch tax payers actually pay Box 3 taxation.
What is the difference in Box 3 taxation?
We now see slowly 2021 income tax assessments arrive with a significantly lower amount of Box 3 taxation in the assessment. Such a lower amount was not applied by any of us or yourself, but automatically done by the Dutch tax office.
That implies the 2021 income tax return was adjusted, previous years the Dutch tax office does not update. The high court stated that it was not mandatory. The Dutch Government blames the high energy prices now, that they have no budget for this compensation. However, the thing is, the tax was levied based on illegal legislation. The illegal aspect only came to light last Christmas in the December 24 , 2021 high court verdict. How can you state you maintain illegal legislation with the argument you have spent all the money already? I know many tax payers that feel the same, they need to pay tax, but already spend everything.
Tax is Exciting
We think tax is exciting. We are a tax compliance company. The clients that actually had cash in the bank in Box 3 exceeding the threshold now receive the 2021 income tax assessment. Some of them could even get as excited about taxation as we are, with this new outcome.