The Council of State has advised the government to drastically amend the bill on actual return box 3. In a response to the House of Representatives, the cabinet indicates that it still sees the proposed law as the best option. It plans to submit the bill to the House of Representatives in the first quarter of 2025. Why?
Need for a new system
The government continues to support the transition to a system based on actual returns. There is a strong social and political desire to tax actual returns in Box 3. Besides advantages, all conceivable options have disadvantages in terms of legal tenability, public support, budgetary consequences, effects on the economy, implementation consequences and ability to do things. The choice for the new system always involves a trade-off between these different perspectives. For box 3, the moment has now arrived where a choice has to be made between imperfect alternatives.
Complexity
An increase in complexity is inherent in introducing a system based on actual returns. Indeed, it moves away from a very simple flat-rate system and a system based on complex reality replaces it.
Alternative schools of thought
The Council of State makes a number of suggestions for alternative schools of thought for the box 3 system. The Council of State does not weigh the alternatives mentioned in the advice on the basis of the various angles such as feasibility, ability to do, budgetary consequences, effects on the economy and legal tenability, but advises the government to do this weighing again. The alternatives mentioned were also discussed and weighed in the long process leading to the present bill. These options all have significant drawbacks as well. Below are the main objections for each line of thought.
Alternative 1) Flat tax with rebuttal system
The Supreme Court rulings of June 2024 effectively introduced a counter-evidence regime in Box 3 until a new regime is introduced. However, a flat-rate system with a rebuttal scheme has drawbacks. The effect of a flat-rate system with rebuttal evidence is at odds with the income tax principle of levying according to ability to pay. There is an imbalance in the system. If a taxpayer has a high actual return in a year, tax is levied on the basis of the flat-rate return. In years with low actual returns, the lower actual return is adhered to. Not all income and wealth groups benefit equally from the benefit of counter evidence. The extent to which the above asymmetry can be used depends on the extent to which the actual return fluctuates around an average. This is much more the case for investors than for savers. Taxpayers with higher assets generally have more investments and can therefore benefit more from the possibility of counter evidence. This system is therefore particularly advantageous for taxpayers with the highest assets. Under the rebuttal scheme as introduced by the Supreme Court, these effects result in a budgetary loss for the government of around €2.4 billion annually, depending on the returns achieved. This loss comes mainly from taxpayers with high assets within Box 3. To use the rebuttal scheme, the actual return must be determined. As a result, the scheme has similar complexity to a system based on actual returns. In addition, under the rebuttal scheme, these data cannot yet be entered in advance. A mitigating factor is that taxpayers under a rebuttal scheme are not obliged to declare the actual return; they can use the flat-rate scheme for the box 3 levy.
Alternative 2) Full capital gains tax
The State Council recommends a full capital gains tax as a line of thought, as a capital gains tax is also applied in box 1 and box 2 and it is a recognisable system internationally. A capital gains tax for box 3 has been examined by the government. A capital gains tax is also a form of a tax on actual return. In the Actual Return Box 3 Act, a hybrid variant was chosen, where real estate and shares in start-ups were subject to a capital gains tax.
However, a full capital gains tax has several drawbacks, such as the incentive for tax planning to defer taxation, economic distortions, significant negative budgetary consequences in the first few years, complexity for citizens and far-reaching consequences for implementation by the Tax Administration.
Under a capital gains tax, tax is only payable on capital gains when (usually) an asset is sold. Since taxpayers generally decide when to sell an asset, this can be economically distorting to a significant extent. A capital gains tax provides an incentive to defer gains. In the long run, a capital gains tax and a capital gains tax - regardless of behavioural effects - will lead to the same revenue in budgetary terms.
In the short term, however, the difference may be large. This is because only capital gains can be taxed from the introduction of the new system. With a capital gains tax, the structural revenue is only reached once all assets are sold once after the system is introduced. If in the year of introduction of a capital gains tax, the tax revenue is several billion euros lower than the structural level and the structural level is reached more or less linearly after more than 10 years, the cumulative loss exceeds €10 billion. The loss depends on the parameters chosen, such as the rate, tax-free income or tax-free wealth, etc. This budgetary loss will have to be covered, in accordance with budgetary rules, and will then fall on a wider group of taxpayers.
Under a capital gains tax, when selling assets, the taxpayer will have to provide the historical purchase value or - if the purchase took place before the introduction of the new regime - the value of the asset when the new regime was introduced. In addition, over a longer period, investments must be tracked that led to an increase in the value of the asset. This also applies when selling shares and bonds. This will demand a lot from the doing of taxpayers. Only for taxpayers with only savings and possibly debts could the tax return be fully pre-filled annually. If the Tax Administration has to be able to fill in the historical purchase value in advance, it will have a lot of additional impact on the Tax Administration's systems.
Alternative 3) Wealth tax
The Council of State argues that within box 3, the required budget revenue is in the way of a simpler solution. In that context, it mentions a broad-based wealth tax as a line of thought to generate additional revenue. A wealth tax does not tax income from assets, but the assets themselves. To that extent, a wealth tax is not an alternative to the levy in box 3. The Council of State therefore describes a mindset where a broad wealth tax would apply alongside income tax.
A broad wealth tax taxes not only Box 3 assets, but also assets from Box 1 and Box 2. The assets in box 1 comprise owner-occupied houses, company assets, pensions and annuities. In box 2, it concerns substantial interests. A broad wealth tax on assets would be a drastic change for citizens and tax authorities and cannot be realised in the short or medium term. As such, a wealth tax is not a solution to the budgetary problems, which do already exist in the short term.
With a wealth tax, as with a tax on lump-sum returns, there is a risk that the tax levied may exceed actual income. In a 2022 opinion, the Landsadvocaat concluded that if the wealth tax cannot be paid out of the income from wealth, it may not pass the proportionality test because it would be an unauthorised violation of property rights. The Landsadvocaat's assessment is that a wealth tax is less likely to result in a violation of property rights the lower the wealth tax rate is and any exemption is higher. Even with a low rate and a high exemption, a violation of property rights may still be possible in individual cases. To prevent a wealth tax from leading to a new infringement of the right to property, a so-called anti-cumulation provision is needed. Under an anti-cumulation provision, the wealth tax is reduced depending on the amount of the taxpayer's income. An anti-cumulation provision is very similar to a rebuttal provision in practice, as both an anti-cumulation provision and a rebuttal provision require the taxpayer to calculate his actual return. This adds complexity to a wealth tax.
In conclusion
Many of the risks mentioned by the Council of State have previously been identified by the Tax Administration and also weighed in the drafting of the bill on actual returns box 3. The best possible consideration will be given to how these risks can be mitigated. The alternatives mentioned, and other directions considered in the past, do not offer a better balance in the various, inevitable dilemmas.
Tip: Want to read more about this? Meanwhile, the cabinet has also reply given to 86 parliamentary questions on the status of the bill on actual return box 3.
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