Supreme Court rules against legislator: Capital gains tax (Box 3 tax) for 2017 and 2018 is in breach of the right of ownership and prohibition on discrimination

On 24 December, the Supreme Court ruled that there is insufficient justification for the flat-rate system for determining the tax base for taxable income from savings and investments in Box 3 of income tax.

The 'asset mix' applied since 2017

To determine the tax base for private assets, since 2017 it has been assumed that part of the assets are invested and part are saved. This is based on an average distribution of assets (the ‘asset mix’) as well as the average gains realised on these assets in previous years. The legislator thus uses a legally determined notional return in which the actual composition of the assets of the taxpayer and the actually realised gains are irrelevant.

As a result of this legislative amendment in 2017, the flat-rate system has become further removed from taxation of the income actually received. In practice, it also turns out that in certain cases the notional return used is (substantially) higher than the actual return realised.

Judgement of the Supreme Court

The Supreme Court ruled that the asset mix that has been applied since 2017 is in breach of the right to the peaceful enjoyment of property and the principle of equality and that there is insufficient justification to do so. This echoes the earlier opinion of Advocate General Niessen. The current system attaches a relatively heavy financial burden to the choice not to make any risky investments (but to save instead). Also, investors whose results were disappointing are relatively heavily taxed. According to the Supreme Court, no reasonable relationship exists between the interests the legislator intended to serve through this system and the inequality that is caused by the design chosen by the legislator to achieve said goal. Therefore, the Box 3 system fails the proportionality test.

The Supreme Court provides a restoration of rights in the case in question. This means that not the notional but only the actual gains of the interested party is included in the levy. This is remarkable as it is the first time that the Supreme Court has issued such a ruling in relation to Box 3. In certain cases, this may lead to a (significantly) lower Box 3 levy.

Practical consequences

In principle, the Supreme Court's ruling only seems to have (positive) consequences for taxpayers who have lodged an appropriate objection to the 2017 and/or 2018 income tax return. The Ministry of Finance has since indicated that it still needs to be assessed whether the ruling will also have consequences for taxpayers who have not filed an objection.

Was your notional Box 3 income in the years 2017 and 2018 higher than the actual gains realised (because you mainly held savings assets or achieved disappointing investment results)? If so, this judgement may also affect you.

Incidentally, the recent coalition agreement shows that the new government intends to change the current Box 3 system and largely aims to abandon the flat-rate taxation of assets. It is still unclear whether this intention will be carried out with greater urgency than initially envisaged as a result of this Supreme Court ruling.

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