It's looking like Box 3 of the Dutch income tax return might be the making of a hot summer for 2025, as the tax office gets ready to advise on the procedure to claim some of your Box 3 tax back. Is it truly free money, or simply a paper trail that won't lead anywhere?
What Box 3 taxes are
In the Dutch tax system, your income and assets are divided into three boxes.
- Box 1, in which your worldwide income, salary, and profit are reported. In this box, there is usually one main deduction: the mortgage deduction.
- Box 2, where you report any share capital you hold that exceeds 5% of the total company capital in which you participate.
- Box 3 is for reporting your worldwide assets. Your worldwide assets are taxed based on the assumption that a certain yield has been made. This system was introduced in 2001. The Dutch are world champions at not providing true yields, so a simple assumed yield was brought in as a solution.
High court resolution
At the end of 2021, the Dutch High Court ruled that this "assumed yield" system for Box 3 is illegal. The taxpayer should be able to counter the assumed yield calculation with the true yield, in order to get a fairer tax bill. A good verdict so far.
However, the court staff then confirmed that the true yield is the combined total of:
- Rental income
- Dividend income
- Interest income
- Realised capital gains
- Unrealised capital gains
The last one is the odd one out. Global accounting rules agree that unrealised gains cannot be taxed. However, according to the Dutch high court, they can. In addition, the ruling determined that costs cannot be deducted from the true yield.
This summer, the Dutch tax office will release the forms that can be used to challenge the assumed yield from Box 3 with the true yield. Anyone who has even a little knowledge of the housing market, the stock market and the cryptocurrency market knows that values have risen significantly over the past year.
In other words, your dividend, interest or rental income might have been marginal, but the unrealised capital gains mean that it is likely the assumed yield will still be the best choice for assessing your tax obligations.
It is expected that many taxpayers will complete the forms, but it seems likely that the vast majority will be disappointed by the outcome of their challenge.
2028: A new system
The plan is to introduce a completely new income tax system in 2028. However, a request to postpone this date has already been made. The reason for this is that the government is simply not able to make a Box 3 regulation that is legal and practical. All the proposals made so far have been ruled to be illegal.
Exciting times ahead!