What the Supreme Court ruling on the Box 3 Recovery Act means for investors

The Box 3 Recovery Act was introduced as a response to earlier legal and social criticism of the Dutch system of capital gains taxation.

The goal was to create a more equitable tax regime for savers and investors, where the levy would be based on a notional return with the possibility for the taxpayer to object if the return was lower. However, this law met with much controversy and was eventually brought before the Supreme Court.

Supreme Court Ruling

On June 2, 2024, the Supreme Court ruled that the Box 3 Recovery Act violates the right to property and the principle of equality enshrined in the European Convention on Human Rights (ECHR). This is because the law still assumes a notional return that does not reflect the actual return that investors can achieve. This means that many taxpayers have unfairly overpaid taxes on their assets

What does this mean for investors?

Refund and Compensation:

• Retroactive effect: Investors who have overpaid taxes since 2017 can now claim a refund. They will get money back from the Tax Administration if their actual return was lower than the flat rate return. The actual return consists of interest, dividends, rent and the returns on stocks and real estate (including paper appreciation). The Supreme Court stated that the actual return should be calculated on the basis of all assets, i.e., without deducting the tax-free assets on which people do not pay tax. Moreover, there is no need to take inflation into account: if the return in a year is 6%, but inflation is 3% in the same year, the return on which tax is due therefore remains 6%. Past positive or negative returns are also not taken into account. Moreover, any expenses may not be deducted from the return.

• Compensation schemes: The tax authorities will have to ask investors for the actual returns (interest, dividends, rents and price gains) for the past years. Taxpayers should list their returns for past years.