How bizarre box 3 can get…

In box 3 of the Bridge Construction Act for the period 2023-2025, the government has chosen the savings variant as the calculation technique for determining the box 3 tax. This follows from Box 3 of the Rights Act (the codification of the Rights Order Box 3 of 28 June 2022) for the period 2017-2022. An arrangement that can become bizarre due to the chosen calculation technique.

Accountancy and tax advisory firms have extended all holidays until the New Year. There is work to do, a lot of work to do. By adjusting the box 3 capital before 1 January 2023, the first reference date in box 3 of the Bridge Building Act, an enormous amount of box 3 tax can be saved for their customers.

Main rules for the savings variant

Box 3 tax is calculated as follows.

  1. Divide box 3 assets into three asset classes:
    a. bank balances (including deposits and from 2023 also cash);
    b. other assets (including stocks, bonds, options, investment property, a second home, receivables, cryptocurrency and shares in a VvE reserve fund); and
    c. debt.
  2. Calculate the return basis: the sum of the fixed returns for the three asset classes.
  3. Calculate the rate of return: the fixed rate of return divided by the rate of return (ie before deduction of the tax-free allowance).
  4. Finally, calculate the benefit from savings and investments: the tax base (i.e. the return base after deduction of the free allowance) x the calculated return percentage.
  5. After this, the box 3 tax for 2023 is: 32% of the tax base.

This technique has been introduced so that the tax-free allowance maintains its effect. It is to that extent explainable on the one hand, but on the other hand it leads to sometimes bizarre possibilities for manipulation.

The fixed return on other assets is set at 6.17% for 2023. The fixed return on bank balances and debt will not be set until after the end of 2023, probably sometime in February or March 2024. One can say something about that in the context of legal certainty , but then, that’s another discussion. Assume that the fixed rate of return for 2023 on bank balances and debt is 0.01% and 2.5%, respectively.

Example 1

Take Alfonsine, a single taxpayer, with bank accounts with a credit of €100,000 on January 1, 2023. In the spring of 2022, she bought a summer house in Renesse with a WOZ value of €500,000. For this she borrowed €450,000, she had withdrawn the remaining €50,000 from her savings account.

The preceding step-by-step plan leads to the following calculation.

Step 1

Her box 3 assets are:

– Bank balances €100,000
– other possessions €500,000
– debt €450,000 -/-
– minus: tax-free compensation €57,000 -/-

Step 2

For Alfonsine, this leads to the following calculation of the dividend basis:

– bank balances €100,000 x 0.01% = €10
– other possessions €500,000 x 6.17% = €30,850
– debt €450,000 x 2.50% = €11,250 -/-
dividend basis €19,610

Step 3

The rate of return will then be € 19,610 / € 150,000 = 13.07%.

Step 4

The box 3 tax base will be €93,000 x 13.07% = €12,155.

Step 5

The final tax at Alfonsine is therefore €12,250 x 32% = €3,889.

See here how a relatively ‘modest’ tax base of €93,000 still leads to a Box 3 tax of €3,889. If one were to talk about a wealth tax, it amounts to more than 4 per cent.

Example 2

Assume that Alfonise establishes a savings company. The simplest example you can think of. And she deposits her €100,000 in that savings company. What are the consequences?

Then her box becomes 3 power:

– bank balances €0
– other possessions €500,000
– debt €450,000 -/-
– tax-free allowance €57,000 -/-

The calculation of the rate of return then becomes:

– bank balances €0 x 0.01% = €0
– other possessions €500,000 x 6.17% = €30,850
– debt €450,000 x 2.50% = €11,250 -/-
dividend basis €19,600

Return price: €19,600 / €50,000 = 39.20%.
Tax base: EUR 0 x 39.20% = EUR 0.
The final charge will then be €0 x 32% = €0.

See here how a simple ‘HEMA BV’ leads to annual tax savings of €3,889. At least annually over 2023-2025, or three years, at least if the new Box 3 system is actually introduced on 1 January 2026.

Example 3

But things can get even stranger than in Alfonsine’s situation. Her parents, Botero and Blanca (tax partners), are real estate investors. They own a total of €5,114,000 in rental properties, for which they have borrowed €4,900,000. What is their box 3 charge?

Box 3 power:

– bank balances €0
– other possessions €5,114,000
– debt €4,900,000 -/-
– tax-free allowance €114,000 -/-

The calculation of the dividend basis is:

– bank balances €0 x 0.01% = €0
– other possessions €5,114,000 x 6.17% = €315,533
– debt €4,900,000 x 2.50% = €122,500 -/-
dividend basis €193,033

Return price: €193,033 / €214,000 = 90.20%.
Tax base: €100,000 x 90.20% = €90,200.
The final charge will then be €90,200 x 32% = €28,864.

What do Botero and Blanca decide to do? They donate a small piece of their investment property worth ‘coincidentally’ €100,000 to Christina, Alfonsine’s sister. How is the math then?

Box 3 power:

– bank balances €0
– other possessions €5,014,000
– debt €4,900,000 -/-
– tax-free allowance €114,000 -/-

The calculation of the dividend basis is:

– bank balances €0 x 0.01% = €0
– other possessions €5,014,000 x 6.17% = €309,363
– debt €4,900,000 x 2.50% = €122,500 -/-
dividend basis €186,863

Return rate: €186,863 / €114,000 = 163.91%.
Tax base: EUR 0 x 163.91% = EUR 0.
The final charge will then be €0 x 32% = €0.

In other words, a ‘tax profit’ of €28,864 per year. And that again for at least three years.

Of course, it costs transfer tax and/or gift tax to donate real estate to Christina, but this is not in proportion to the tax savings with her parents.

How did it happen?

The cabinet previously had plans for a fixed fee for the asset classes bank balances, other assets and debt. See Folketingpapierer TK 35.026, no. 74 (letter from SvF of 6 June 2019) and the associated news of 6 June 2019. This letter to the Folketing was published in response to the judgment of 14 June 2019, ECLI:NL:HR: 2019:816, in which the Supreme Court previously considered the legal box 3 system to be in breach of the ECHR.

However, Box 3 tax only played a role in these plans if the assets (and not the balance of the yield basis) were higher than €30,846, the tax-free capital at the time. And a ‘tax-free income’ of €400 was proposed to spare small savers in particular.

In the savings variant, the government has chosen a cumbersome calculation technique, where it is really only the tax base that is relevant. This instead of the sum of the three asset classes’ fixed income, possibly after adjustment with a tax-free income. And that tax base is relatively easy to influence. Much simpler than just the fixed return.

A number of people will undoubtedly find this morally reprehensible and label it as all sorts of funny little schemes that consultancies like to throw out in the final months of this year. Honesty compels me to say that I cannot dispute this statement. Only this could have been prevented simply by further developing the original ideas of 2019. And using the fixed return as a basis for taxation instead of a ‘constructed’ tax base.

Already then, AFM strongly criticized the government’s plans from 2019, cf. letter of 11 March 2020, reference JiBn-20011207, in which it notes “significant disadvantages of the proposal”, including:

  • doubts about the use and calculation of the fixed return;
  • fear of behavioral change: defensive investments are fiscally unattractive;
  • leading to a behavioral change: from investment to savings.

There is now a further point of criticism: scheduling with the tax base.

So what are the tips for the month of December?

Try to erode the tax base. The most lucrative option is to get the basis of return even below the tax-free allowance. In that case, box 3 tax does not have to be paid at all, regardless of how high the (fixed) income from the assets is. The behavioral effects that the AFM already predicted in 2020 will be the subject of advice in December 2022:

  • swapping low-yielding assets (such as government bonds) for savings;
  • claim receivables and convert them to a bank balance;
  • repayment of loans from investment capital;
  • temporarily convert high-yielding assets into savings outside the arbitration period;
  • loan of savings;

but above all: reduction of the tax base, preferably to € 0! Then, despite a high (fixed) return on your capital, you pay no box 3 tax at all.

See here why audit and tax advisory firms have extended all vacation days until the New Year.

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