Revision of taxation on investment income previous message

Revision of taxation on investment income

Investment income is taxable in the Netherlands on basis of a deemed or fictitious income (4% of the value of the investments at the beginning of the tax year) at a fixed rate of 30%. The structure of the so-called box 3 taxation has been subject to much debate lately. The deemed yield on investments of 4% felt out-dated in a world where banks pay less than 1% interest on normal savings accounts. Nonetheless, the current box 3 regime will maintain in force also in 2016.

It is proposed to change the calculation of the deemed investment yield as from 2017 based on real market data and the type of investments that the taxpayer holds. The yield on savings will be lower than the yield on other types of investments like shares, bonds and real estate. In the bill it is explained that the average income from savings was 1.63 during the last 5 year period whereas the average yield on other investments averaged 5.5% in that same 5-year period. 

However, the proposed rules do not take into account what asset mix a taxpayer actually applies in his investment portfolio. Instead, the legislator opts to apply yet another fiction. Persons with investments up to EUR 100,000 are deemed to hold their investments dominantly in savings accounts whereas persons with investments exceeding EUR 1 million are deemed to invest that part of their investment fully in shares, bonds and real estate. For persons with investments between 100,000 and 1,000,000 euro the asset mix is deemed to be 21% in savings accounts and 79% in other investments.

The proposal is to apply the following table to calculate the deemed income from investments.

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The average yield on savings is calculated over a five-year period (for 2017 the reference period will be 2011-2015). The calculation of the average yield on investments is based on the same period, with the last year being taken into account for one-fifteenth part. An explanation for this way of calculating the average yield is not provided.

The yields are recalculated every year. The above table contains, therefore, the provisional rates. During the year 2016, the final percentages for 2017 will be settled on basis of the most recent data available.

The tax rate remains unchanged at 30%. Although this is unsaid the new box 3 regime effectively results in a progressive taxation on investment income. Currently the effective tax rate is now 1.2% of the investment value (i.e. 30% of 4%) for all taxpayers. As from 2017 this will change into 0.87% for persons for small investors, 1.41% for persons with a somewhat larger wealth and 1.65% for millionaires.

Interestingly this new box 3 regime will also apply to non-resident taxpayers. Such persons will be taxable in the Netherlands exclusively on income from Dutch immovable property. Despite the fact that they invest only in one asset class, their deemed income that is taxable in the Netherlands will be calculated as if they hold a mix of all types of investments.

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