How Netherlands’ wealth tax went wrong – and cost the nation billions

Netherlands' wealth tax decision has opened the door to legal redress for hundreds of thousands of people

The Netherlands is expected to pay billions of pounds in compensation to taxpayers after a divisive levy on investments and second homes was shot down by the Dutch Supreme Court.

On 6 June, the court ruled that the country’s wealth tax went against the European Convention on Human Rights because it forced savers and investors to pay tax on income they had not earned.

The decision has opened the door to legal redress for hundreds of thousands of people who were overcharged by the tax authority.

Outgoing state secretary for finance Marnix van Rij estimated that the upfront cost would be €4bn – or £3.37bn.

But the true cost could rise by billions of euros per year while the government works out a new system to replace the controversial levy – a system not expected until 2027.

The Supreme Court’s decision may serve as a warning for other countries seeking to raise revenue from taxes on savings and investments.

Labour is considering options for extra wealth taxes if it wins the general election on 4 July, as reported by the Guardian.

The party is under pressure to explain how it will fund its plans for public services, and so far has ruled out raising income tax, National Insurance or corporation tax.

100pc tax rate

Since 2001, the Netherlands has divided income into three different types, known as boxes.

“Box One” taxes employment income, “Box Two” applies to people with a substantial share in a business, and “Box Three” is effectively a wealth tax – levied on income from savings, investments and second properties.

For years Box Three has been under attack because it is based on fictional – rather than actual – returns.

There have been various iterations of the levy but when it was first introduced, the government assumed that everyone earned a 4pc return on their assets. Taxpayers were then charged 30pc on that yield.

This was regardless of whether they held cash, stocks or property and regardless of how their investments performed.

At the time, Minister of Finance Gerrit Zalm presented the arrangement as risk-free. “Any fool can get a return of more than 4pc,” he said.

But little did Mr Zalm know that the credit crunch was just around the corner.

Robert van der Jagt, of accountancy firm KPMG, said: “At the time, 4pc was very favourable. But then the financial crisis happened – and interest rates dropped to well below 4pc.”

Savers were effectively punished for holding their money in low-interest accounts, with many forking out more in tax than they earned from their wealth. As a result people were charged effective tax rates of 100pc or more.

From 2008 onwards, taxpayers started challenging Box Three, which led to the government reforming the levy in 2017.

Under this new regime, the deemed yield on savings was cut to 1.63pc while the yield on investments and second properties was brought up to 5.39pc. This was to reflect the fact that investors usually earn higher returns. These yields were then adjusted every year.

But taxpayers were still being charged based on hypothetical returns. So on 24 December 2021, in the so-called Christmas judgment, the Supreme Court decided the 2017 regime had violated taxpayers’ property rights.

“This was like an earthquake judgment,” said Mr Van der Jagt. “Nobody expected it.”

The court ordered the government to pay legal redress, although it did not clarify how this should be calculated.

The Dutch government later confirmed it would automatically compensate 60,000 people who had challenged their tax bills, with an estimated cost to the Treasury of €3bn.

Hundreds of thousands owed redress

With the 2017 regime now deemed unlawful, the government was forced to introduce a temporary system.

The so-called “bridging regime” that followed was an improvement on the 2017 reforms in that the government calculated yields more accurately.

But still the system was not based on actual returns. This was bad news for landlords and property investors, because the tax authority continued to assume they were earning yields of more than 5pc even as interest rates soared, the property market cooled and stock markets crashed.

In 2023, landlords found themselves paying tax on a higher yield of 6.17pc, shrinking their profit margins.

In another landmark judgment, the Supreme Court concluded in June 2024 that this regime also went against taxpayers’ property rights.

“The fixed return is calculated in the same way as the original system. This means that for all assets other than bank deposits, the problem remains,” the court said.

“It is called the D-Day judgment because it arrived on 6 June,” said Mr Van der Jagt. “It was a very negative judgment for the government. The Supreme Court also gave further clarity on how income must be calculated.”

Many of those compensated after the Christmas judgment were savers.

This time most of the people getting their money back will be investors who lost out when stock markets plunged.

The Amsterdam stock market fell by around 13pc in 2022 as inflation soared – but the tax office assumed investors generated returns of 5.5pc, and taxed them accordingly.

Hundreds of thousands of people could claim refunds because of the ruling. However, securing compensation might not be easy. Taxpayers will have to prove that they paid too much tax and the already-burdened Dutch tax authority will have to retrospectively check their claims going back as far as 2017.

Mr Van der Jagt said: “It’s very labour intensive for the tax authority. The burden of proof is also on the taxpayer to show their income.”

Ironically, it was the desire for simplicity that led to the creation of this unlawful tax in the first place.

“In the Netherlands, we have a very simple system,” said Mr Van der Jagt. “You log in to your self-assessment account, and your whole tax return is already pre-populated with information. Box Three was very difficult to abuse, and it also meant a stable income for the government.

“Now until a new tax is created, you have a system where people can cherry pick. Either they earn less than the assumed yield in which case they can make a claim or they earn more than that yield. So it’s win-win for the taxpayer, lose-lose for the government.”

There is even evidence that the 2001 tax reforms have resulted in the super-rich paying less tax.

In a report published last year, investigative journalists at Follow the Money said that the wealthiest were able to avoid higher tax rates in the Netherlands by setting up companies and moving their Box Three income into Box Two. They also borrowed money so they could offset their debts against their investments.

The government has now promised to introduce a new regime in 2027, but this will cost billions of euros to implement.

“There’s a lot of pressure on the government right now to create a new system by 2027. It’s going to be ambitious,” said Mr Van der Jagt.

Recommended

The city that declared all-out war on landlords – and what happened next

Read more

Play The Telegraph’s brilliant range of Puzzles - and feel brighter every day. Train your brain and boost your mood with PlusWord, the Mini Crossword, the fearsome Killer Sudoku and even the classic Cryptic Crossword.