In a significant legislative move, the Dutch House of Representatives has approved the Actual Return in Box 3 Act, a reform designed to overhaul the way investment income is taxed for residents. This new law mandates a flat tax rate of 36% on actual returns from savings and investments, set to take effect on January 1, 2028. This shift replaces an existing framework that taxed investment income based on presumed returns. A series of rulings by the Dutch Supreme Court, which began in December 2021, deemed the previous system unconstitutional, necessitating this reform.
Under the new regime, the tax applies not only to realized income such as interest, dividends, and rental earnings but also on the annual increase in asset values for stocks, bonds, and cryptocurrencies, even if these assets remain unsold. For instance, if a resident’s portfolio of shares gains €10,000 in value over the year, this unrealized gain will be subject to taxation, regardless of whether any shares were sold during that period.
However, certain assets, including real estate and shares in qualifying startups, will be taxed differently. In these cases, the government will adopt a capital gains approach, taxing only the appreciation in asset value when sold or disposed of. Regular income from these assets continues to be taxed annually when received.
The Parliament also approved an amendment to shorten the law’s review period from five years to three years to enable quicker adjustments in case any issues arise after implementation. Several proponents of the bill have expressed that taxing unrealized gains is not their preferred method, but they felt compelled to support the measure due to the absence of a legally sound framework for collecting investment taxes—resulting in an estimated revenue loss of €2.3 billion annually for the treasury under the previous system.
Before it becomes law, the bill must receive approval from the Senate.
The Dutch personal income tax system classifies income into three separate boxes, each governed by different rules and rates. Box 1 addresses income from employment and home ownership, Box 2 pertains to substantial interests in companies, and Box 3 covers taxable income from savings and investments. The recent reform restructures Box 3, which previously employed a fictitious rate of return for tax calculations. The new regulations establish a straightforward tax on actual earnings at a flat rate of 36%.
Additionally, the former tax-free capital threshold has been replaced by a tax-free annual return of €1,800, with no tax obligations for returns below this amount. Investors can also carry forward any net losses incurred in a year to offset future gains, although only losses exceeding €500 qualify for this treatment.
Criticism of the bill has emerged, particularly from the cryptocurrency community, highlighting a core challenge: investors may be required to pay taxes on gains not yet realized in liquid form. This situation raises concerns about liquidity, potentially pushing some crypto holders to consider relocating to countries with more favorable tax regimes.
The Dutch Parliament has recognized this liquidity risk, evidenced by the decision to exempt real estate and startup shares from the annual mark-to-market tax treatment, applying a typical capital gains tax approach instead. Importantly, the bill includes provisions for unlimited loss carryforwards and designates a tax-free return threshold of €1,800 to exempt smaller savers.
The impetus for these reforms stemmed from a series of court decisions ruling the previous Box 3 framework illegal, with the Supreme Court asserting that taxing assumed income—especially at a time of low interest rates—was unjust and unconstitutional. The delay in implementing a new system has resulted in significant financial losses for the Dutch treasury, further motivating legislative action.
While the Dutch top statutory personal income tax rate stands at 49.50%, ranking high among European nations, many other countries tax capital gains only upon realization. The unusual approach taken by the Netherlands—assessing taxes annually based on portfolio value changes—has drawn attention and discussions about future possible transitions to a more conventional realized capital gains model.
