Dutch Wealth Tax Reform Targets Unrealised Gains, Stirring Global Debate
The Netherlands has recently approved a significant reform to its capital gains tax system, a move that is generating widespread attention far beyond its borders. As governments worldwide seek new revenue streams without overtly raising taxes, wealth levies are experiencing a resurgence in popularity. The Dutch approach is particularly contentious because it extends to taxing unrealised gains—paper profits that have not yet been converted into cash.
Understanding the Dutch Tax System Overhaul
This reform is integrated into the Dutch personal tax framework, specifically within the notorious "boxes" structure. Box 3, which handles income from savings and investments, has long operated on a controversial assumption: the state taxed individuals based on a notional return on their assets, regardless of actual earnings. Following the financial crisis, this system caused significant distress, as savers earned minimal returns on deposits yet faced taxes tied to outdated, higher interest rates.
The newly enacted Actual Return in Box 3 Act, set to take effect on January 1, 2028, will impose a flat tax rate of 36 per cent on actual returns. This includes cash yields such as interest, dividends, and rent, as well as annual changes in asset value, even if the assets are not sold. Essentially, it introduces a mark-to-market taxation model for mainstream financial assets.
Legal and Political Drivers Behind the Change
The shift to this new system is not merely a bold political decision but rather a response to legal imperatives. The Dutch Supreme Court has systematically undermined the credibility of the previous "assumed return" model over several years. In a landmark ruling in December 2021, known as the "Christmas judgment," the court found that this approach could infringe on property rights and non-discrimination protections when it deviated from reality. A subsequent ruling in June 2024 reinforced that taxpayers must have the option to be taxed based on actual returns if they are lower than the notional ones.
The current Dutch government, a minority coalition comprising D66, VVD, and CDA, has had to navigate these legal constraints. While D66 is more receptive to redistribution narratives, VVD remains cautious about policies perceived as hostile to capital, and CDA emphasises fairness and social cohesion. Despite internal reservations, the coalition has prioritised compliance with court rulings to avoid a system deemed unsustainable, with the reform projected to prevent a cost of around EUR 2 billion.
Global Context and UK Implications
The Netherlands is not alone in revisiting wealth taxation. Spain has implemented a "solidarity" tax on large fortunes, Norway's Labour Party campaigned on wealth tax issues in recent elections, and Switzerland recently held a referendum on a 50 per cent tax on inherited fortunes over CHF 50 million, though it was rejected. In Australia, capital gains tax reforms are anticipated in the upcoming budget.
In the UK, there is an ongoing debate about whether wealth is taxed too lightly compared to income from work. With Labour facing fiscal constraints, the allure of wealth taxes is evident. However, senior ministers have expressed caution; for instance, the Business Secretary previously dismissed a broad wealth tax as "daft" due to practical challenges. Nevertheless, changes within Keir Starmer's team and a shifting political climate suggest this topic may be revisited, potentially leading to a leftward shift in economic policy discussions.
Conclusion: A Potential Model for the Future
Taxing unrealised gains remains a politically sensitive issue, yet the Netherlands is proceeding, driven by legal necessity. Governments globally favour revenue measures that can be framed as promoting fairness. If the Dutch successfully implement this system without harming long-term capital formation, it could serve as a model for other nations. Such taxes, even if controversial, might arrive in the UK sooner than anticipated, reshaping the landscape of wealth taxation and economic policy.
