On 16 February 2016, Advocate General (AG) Niessen of the Netherlands Supreme Court (Hoge Raad der Nederlanden) (the Court) published his opinion in case No. 14/05020 regarding whether the taxation of capital is compatible with article 1 of the 1st Protocol of the European Convention on Human Rights (ECHR). Details of the opinion are summarized below.
(a) Facts. The taxpayer, a resident of Norway, owns a house in the Netherlands, which he does not rent out to a third party. The taxpayer is deemed to make a 4% yield on the value of the house which is determined by the municipality (WOZ-value). This deemed yield is taxed at the rate of 30%, which results in an effective tax rate of 1.2%. The taxpayer reasons that the taxation of this deemed 4% yield is incompatible with article 1 of the 1st Protocol of the ECHR, because he actually does not realize such yield.
The Court of Appeal in The Hague held that the taxation of capital is not incompatible with article 1 of the 1st Protocol of the ECHR because the legislator has a wide margin of interpretation with respect to the introduction of laws.
(b) Legal background. If immovable property is classified as an investment asset, e.g. owned by the taxpayer but rented out to a third party, the net value of the property on 1 January of a tax year is taxed as income from savings and investments. Property and assets in this category are deemed to produce a notional yield of 4% per year, which is taxed at the flat rate of 30%. For houses, which are not an owner-occupied dwelling, the yield is calculated on the value of the house determined by the municipality (WOZ-Value).
(c) Opinion. The AG pointed out that the deemed yield taxation originates from the 1990s of the last century when the yields realized were very high. However, the political and economic development, thereafter, shows that no certainty exists that a deemed yield of 4% can be realized during a longer period.
Thereafter, the AG explained that the deemed yield taxation may result in arbitrary taxation. He observed that individuals are seldom wealthy during their entire lives. The period during which individuals are wealthy is, however, decisive for the yield realized.
Furthermore, the deemed yield realized by individuals is strongly influenced by their investment strategy. As a result, significant differences may exist between the yields realized by individuals.
The taxation of income should, however be based on the ability to pay (draagkrachtsbeginsel). This principle is violated if taxation is not based on yields which individuals have actually realized.
A further consequence of the deemed yield tax is, moreover, that individuals with a quite different income are taxed on the same base (a 4% yield). This could be incompatible with the equality principle.
The AG takes the view that if the deemed yield taxation must be regarded as a kind of net wealth tax. This tax is of a confiscatory nature if the effective tax burden on the income actually obtained from the capital is more than 100%. In that case, taxpayers are forced to face a reduction of their capital.
Referring to the decisions of the European Court of Human Rights (ECHR) in the cases Gall (No. 49570) of 25 June 2013, N.K.M. (No. 66529/11) of 15 May 2013 and R. SZ. (No. 41838/11) of 2 July 2013, the AG observed that a composition of the relevant facts can lead to the conclusion that a disproportionate infringement and violation of the right to enjoy property exists.
Due to the arbitrary effect and confiscatory nature of the levy in conjunction with the actual knowledge concerning the unpredictability of macroeconomic developments, the AG concluded that the deemed yield tax constitutes a disproportionate infringement of article 1 of the 1st Protocol of the ECHR, concerning the right to enjoy property.
Finally, the AG held that this problem cannot be solved by a judge because it requires the making of legal political choices which is for the legislator. However, the Supreme Court in the case at hand could decide that prospective overruling will take place if the legislator does not amend the deemed yield tax within a reasonable time.
In individual cases, however, restrictions have to be granted if the levy exceeds the amount of net income and value increases of the capital.
Source: Dr René Offermanns, IBFD Principal Research Associate
