Council of State strongly criticises Heinen’s income tax reform

The Council of State has delivered a withering verdict on finance minister Eelco Heinen’s plans for a capital gains tax system, saying the proposal had been drawn up too hastily and without proper consideration.

The administrative court said the deadline of 2028 for implementing the law was unrealistic because it would not give the tax office, banks and other institutions time to adapt their systems.

The report from the Council of State, which acts as the government’s constitutional advisor, is the latest setback for the cabinet as it tries to steer its budget for next year through parliament.

Heinen had hoped to speed up the reform of the income tax system to prevent the government losing more money from the current Box 3 mechanism, which the Council of State struck out in 2021 when it ruled that it unfairly discriminated against some savers.

Coalition and opposition parties are divided on how to reform Box 3, the section of the tax return form which calculates the tax due on assets savings based on an estimated rate of return.

D66, CDA and the left-wing opposition parties wanted to formalise this by taxing investors on their actual gains, but Heinen’s party, the right-wing liberal VVD, and opposition groups such as JA21 favour a capital gains tax instead.

€10 billion shortfall

The latter option would create an estimated €10 billion shortfall in the immediate term because assets will not be taxed until they are sold.

The existing mechanism is costing the state €3.5 billion a year in lost revenue because savers can reduce their tax bill if they show their actual returns were lower than the estimated figure, but do not have to pay more if it is higher.

The Council of State criticised the minister’s decision to use a “novelle”, a device that allows legislation to be amended after it has been passed by the Lower House but is still wating to be approved by the senate.

Heinen said that would allow capital gains taxes to be levied on real estate and startup business in 2028 as a stepping-stone towards introducing the tax on all assets from 2030.

But the Council of State said the plans were too complicated, would only affect around 10% of all asset wealth and would have to be enacted at “very high speed”. It would be better to change the entire system in one go in 2030, the report said.