NL: Judgement on tax on hypothetical income contrary to European Convention on Human Rights

[nest egg]

"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." (link)

While I understand the taxes are not directly comparable, the thought did cross my mind as to whether Ireland's Deemed Disposal regime could be open to a similar challenge.

The Dutch wealth tax's basis is on hypothetical returns, Ireland's deemed disposal rules are based on taxing unrealized gains. People often pay the tax without having liquidated the asset to realise the gain. The principle doesn't seem to be a million miles away, or am I way off here?

 

[Brendan Burgess]

Seems like a reasonable system.

You own a second home worth €200k.
They deem you to have hypothetical income of €8k.
They tax you accordingly - if the income tax rate is 50%, you pay €4k tax.

If I own an investment property and choose not to rent it out, it's certainly arguable that I should pay tax on the income I would get.

Brendan

 

[Brendan Burgess]

However, it's very different from our deemed disposal.

It's based on actual income and not hypothetical income.

But someone will probably challenge it.

Brendan

 

[Dr Strangelove]

I pay LPT on my house even though there is no income stream, realised or unrealised, associated with it.

I agree deemed disposal is a silly tax but it doesn’t contravene your human rights.

 

[jpd]

What a stupid decision - a State has the right to tax whatever it wants, that's how democracies work

 

[Brendan Burgess]

I wonder will the Dutch government appeal it to the ECHR?

Can they appeal it?

Brendan

 

[nest egg]

However, it's very different from our deemed disposal.

It's based on actual income and not hypothetical income.

But someone will probably challenge it.

Brendan

I agree it's different in many respects, but to state the obvious, DD may not be based on actual income either, the tax is due even when you haven't realised a gain. From that perspective, DD can also be said to be hypothetical. For obvious reasons the amount of tax owed will be much closer to reality that than some of the examples given from the Dutch wealth tax, but the basic idea that you can be taxed on a gain you haven't actually made I think is interesting in the context of this judgement.

 

[jpd]

You have made the gain, you haven't realised it but it is a gain nonetheless

 

[Brendan Burgess]

There is a big difference between a holiday home on which there is no income being assigned a hyopthetical rent of 4% and
an investment which has generated €4,000 in capital gains and dividends but which have just not been realised yet. It is not a hypothetical income. It's a real income.

Brendan

 

[jpd]

Taxing wealth isn't necessarily a bad idea - so taxes on holiday home, or PPR, is ok imho

 

[Itchy]

I agree it's different in many respects, but to state the obvious, DD may not be based on actual income either, the tax is due even when you haven't realised a gain. From that perspective, DD can also be said to be hypothetical. For obvious reasons the amount of tax owed will be much closer to reality that than some of the examples given from the Dutch wealth tax, but the basic idea that you can be taxed on a gain you haven't actually made I think is interesting in the context of this judgement.

DD would be difficult if the underlying assets were non-marketable I suppose, but you would be due a refund on realisation, if you overpaid tax, so quite different to NL I think.

If you conduct a transaction that's not deemed to have occurred at the market rate, e.g. a connected party asset sale, Revenue will deem the transaction to have occurred at market rate, whatever that is? Or if you import a car they will tax you on an 'open market selling price' of the vehicle, rather than the market price you paid!

 

[nest egg]

DD would difficult if the underlying assets were non-marketable I suppose, but the you would be due a refund on realisation, if you overpaid tax, so quite different to NL I think.

If you conduct a transaction that's not deemed to have occurred at the market rate, e.g. a connected party asset sale, Revenue will deem the transaction to have occurred at market rate, whatever that is? Or if you import a car they will tax you on an 'open market selling price' of the vehicle, rather than the market price you paid!

Thanks Itchy, I hadn't appreciated how many deemed taxes were actually in operation!