On August 13, 2010, the Supreme Court ruled that an apartment owner’s share in the Owner’s Association (“OA”) will be taxed in Box 3 instead of Box 1. In Box 3, personal income tax is levied at a rate of 1.2% on the average value of the OA share. In Box 1, the share would have been left untaxed, since it would have been linked to home ownership.
The owner of an apartment is, by law, also a member of the apartment building’s Owners’ Association (“OA”). The OA promotes apartment owners’ common interests and, in doing so, is responsible for the building’s maintenance. To meet these costs, apartment owners generally make monthly payments to the OA. Often, this includes money that must be put aside for upcoming maintenance work. The source of dispute was whether an apartment owner’s share in the OA should be taxed in Box 1, as argued by the taxpayer, or in Box 3, as argued by the tax inspector. The District Court and the Court of Appeals found in favor of the tax inspector.
In an appeal to the Supreme Court, the taxpayer once again argued that the share in the OA belongs in Box 1. The Advocate General (“AG”) opined in favor of the appeal in cassation. According to the AG, no independent significance can be attributed to the membership rights to the OA, which means that the share is allocable to home ownership in Box 1. The AG argued, among other things, that the membership rights to the OA were, by law, generated by the apartment ownership and cannot be separated therefrom.
Supreme Court: Share in the OA taxed in Box 3
The Supreme Court did not adhere to the AG’s reasoning and instead held that the share in the ownership of the OA in fact belong in Box 3. According to the Supreme Court, membership in the OA and apartment rights for civil-law purposes are separate legal concepts. Thus, a membership right to an OA is not considered as being part of a building, and thus also not as part of home ownership in Box 1. Furthermore, the Supreme Court referred to the Valuation of Immoveable Property Act (“WOZ”), which states that the share in the OA do not apply to the valuation of real estate.
According to the Supreme Court, membership rights in an OA are considered as “other rights” with a value on the open market that must be reported in Box 3. The Supreme Court further stated that, to establish this value, all relevant facts and circumstances must be taken into consideration. One of the relevant factors is that the OA has built up capital and reserves with it’s member’s contributions. The Supreme Court did not further elaborate on exactly how the value on the open market should be calculated. The Ministry of Finance is, in any case, of the opinion that the share in the OA must be valued at the nominal value on the value reference date for Box 3.