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Entrepreneurs have a choice: They can pay out the company’s profits to themselves in the form of dividends – or grant themselves a salary increase. But what is the ideal ratio between salary and dividends?
Find out what the tax consequences of both options are, and see in our example which one makes more sense.
“Whether you go for salary or dividend – the decision not only affects your company, but can also affect your succession planning.”
At first glance, this seems to be the more interesting possibility. If you pay out a dividend instead of increasing your salary, you are also keeping non-wage labor costs low. But in doing so, you need to consider two key disadvantages:
Fundamentally, you should make sure that your salary is not too low. If your average annual salary is currently below CHF 86,0401, you will not receive the maximum AHV pension later. Overall, however, companies enjoy “considerable discretion” as to how they determine salaries and dividends – as long as there is no “obvious disproportion between work performance and salaries or between capital employed and dividends.”2
2 See the Swiss Federal Supreme Court BGE 9C_669/2011 of October 25, 2012 (in German)
Dividends paid to shareholders are generally taxable income in Switzerland – in contrast to capital gains, which are usually tax-free. Example: If a share pays out a dividend of CHF 30, this “profit” is treated differently for tax purposes than if you sell the same share for CHF 30 more, i.e. you achieve a CHF 30 capital gain. The exception to this principle is called the capital contribution reserve.
Good to know
Not every company that makes a profit automatically pays a dividend. This is because the company’s management can decide whether, and how high, a dividend will be distributed – or whether the profit should be reinvested. Similarly, management has discretion to determine the type of dividend.
3 A special feature applies to so-called qualified participations, i.e. participations holding at least ten percent of the share capital of a stock corporation (AG) or limited liability company (GmbH). Dividends from such holdings are taxed preferentially in all cantons and at the federal level. Source: Section 4, Article 20 of the Federal Act on Direct Federal Tax, see also the 2019 Tax Case for Reducing Economic Double Taxation (PDF, in German).
If you pay yourself a higher salary, the tax burden increases for you as a private individual, since you are earning more income. But at the same time, this option has several advantages:
Which option is better depends heavily on individual circumstances – and also on your preferences as well as your current life phase.
Let us assume that an AG or GmbH generates a pre-tax profit of CHF 200,000.
Our calculation is for the year 2022 and is based on the tax rate for a married couple (both of whom belong to the Protestant-Reformed church) who pay taxes in Winterthur (ZH).
AMOUNT IN CHF
|Profits before taxes||200’000|
|Tax on profits||–36’000||18%|
|Partial tax on dividend||–11’500||7%|
|Increase in wealth tax **||–2’400|
|Net dividend after taxes||150’100|
AMOUNT IN CHF
|Profit before salary||200’000|
|Employer’s social security contributions||–10’200||6% of gross salary|
|Value fluctuation reserves ***||–3’000|
|Employer’s pension fund contributions||–17’000||10% of gross salary|
|Employee’s social security contributions||–10’200||6% of gross salary|
Employee’s pension fund contributions
|–17’000||10% vom Bruttolohn|
|Voluntary pension fund purchases||–50’000|
|Taxable net salary||80’800|
|Pension fund credit||87’000|
|Capital withdrawal taxes in ZH (1 million)||–7’800||9%|
|Net after taxes including PF credit||160’000|
* AHV: You are only entitled to the maximum pension if the average insured annual salary is CHF 86,040 or more.
** Capitalization at 9.5 percent, using the “practice” method: (2 × earnings value + 1 × substance value) ÷ 3
*** Paid by employer, voluntary
Are you wondering how you can optimize your taxes, both in your company and as a private individual? This is a very broad question that can also be related to issues such as succession planning. It is therefore worthwhile to have your individual situation reviewed carefully, not least so that profits do not unjustifiably remain in the company as Earnings Carried Forward. This can unnecessarily complicate your succession planning before retirement.
We would be happy to advise you – without obligation. Get in touch with us!
Tax advice in context
If you are not familiar with the jungle of tax regulations, it is easy to fall into a tax trap. After all, not every taxpayer is able to keep abreast of possible “knowledge advantages” by being in direct contact with the tax authorities. Our experienced tax experts are able to negotiate Swiss tax issues of all kinds on an equal footing with the authorities and, where necessary, obtain binding tax rulings on your behalf.
Contact us, without obligation – to analyze your tax situation with our experts.