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Salary or dividends? Tax tips for entrepreneurs

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Published on 17.08.2022

 

The salary-to-dividend ratio—a comparison of taxes in Switzerland (with example)

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.”

 

Profits as a dividend

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:

  • Your corporate profit is effectively being taxed twice. Once at the company level, where profits are earned, and a second time when distributed as a dividend. The good news: With the latest corporate tax reform, some of these income tax rates were drastically reduced. At the shareholder level, your dividends from so-called "qualified participations" are taxed at a preferential rate.
  • A dividend is very likely to lead to your being liable for slightly higher wealth taxes as well, since your company is posting higher profits this way, which means it is therefore valued higher.

 

Fundamentally, you should make sure that your salary is not too low. If your average annual salary is currently below CHF 88,2001, 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

1 As of 2024
2 See the Swiss Federal Supreme Court BGE 9C_669/2011 of October 25, 2012 (in German)

 

Did you know?

Tax-free dividends out of the CCR

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 (CCR).

A higher salary for you

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:

At the corporate level, the company’s profit decreases. This means that taxes will be lower here.

A higher salary often increases the purchasing potential in your pension fund. This allows you to make additional purchases, which can be deducted from income taxes and later withdrawn as capital, after a period of three years during which withdrawals are blocked. This is granted preferential tax treatment in all cantons.

 

A comparison: Which option is better now?

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.

  • Dividend option: After deduction of all taxes at the company and shareholder level, you are left with a net amount of around CHF 150,000 from this dividend pay-out.
  • Higher salary option: If you opt for a higher salary instead, you will have around CHF 160,000 left, after all tax optimizations and pension fund purchases. So, this option would be the better one.

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.

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About the author

Claude Frosio

Claude Frosio

Head Tax Consulting

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