Salary or dividends? Tax tips for entrepreneurs
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 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)
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).
Exception: Dividends from capital contribution reserves
- Usually, companies fund their dividends from retained earnings. Private investors must pay tax on them as income.3
- However, if a company has capital contribution reserves (CCR), then it may also use these reserves for dividend payments.4 As an entrepreneur, you have a great deal of freedom in this regard, as long as your company is not listed on the stock exchange as a corporation or cooperative.
- For listed corporations and cooperatives, this amount was capped in 2020, so that dividends from the capital contribution reserve may not be higher than dividends paid out from retained earnings. This means that if CCR dividends are paid out, dividends from retained earnings must always be paid out as well. The consequence is that up to half of the dividends paid by listed companies are tax-free for private investors.
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).
4 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.
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.
How we calculated this example
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% Dividend * 164’000 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 Gross salary 169’800 Employee’s social security contributions –10’200 6% of gross salary
Employee’s pension fund contributions
–17’000 10% vom Bruttolohn Net salary 142’600 Voluntary pension fund purchases –50’000 steuerbarer Nettolohn 92’600 Einkommenssteuern –11’800 13% 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.
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