Salary or Dividends for the Owner of a Company: How to Optimise Remuneration

The owner of a GmbH or AG is always faced with the important question of how best to optimise the income they receive from their company. The issue primarily comes down to deciding on the balance between salary and dividends. This is a pivotal decision with implications for personal income, social security, and tax efficiency. In this article, we explore the considerations and consequences involved in this choice, and what is practically permissible in the efforts to optimise taxes.

The choice between salary and dividends for the owner of a GmbH or AG

As the owner and managing director of a GmbH or AG in Switzerland, you play multiple roles in the company. You are at once a shareholder and an employee. This means you have the right to receive both a salary and dividend distributions.

But how do you balance them in the most efficient way possible, considering both tax optimisation and the cost of social security contributions? Furthermore, how much are you legally allowed to pay yourself in salary and dividends without receiving scrutiny from either tax or social security authorities?

Salary vs Dividends from a tax and social security perspective

The owner of a GmbH or AG is essentially looking for the most cost-effective way to transfer the profits of his business to his personal account. In most cases, he can do so either by issuing dividends to himself as a shareholder or by paying a salary to himself for the services he provides to the company. Generally, a combination of both is used to remunerate the owner/s.

The primary consideration is optimising the tax burden and the cost of social security contributions. Dividends are subject to double taxation, in that they are distributed from the company’s profit after tax, and the recipient (the owner) must also pay personal income tax on the dividend income received. As such, dividend payments are usually the less tax-efficient option for the company; however, they are often more tax efficient for the shareholder. This is due to the partial taxation of dividends at the personal level and the fact that there are no social security contributions owed on dividends.

On the other hand, salary/wages and interest payments are not subject to double taxation, because the company may deduct them from profits as business expenses for tax purposes. However, salary payments are not as efficient for the recipient because they are fully taxable compared to the more lenient treatment of dividends. Additionally, the receiver of the salary must pay minimum social security contributions, such as AHV and IV etc.. This further reduces their “take-home” income.

Let’s summarise the main characteristics of salary and dividend withdrawals related to income tax and social security:

Characteristics of salary withdrawals:

• Salary withdrawals are fully taxable as personal income for the receiver of the salary.
• They can be deducted from taxable income at the company level if considered realistic (within market norms) which ultimately reduces the corporate tax liability.
• They are subject to social security contributions for the recipient of the salary. It is important to keep in mind that not all these contributions should be viewed as a pure expense. The pension savings contributions, for example, are put towards retirement savings. However, the risk contribution portion should be viewed as a pure cost for the salary earner unless it provides a genuine benefit.
• On the other hand, the structure of the occupational pension provision has a major effect. Keeping in mind that pension fund assets and their earnings are not liable for wealth or profit taxes, it may be beneficial to maximise pension fund contributions from a tax perspective. Higher salary payments allow for higher contributions to the pension fund and tax-deductible pension fund purchases.
• Also, above certain income levels, payments to the AHV are no longer pension-forming.

Characteristics of dividend withdrawals:

• Dividend payments are exposed to double taxation (at both the corporate and personal level) as they are distributed from company profit after tax.
• However, recent corporate tax reforms have reduced the double taxation, in that dividend payouts may only be liable for partial taxation at the personal level. The extent to which these benefits apply depends on the canton in which the dividends are distributed, as the participation and partial tax rates vary.
• Dividend withdrawals are not subject to social security contributions if they are within a normal market range.

Appropriateness of salary and dividend values

Optimising tax liability and social security costs is not the only factor you have to consider when deciding how to balance salary and dividend withdrawals. It’s also crucial that both these values are deemed appropriate and reasonable from the viewpoint of tax authorities and social insurance to avoid unwanted consequences. The legislature has set certain guidelines to avoid deliberate tax evasion and misuse of the owner’s freedom to set their own salary.

When is the salary deemed too high?

Performance pay must stand up to a third-party comparison and be in line with local and industry standards. The following criteria are used for comparison and to determine the appropriateness of the salary level:

• Internal salary comparison: the salary of the owner is compared to the salary of other managers within the company to see whether it is in line.
• Industry comparison: the salary is compared to the salary of others in the industry holding a similar position.
• The financial position of the company.
• How the dividend distributions compare to the salary (low dividends could indicate an overinflated salary figure)
• The qualifications of the owner and their position within the company.

If the salary is deemed to be unreasonably high by tax authorities, it is viewed as a deliberate attempt to artificially lower the company’s taxable income with salary deductions and the authorities may, therefore, reclassify a portion of the owner’s salary as dividends.

Fortunately, the authorities do provide significant scope for discretion in setting the salary of the owner, and so a reclassification of salary to dividends is only allowed if there is a clear discrepancy between the salary and the services performed.

When are dividends deemed too high?

From a personal perspective, it can be attractive for the company owner to lower their salary and increase the dividend payout. This is partly due to the easing of the double taxation burden of dividends, whereby dividends are only subject to partial taxation at the personal level. It also reduces mandatory social security contributions which are due on salary payments, and therefore leads to a higher cash payout for the owner. However, performing such practices to the point of paying an unreasonably low salary or distributing an excessive dividend payout can result in scrutiny from social security authorities such as the AHV or SUVA. In such circumstances, the authorities may reclassify the dividends as salary so that it is in line with market norms.

In determining whether the dividends are too high or salary too low, the authorities will examine both:

• The dividend payout: they will check to see if the dividend is not excessively high. Ordinarily, a dividend payout is excessive if it results in a return of equity of over 10% for the shareholder, but this is also dependent on the specific situation at hand. The company may pay a higher dividend if is distributed out of retained earnings, which shouldn’t be subject to reclassification provided the salary is appropriate.  
• The salary payout: they will also examine the salary to see if it is within appropriate norms. Details on the various comparisons and checks are listed in the previous section. One additional tool is to use a federal wage calculator like Salarium to see if the salary is in accordance with market norms.

Profit retention strategies

This article primarily focuses on optimising the balance between salary and dividends for the owner of a company in Switzerland, and so we have not mentioned any other options up until now. However, it is important to note that the owner of a GmbH or AG has one more strategy at their disposal for maximising their financial gain and the wellbeing of the company at the same time. That is, instead of withdrawing all the available profits in the form of dividends or through a salary payment, they can instead opt to accumulate the profits within the company.

Accumulating company profits has the effect of increasing the net equity of the company and this should ultimately reflect as an increase in the value of the shares that the owner holds. Capital gains from the sale of private movable assets (which includes shares in a company) are typically tax-free in Switzerland. This then provides the opportunity for the owner to sell the shares at the higher price later and make a tax-free capital gain as an alternative to immediately withdrawing the profits in the form of dividends or salary.

Calculating the relative advantage of such a strategy can be quite complex and subject to uncertainty, as there are many unknown variables surrounding the final share price that the owner can realise from the sale of shares later. However, all else being equal, it is assumed that the accumulation of company profit should result in an equivalent increase in share price which thus makes this an attractive strategy to consider. 

To sum it up

The choice between salary and dividends for the owner of a Swiss company requires careful consideration of personal financial needs, tax implications, and the company’s financial health. Both options have their pros and cons, and what works for one business might not be suitable for another.

While it may be more advantageous from a personal tax perspective to reduce one’s salary and receive a higher dividend payout instead, this may result in a higher overall tax burden when the company’s tax situation is taken into account. This approach may also reduce retirement and other benefits for the owner.

Furthermore, when deciding how best to distribute salary and dividends as the owner, you need to keep in mind the reasonable limits with which either of these can be altered. Both the dividend rate and salary withdrawal should be within market norms to be considered reasonable. If you pay yourself a salary that is too low compared to industry standards, the social insurance assumes that you are trying to save on social security contributions and reclassifies part of the dividends as salary. If, on the other hand, you pay yourself a salary that is much higher than industry standards, the tax authorities assume that you are artificially trying to reduce the company’s profit and thereby save on profit taxes, and they will in turn reclassify a portion of the salary as dividends.

Finally, instead of withdrawing all available profits as salary and dividends, the owner/s can decide to accumulate a portion of the profits and keep it within the company as retained earnings. This would enhance the financial stability and health of the company while providing the opportunity to achieve a greater tax-free capital gain on the sale of shares down the line, the value of which would be increased by the retention of profits.

Due to the complexities involved in optimising salary and dividends while remaining compliant, it’s crucial to consult with financial and legal experts who specialise in Swiss taxation to make an informed decision. That’s where Nexova AG is there to assist you.