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Salary or dividends – what position should you take in the new tax environment?
Article published in Le Temps on November 29, 2019
The new Swiss corporate tax reform will come into effect next year. For business owners, a mixed solution of salary and dividends may prove most effective in dealing with the fiscal impact. Above all, though, a proper retirement saving strategy will be essential.
There have been many changes to the tax treatment of companies and business owners in Switzerland over the last ten years. The second corporate tax reform that came into effect on 1 January 2011 lowered the rate of tax on dividends if a business owner holds at least 10% of a company. Naturally, the practice of taking profits as dividends became more popular. The reform also made taxation neutral as far as the legal form of the business was concerned (sole ownership, partnership or joint-stock company).
Last May, a referendum approved the new draft corporate tax reform known as TRAF1. One of the key measures is a sharp reduction in the rate of tax on profits, at least in some cantons. These reforms raise many questions for company bosses when it comes to salary and dividend policies.
In this article, we will consider the possibilities and effects of both, and also how business owners can implement a strategy that suits their needs. In addition to salary and dividends, a third aspect of key importance to the overall tax burden must be taken into account: retirement savings.
Salary and dividends: impact on income tax and wealth tax for business owners
It is important to bear in mind that both salary and dividends are fully subject to income tax. As mentioned above, dividends may enjoy a lower rate if the shareholder owns at least 10% of the share capital.
When calculating wealth tax – and in the absence of a stock exchange listing – company value is based on both "net asset value" and "yield value" as calculated by the Federal Tax Administration.
While paying a dividend does not reduce the yield value of a company, it does affect its net asset value, since a portion of the company's reserves is transferred to shareholders.
Paying a salary, meanwhile, reduces both the net asset value and yield value of the company, and wealth tax for the business owner may be (substantially) lower as a result.
The major role of retirement saving in taxation
Although retirement saving is often neglected by business owners and the self-employed, it offers several ways to reduce the tax burden while offering appropriate insurance coverage. In addition to or instead of joining the mandatory occupational pension scheme, a business owner/shareholder may opt for supplementary occupational pension cover (for themselves and some or all of their staff).
Membership of such a plan has the effect of increasing the ordinary contributions due by the employer and the employee. During the entire phase of setting aside retirement savings, ordinary contributions are tax-deductible both for the employer and the employee, for the portion that each has to pay.
It is also possible to buy back contribution years to make up for any shortfall in savings. These buy-ins cover years when the person insured was not a member of the occupational pension scheme, or not on the same terms. They are fully deductible from the taxable income of the person insured.
Should retirement saving be financed from salary or dividends?
The amount of salary and the contribution rate for occupational pension provision has a direct impact on the amount that can be bought in, i.e. paid into the pension fund. These buy-ins may be financed from the salary of the business owner/shareholder, from other assets, or from dividends paid by the company.
So it is a question of finding the right balance, taking the various factors into account (reinvestment in the company, the business owner's personal circumstances and lifestyle, etc.). In general, a mixed solution is usually preferable: in this case, remuneration consisting partly of salary used, for example, to finance the business owner's lifestyle and partly of dividends used to pay for the buy-in of missing contribution years.
The dividends simply pass through the hands of the shareholder/business owner before ending up in the occupational pension plan. As a result, the taxation of the dividends is offset by the buy-ins made. The same is also possible for salary, at least the part of it that is not needed for the business owner's lifestyle.
Assuming a company makes a pre-tax profit of CHF 500,000 and the entire amount is taken in the form of a salary and/or dividends by the managing shareholder, it is interesting to note the effect that buy-ins have on the business owner's tax position.
If, on retirement, the business owner opts to have their occupational pension assets paid out as capital, the dividends or salaries that helped to create this capital benefit from the lower tax rates applicable to occupational pension provision.
1 Tax Reform and AHV Financing Act (TRAF)
2 Calculations carried out using the example of a company based in Nyon. The business owner/ shareholder is also resident in Nyon. Maximum tax rates applicable in 2019.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter "Lombard Odier"). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document.
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