When should a shareholder take salary payment and when should they take payment in dividends?
For tax planning purposes, a shareholder in a small company needs to consider when to get paid in salary income and when to take payments in dividends. What is the most tax-efficient option in Finland; salary, dividend, or a combination of both?
There is no straightforward answer to this question, as the shareholder's other income and deductions will affect the matter. Income taxation in Finland is progressive; the more you earn, the more you pay in tax. Municipal tax, on the other hand, varies depending on where you live.
Differences between personal and corporate taxation
When calculating total taxation, both the company tax and the personal tax of the shareholder must be taken into account. The company pays income tax on the income from which the dividend is distributed from. In addition, the shareholder pays capital income tax on the capital income portion of the dividend and progressive income tax on the possible earned income portion of the dividend. The shareholder pays income tax on the salary, while the shareholder's wages and fringe benefits are deductible items for the employer company. If the combined tax burden for the shareholder's personal and company tax is less than 26%, it is preferable for the shareholder to take salary payments as the tax burden on the dividend is at least 26% considering the company's and the shareholder's taxation.
Shareholder's tax planning starts with the shareholder's need for money. Is it necessary to get the salary payment monthly, less frequently, or if it is sufficient to withdraw the money once a year? For taxation, it matters which calendar year the income is attributed to. Wages are taxed in the year in which they are paid, and dividends drawn in a calendar year are taxable income for the following year or even the year after that. The tax year of the dividend is determined by the closing date of the general meeting unless the minutes of the meeting specifies a different date for the payment of dividends. Overall, tax planning between dividends and salary income should always be considered at the individual level. Often, dividends and wages are both sources of income for the owner-entrepreneur.
What is the tax treatment of dividends?
The taxation of dividends depends on both the amount of the dividends and the net assets of the company. A reduced dividend, the so-called 8% dividend or capital gains dividend, is 75% tax-free income and 25% taxable capital income. The 8% mentioned above is calculated based on the net assets in the year-end financial statement of the year preceding the tax year of the dividend. In a single shareholder company, the net assets are equal to the mathematical value of the shares.
Remember that the tax is affected by any deductions at the shareholder level. An apartment that is included in the net assets of the company and occupied by a shareholder, or a loan from the company, i.e. a shareholder loan, is deducted from the mathematical value of the shares under certain conditions. The maximum amount for capital income relief is 8% of the mathematical value of the shares. Dividends exceeding the amount of €150,000 or the 8% mentioned above are subject to a higher tax rate. Dividends exceeding €150,000 up to the 8% threshold are 85% taxable capital income and 15% exempt capital income. Dividends exceeding the 8% threshold are 75% earned income and 25% exempt income. In most cases, it is most advantageous to aim for within the relieved dividend limits, with a higher proportion of dividends being tax-free capital income.
The choice between salary and dividend payments should be made considering the overall tax position of the company and the shareholder
The taxation of salary and dividends is affected by the shareholder's other taxable income and deductions
If the tax burden is less than 26%, it is generally preferred to take salary payments rather than dividends
The amount of relieved capital income dividend is 8% of the net assets (mathematical value of the shares), of which up to €150,000 75% is tax-free and 25% is taxable capital income.