A director and major shareholder (DGA) can withdraw funds from their private limited company in the form of a salary or a dividend. Which of the two is the most advantageous in 2021?
Usual wage
Before we answer that question, we should note that the director-major shareholder’s salary must comply with the standard remuneration scheme. This also applies to the director-major shareholder’s tax partner, if they also work for the private limited company.
In principle, the director-major shareholder’s gross annual salary must be at least €47,000 (in 2020, this was still €46,000). However, if it is higher than that, the salary must amount to:
- 75% of wages from the most comparable employment;
- the highest salary paid to “ordinary” employees of the private limited company (or its affiliated entities).
Salary
The salary paid by the private limited company is deductible as a labour cost from the profit on which corporation tax is payable. For the director and major shareholder, the salary is subject to income tax under Box 1 (income from employment and property).
Income in box 1 is subject to income tax at a rate of 49.5%. This rate applies to income above €68,507. Up to that amount, a rate of 37.1% applies.
In addition to income tax, an income-related contribution under the Health Insurance Act is payable. This amounts to 5.75% and is payable on income up to €58,311.
The combined levy at the low rate amounts to 37.1% + 5.75% = 42,85%. And given the high rate at 49,5%. Unfortunately, however, it’s a bit more complicated than that. For incomes falling within the lower tax bracket, the general tax credit (AHK) and the employed person’s tax credit (AK) decrease as income rises. As a result, the effective tax rate is higher than the 42.85% calculated above.
Dividend
Dividends are not deductible from the BV’s profits. For the director and major shareholder (DGA), dividends are subject to income tax in Box 2 (income from a substantial interest). The rate in Box 2 is 26.9%.
As the dividend is not tax-deductible, corporation tax is payable on it. This amounts to 15%. Profit after tax amounts to 85%. This amount is distributed and is then subject to income tax: 26.9% * 85% = 22.865%. The total tax burden on the dividend is therefore: 15% * 22.865% = 37,865%.
The BV is liable for corporation tax at a rate of 25% on profits in excess of €245,000. The income tax payable is therefore: 26.9% * 75% = 20.175%. The total tax burden on the dividend is therefore: 25% + 20.175% = 45,175%.
Conclusion
What does all this fiddling with figures actually achieve? The conclusion seems to be that, up to the income level on which the low rate is payable in Box 1 (€68,507), a salary is more advantageous than a dividend. However, due to the income-dependent phasing out of the AHK and the AK, this tipping point is much lower: at around €25,000.
From as little as €25,000, receiving dividends is more tax-efficient than a salary (please note the ‘usual wage’ rule). And this analysis does not yet take into account any potential effects on healthcare, rent and childcare allowances.