Distributing profits in a GmbH or AG: how it works

You’ve closed the financial year with a profit. That money is now in the company, but you want to take it home. The question is: how? In Switzerland the main channels are two — dividend and salary — and the choice has very different tax consequences. Let’s look at the mechanism.

First rule: the profit belongs to the company, not to you

In the GmbH and the AG, the separation of assets applies. The profit belongs to the company; it becomes yours only after a formal distribution decision taken by the shareholders’ meeting, as a rule when the annual accounts are approved. Withdrawing money without a legal title is not a distribution: it is a loan to the shareholder or, worse, a hidden distribution that audits will pick up.

Before distributing, the CO requires a portion of the profit to be allocated to the legal reserve until the prescribed limits are reached. Only the freely available profit may be distributed.

The dividend and the withholding tax

The classic route is the dividend. Here comes into play a mechanism that surprises many: the 35% withholding tax.

When the company resolves a dividend, it must withhold 35% and pay it to the Federal Tax Administration. The shareholder receives only 65%. This is not a lost tax: it is a guarantee that the tax authorities collect in advance. A shareholder resident in Switzerland, by correctly declaring the dividend, has the 35% withheld refunded. In practice the withholding tax only hits those who fail to declare.

For a shareholder resident abroad, the refund depends on the double taxation treaty between Switzerland and their country: often part of the amount withheld is recovered, rarely the whole.

The partial taxation of the dividend

The dividend received by the shareholder is taxable income, but with a discount. To avoid economic double taxation — the profit has already been taxed at company level — Switzerland applies the partial taxation of qualified dividends, typically for holdings of at least 10% of the capital.

In practice only a part of the dividend (the exact share depends on the federal and cantonal level) is added to the shareholder’s taxable income. This eases the burden and makes the dividend competitive with salary in many configurations.

Dividend or salary?

Salary follows the opposite logic:

• It is deductible for the company, so it reduces the company’s profit and tax.
• It is subject to social security contributions (AHV/IV/EO – old-age, disability and loss-of-earnings insurance – and, up to the ceilings, unemployment insurance) and builds up your pension (2nd pillar).
• It is taxed in full as employment income in your hands, with no partial taxation.

The dividend, by contrast, is not deductible for the company (it comes out of already-taxed profit), generates no AHV contributions nor pension, but benefits from partial taxation.

There is no universal answer. The optimal combination depends on:

• The company’s level of profit and its effective tax rate.
• Your personal marginal rate.
• The pension objective: a low salary today means a leaner pension tomorrow.
• The contribution ceilings and the cantonal rules on partial taxation.

The textbook mistake is “all dividend to avoid paying AHV”: it works in the short term, but it erodes the pension and, if the salary is disproportionately low compared to the role, the compensation funds can reclassify part of the dividend as salary.

The less-travelled alternatives

Besides salary and dividend there are other channels, each with its own rules:

• Repayment of capital contributions (capital contribution reserves): under certain conditions it can be distributed without income tax for the shareholder.
• Repayment of loans that the shareholder had granted to the company.
• Compensation for real services (rent of a property to the company, interest on shareholder financing), which must however respect market conditions.

Each must be documented and justified: the economic substance must hold up, otherwise a tax adjustment kicks in.

How we approach it

At SIH ONE the distribution of profits is not an improvised year-end decision: it is a policy we define together. We calculate the salary-dividend mix that minimises the overall company-plus-shareholder burden, we handle the resolution and the withholding tax declaration to secure your refund, and we keep an eye on the balance with your pension.

Want to know the most efficient salary-dividend mix for your situation? Let’s talk about it.