Dividends and double taxation: how it works

The dividend is the way a GmbH or an AG distributes the profit it has generated to its shareholders. But the same franc of profit risks being taxed twice: first as the company’s profit, then as the shareholder’s income. This phenomenon is called economic double taxation, and the Swiss system mitigates it with precise rules. Understanding how they work is essential when deciding how much and when to distribute.

The two levels of taxation

Let’s start from the principle. The profit goes through two stages:

• Company level: the profit is subject to profit tax (federal, cantonal, communal). What remains after tax is the distributable profit.
• Shareholder level: when the net profit is distributed as a dividend, it becomes the shareholder’s taxable income, which they declare and on which they pay their own income tax.

Adding the two levels, the same wealth undergoes two levies. Without corrective measures, the overall burden would be penalising compared to other forms of remuneration.

The partial taxation of dividends

To mitigate this effect, Switzerland provides for the partial taxation of dividends deriving from qualified holdings. A holding is considered qualified when the shareholder holds at least 10% of the company’s capital.

Where this condition is met, the dividend is not taxed in full in the shareholder’s hands: only a part is added to taxable income. The logic is to recognise that the profit has already been taxed once at company level, and therefore to reduce its taxation at the personal level. The exact percentages of partial taxation differ between the federal direct tax and the individual cantons, but the principle is common: less than 100% of the dividend enters taxable income.

Be careful: partial taxation concerns the shareholder’s income tax. It remains distinct from the 35% withholding tax, which is a guarantee levy recoverable through a correct declaration.

Dividend or salary?

The distinction between the two levels opens the classic question for someone who is both a shareholder and works in their own company: pay yourself with salary or with dividend? There is no single answer, because several variables come into play:

• the salary is a deductible cost for the company, but it is subject to social security contributions and to ordinary income tax;
• the dividend is not deductible for the company and presupposes that the profit has already been taxed, but it benefits from partial taxation and generates no social security contributions;
• a salary that is too low against high dividends can be challenged by the social insurance authorities, which may reclassify part of the distribution.

The right choice is a balance, not an extreme optimisation of one of the two channels.

The international dimension

When the shareholder resides in a state other than the company’s, potential legal double taxation is added to economic double taxation: two states taxing the same income. This is where double taxation treaties come in.

These treaties, concluded by Switzerland with numerous countries, allocate the taxing power and set a maximum rate on dividends in the source state. In concrete terms:

• the withholding tax levied can be reduced to the treaty rate;
• the excess over that rate is refundable on request;
• the shareholder’s state of residence generally grants a tax credit or an exemption to avoid the double levy.

Ignoring the applicable treaty often means paying more than due or tying up liquidity in the refund.

Recurring mistakes

• Confusing the two levels: the taxation of the company and that of the shareholder are distinct planes; adding them without distinguishing them distorts every estimate.
• Taking partial taxation for granted: without the qualified holding threshold, the dividend is taxed in full.
• Neglecting the international profile: the shareholder’s residence radically changes the outcome.
• Taking the salary-dividend mix to extremes: aggressive optimisation attracts challenges.

How we approach it

At SIH ONE we calculate the overall burden at both levels, verify the conditions for partial taxation, calibrate the mix between salary and dividend in a defensible way and, for foreign shareholders, apply the correct treaty by handling the reduction and refund of the withholding tax.

Want to understand how much you really keep from a dividend? Let’s do the maths on both levels.