How dividends are taxed for individual shareholders
When an AG or a GmbH distributes profits, the individual shareholder receives a dividend that must be declared and taxed as income. But the taxation of dividends in Switzerland does not follow exactly the same rules as other income: for significant holdings there is a partial taxation, designed precisely to mitigate economic double taxation. Understanding the mechanism is essential for anyone who is at once shareholder and director of their own company.
The starting point: economic double taxation
The profit distributed as a dividend has already been taxed once at the company level, as corporate profit. If it were then also taxed in full at the shareholder level as income, the same profit would suffer two full levies. To partly correct this distortion, the Swiss system provides for a partial taxation of dividends deriving from qualified holdings.
The qualified holding
Partial taxation is not available to anyone who collects a dividend, but to those who hold a qualified holding, that is, a minimum share in the capital of the distributing company. Below that threshold, the dividend is taxed as ordinary income, with no reduction.
For the shareholder-entrepreneur who owns the majority or all of their own GmbH or AG, the requirement is normally amply met: this is precisely the figure for whom partial taxation was designed.
How partial taxation works
With partial taxation, only part of the dividend enters taxable income; the rest is excluded from the calculation base. This applies both at the federal direct tax level and at the cantonal level, but the taxable share may vary between the Confederation and individual cantons. It is therefore necessary to check the percentage applicable in the canton of residence, because it has a direct impact on the effective burden.
The practical effect is that the dividend, for the same gross amount, bears less income tax than a salary of equal size. But this is only half the picture: one must also look at what happens upstream, at the company level, and at the withholding tax.
The 35% withholding tax
Dividends are subject to the 35% withholding tax, withheld by the company at the time of distribution and paid to the FTA (Federal Tax Administration). For the shareholder resident in Switzerland who duly declares the dividend, the withholding tax is refunded or credited against ordinary tax: it is therefore an advance, not a definitive cost. Anyone who does not declare the dividend loses the right to a refund, turning the withholding into an actual burden. Correct declaration is therefore decisive.
Dividend or salary: the comparison that counts
For those who are both shareholder and director, the recurring question is whether it is better to draw profits as salary or as dividend. There is no single answer: it depends on the balance between several factors.
- Salary is deductible as a cost for the company, but it is subject to AHV/IV/EO (old-age, disability and loss-of-earnings insurance), ALV (unemployment insurance), BVG (occupational pension) and the other social charges, and it is taxed in full as income.
- Dividend is not deductible for the company (it comes out of profit already taxed with profit tax), does not generate social security contributions, but benefits from partial taxation at the shareholder level.
A salary set too low in favour of high dividends may, moreover, be challenged by the authorities and the compensation funds, which may reclassify part of the distribution. And forgoing salary entirely also means reducing pension coverage (AHV and BVG benefits). The optimal combination must be calculated on the actual figures, not decided out of habit.
A picture to read in full
The real advantage of a dividend is measured by adding up all the levels: profit tax paid by the company, partial taxation at the shareholder level, the effect of withholding tax, social contributions saved and reduced pension accumulated. Looking only at the reduced rate on the dividend, without the rest, leads to wrong conclusions.
How we work
At SIH ONE we calculate the optimal mix between salary and dividend on the real situation of the shareholder-entrepreneur, taking into account partial taxation in the canton of residence, social charges, pension provision and withholding tax. We manage the distribution, the withholding and the declaration so that the right to a withholding-tax refund is always secured. The accounting and documentation are validated by a qualified professional.
Do you want to know how to pay yourself tax-efficiently from your company? Let’s calculate it together.