Choosing Between Salary and Dividend for a Director-Shareholder
Sofie is the sole director and shareholder of a small consultancy BV. The company expects a profit before her remuneration of €120,000 for the year. She currently pays herself a salary of €45,000, which the company deducts as a business expense. She is considering lowering her salary to €20,000 and taking the rest as a dividend, arguing that dividends are taxed more lightly than salary. She asks her accountant to compare the two options. The accountant warns that there is a minimum director's remuneration rule and that the company may not simply deduct whatever salary it likes if it is not commercially justified. Sofie also wants to know whether the timing of the dividend (declared in December, paid in February) affects the company's and her own tax position.
1. What are the main tax and legal constraints on reducing Sofie's salary to €20,000?
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First, many jurisdictions impose a minimum director's remuneration that must be paid before the reduced-rate corporate tax or the dividend regime applies; if the salary falls below that minimum, the company may lose favourable treatment. Second, a salary must be commercially justified and arm's-length; an artificially low salary followed by a large dividend can be recharacterised by the tax authority as disguised remuneration, especially for a director-shareholder. Third, social security contributions are usually calculated on the salary, so reducing it affects her social protection (pension, sickness, unemployment). The comparison must therefore include corporate tax on the retained profit, personal tax on salary versus dividend, social contributions, and the minimum-remuneration condition, not just the headline dividend rate.
2. How should the accountant structure the comparison between the two remuneration packages?
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The accountant should compute, for each option, the total tax and social cost at company and personal level combined. Option A: salary €45,000 deducted from the €120,000, leaving €75,000 of taxable profit subject to corporate tax; Sofie pays personal tax and social contributions on €45,000. Option B: salary €20,000 deducted, leaving €100,000 of profit; corporate tax is paid on that profit, and the after-tax amount distributed as a dividend is taxed in Sofie's hands, often at a separate dividend rate with a possible exemption or credit. The comparison must use actual rates, include social contributions, and check the minimum-remuneration threshold. The conclusion is rarely that one option is always better; it depends on the rates and on how much profit is retained in the company.
3. Does the timing of the dividend (declared in December, paid in February) change the analysis?
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Yes, for both parties. For the company, a dividend declared in December but unpaid at year-end is usually recognised as a liability to the shareholder at the moment the general meeting approves the distribution, not when cash moves; the tax treatment follows the applicable rules on declaration versus payment. For Sofie, the dividend is generally taxable in the year it is attributed or paid, depending on national rules, so a February payment may fall into the next personal tax year. The accountant must check the specific attribution rules and ensure the company has sufficient distributable reserves after the year-end accounts are approved; a dividend cannot be paid out of capital. Timing can therefore shift the tax burden between years and must be planned, not left to the payment date.