The decision between dividend payments and salary increases is not a simple one. It varies depending on multiple factors such as tax regime, company structure and both personal and business financial goals. To make an informed decision, the tax and legal implications of each option must be thoroughly understood.
Below, we explore some of the key issues to consider in determining which option is best for you or your company.
Understanding dividends and their taxation
Dividends are considered to be income from movable capital. This means that, when received as part of a company's profits, they are included at 100% in the savings tax base in the recipient's tax return. Dividends are subject to taxation ranging from 19% to 26%, depending on the amount received.
Advantages of collecting dividends:
- Reduced taxation: The savings tax base is taxed at a lower rate compared to the general personal income tax base for salaries.
- Flexibility: You can decide the timing of dividend distributions, allowing for strategic tax planning.
Disadvantages of collecting dividends:
- Double taxation: Before distributing dividends, the company must tax the profit through corporate income tax, which in Spain is 25%. This adds an additional tax burden, as the sum of the corporate tax (25%) and the minimum tax on dividends (19%) could lead to a combined tax burden of up to 44%.
- Legal restrictions: There are legal conditions for the distribution of dividends, such as earmarking 10% of the profit for legal reserves until 20% of the company's share capital is reached. In addition, company regulations may set additional limitations.
Fiscal implications of the payroll increase
Choosing to increase payroll may be a fiscally attractive option if the tax rates on earned income are lower than those faced by dividends after corporate taxes. In general, raising pay to certain thresholds may be more beneficial than paying dividends, especially in single-partner firms, as payroll taxes may be lower than the combination of corporate and dividend taxes.
Advantages of raising your salary:
- Tax simplicity: Including all income as salary simplifies personal and business tax management, avoiding complex calculations of dividends and withholdings.
- Social benefits: Higher wages increase social security contributions, which in turn can improve benefits such as pensions and unemployment benefits.
Disadvantages of raising your salary:
- High taxation: Salaries are taxed at the general personal income tax base, which in the case of high incomes can be up to 47%, which is significantly higher than the taxation of dividends.
- Impact on the company's cash flow: Raising payroll increases labour costs, which can affect the company's cash flow, especially in SMEs or cash-strapped businesses.
Impact of corporate taxation
Corporate taxation is a key argument in this discussion. In Spain, companies generally pay a 25% on their profits. If these profits are distributed in the form of dividends, the tax burden could rise significantly when the tax is added to the dividends. For example, the sum of the corporate tax (25%) and the minimum tax on dividends (19%) results in a 44% tax impact.
Legal regulations and restrictions
There are legal regulations that must be respected when considering dividends. For example, 10% of profit must be allocated to legal reserves up to 20% of the company's share capital. In addition, the company's own regulations may set additional limitations.
Non-fiscal benefits of raising your salary
In addition to the fiscal aspects, raising wages can bring additional benefits. It can increase social security contributions and positively affect the calculation of certain entitlements, such as pensions and other employment benefits.
Strategies for minority shareholders
The protection of minority shareholders requires the distribution of at least 25% of annual profits. This rule guarantees rights to those who have a smaller stake in the company. Consequently, where there is diversity in the shareholding structure, it may be more favourable to address wage issues in order to maintain greater control of capital.
International dividend considerations
For dividends received by non-residents, there are double taxation agreements that can alleviate tax burdens by claiming back excess over the treaty rate. This encourages cross-border tax planning.
Personalised and planned decision
Finally, the decision between dividends or payroll should be a personalised one, based on a comprehensive analysis of the personal and corporate tax situation. Consultation with a tax advisor can be vital to optimise tax costs and maximise benefits.
Opting for one strategy or another is a multifaceted decision that has to do not only with taxes, but also with the long-term objectives of the company and the partners. The key is to balance tax burdens, respect legal provisions and align choices with financial goals.
Frequently asked questions
How much dividend can be declared?
The amount of dividends you can declare depends on the profits made. Dividends cannot be distributed if the net worth is negative or it would affect the legal reserve. The law also protects minority shareholders by requiring a minimum distribution of 25% of profits if there is a discrepancy. This legal context should be a key consideration when deciding the amount to declare.
What percentage of salary can the dividend be?
There is no strict limit on what percentage of your total income can come from dividends. However, it is crucial to find a beneficial balance. A common combination is to allocate a salary that covers your basic personal expenses and use dividends for additional income and tax efficiencies.
