Choosing a limited company as the form of company enables the company's profits to be distributed to the shareholder in the form of a dividend. If well planned, dividend distribution can have a beneficial effect on the shareholder's personal taxation.
The decision on dividend distribution is made by the general meeting, on the proposal of the company's board. The dividend can be withdrawn right after the general meeting at the earliest.
You can decide to distribute a dividend if your company has distributable funds at the time of closing the accounts. The dividend to be distributed can be no more than the amount of distributable assets, but the distribution of dividends must not jeopardize the company's solvency.
For the dividend recipient, the dividend income is divided into tax-free income, taxable capital income and/or taxable earned income, depending on the amount of the dividend to be distributed.
Capital income dividend
Usually, when talking about a so-called tax-reduced dividend, this refers to a capital income dividend. In this case, the dividend decided to be distributed is a maximum of 8% of the company's net assets. In most cases, net worth equals total equity.
75% of the capital income dividend is tax-free income for you and the remaining 25% taxable capital income up to €150,000. Instead, of the part exceeding €150,000, 15% is tax-free income and 85% is taxable capital income.
The tax rate for capital income is 30% up to €30,000 and 34% for the part that exceeds this.
If the dividend decided to be distributed is more than the above-mentioned 8%, the portion that exceeds this is an earned income dividend for you. As the name suggests, this portion is taxed on you according to your personal income tax rate. However, so that up to 8%, the dividend is a capital income dividend for you, and only the part that exceeds it is an earned income dividend.
75% of the earned income dividend is taxable earned income for the recipient and 25% is tax-free income.
However, for tax reasons, it is not recommended to increase the dividend by more than 8%.
Withholding tax on dividends
The payer of the dividend, i.e. your company, makes a 7.5% withholding tax on the dividend to be paid. If the dividend to be paid is more than €150,000, the withholding tax is 28% on the part that exceeds this.
The portion after withholding is left for you to withdraw.
More information about dividends on the website of the tax administration.