When setting up a limited company, you should familiarize yourself with the taxation of the company and how it happens. A limited company includes community tax, which is a tax paid on the result. If community tax is paid in advance, it is tax prepayment. In addition to these, you must consider the value added tax, which you invoice as part of the price of your product or service, and which is charged to the state. In limited company operations, the entrepreneur can withdraw a salary and/or dividends, in which case taxation must be considered.
Community tax and tax prepayment
Community tax is paid on the company's profit. Community tax refers to community income tax and it is currently 20% of the company's profit. The result is determined by subtracting the deductible expenses from the company's taxable income. For example, company expenses include salaries paid to the entrepreneur himself and salaries paid to employees. Tax is also paid in advance on the profit of the limited company, and it is called tax prepayment. Taxes are collected in advance during the bookkeeping period for payment. Taxes are collected by assessing the company's profit. If the collected taxes do not cover the tax prepayment, the limited company must pay the missing part with an additional prepayment.
Value added tax
Value added tax, or VAT, is a consumption tax that is always paid by the buyer of a product or service. It is used to tax the difference between the sales price of the intermediate products used to produce products and services and the finished product, i.e., the value added. The payment of VAT depends on turnover, as companies with lower turnover can apply for a longer reporting period instead of a one-month reporting period. The company is liable for value added tax if the turnover of the 12-month bookkeeping period exceeds 15 000 euros. It is possible to apply for a VAT relief if the turnover for the financial year is less than 30 000 euros. This means that, as an entrepreneur, you can get a tax relief and claim back the value added taxes you paid. More information about the tax relief from the tax administration.
Taxation of the company owner
In a limited company, the owner can pay themself a salary, which is normally taxed as the entrepreneur's earned income. This is considered an expense that reduces the company's profit. In addition to the salary, the limited company can also pay dividends and benefits to its owner. Dividend income is determined as either earnings or capital income, and the dividend is only distributed after the company's profit has been taxed. Taxation of dividends depends on whether the company distributes more or less than 8 percent of the mathematical value of the shares as dividends. If the dividend is distributed at less than 8 percent, the taxation is also lower. To calculate the mathematical value of a share, the company's net assets and the number of its outstanding shares must be considered. Net assets are calculated according to the financial period that ended in the previous year when the company's assets are subtracted from its liabilities. The mathematical value of the share is obtained when the net assets of the limited company are divided by the number of outstanding shares.
More about the taxation of dividend income from the tax administration's website.