Currently we are in the middle of October, soon it is November and December is always the short holiday month. In other words, before you know it, the 2015 calendar year has finished. The moment that year has finished, the managing director salary needs to have determined his 2015 salary.
Why are there minimum salary requirements for managing directors shareholders?
The answer is simple, as without such rules, these directors would take out a low salary and a high dividend. Salary is taxed at a progressive rate up to 52%, dividend is overall taxed at 25%. As the general assumption is that 25 is less than 52, a dividend is preferred.
Having a low salary implies you are open for benefits. Rental benefit, health care benefit, child daycare benefit. That is for people that find it difficult to pay for these costs as they low income generators. The managing director is in fact not a low income generator if you take into account the dividend.
Hence to prevent the managing director to use benefits that are actually not created for his type of income, a minimum required income is set.
Is a dividend actually cheaper than a salary?
The logic of 25% dividend withholding tax being lower than max 52% wage tax is tested in the next example.
The company made a EUR 200.000 profit and that is paid as a dividend. The corporate income tax is 20%, hence EUR 40.000 corporate income tax is due to the Dutch tax office. The balance, being EUR 160.000 is paid as a dividend to the managing director at in total 25% dividend withholding tax, being again EUR 40.000. This implies EUR 120.000 is received in the private bank account of the managing director. At the same time no taxable employment income was earned, so any deductions in Box 1 of the income tax return will vaporate. For instance the mortgage deduction, which can be a blow.
The company made a EUR 200.000 profit and the managing director will take out a EUR 200.000 salary. Which implies the company has no profit, hence no corporate income tax is due. The EUR 200.000 income is subject to EUR 98.145 wage tax, hence EUR 101.855 net is paid into the bank account of the managing director. In the income tax return EUR 101.855 is the base from which deductions can be taken, such as the mortgage deduction.
The dividend costs EUR 40.000 corporate tax and EUR 40.000 dividend withholding tax, hence EUR 80.000 total tax. The salary costs EUR 98.145 tax. The difference is EUR 18.145.
The answer to the question is, yes a dividend is cheaper.
Is a dividend also cheaper when you hold the 30% ruling?
The EUR 200.000 salary with a 30% ruling implies EUR 66.945 wage tax is withheld and EUR 133.055 is paid into your bank account. The answer is then quickly given. With a 30% ruling a dividend is not beneficial over a salary. When possible personal income tax deductions are taken into account, like the mortgage deduction, the salary is very much in favor.
What salary to take out?
If the managing director shareholder also holds the 30% ruling, the maximum salary is the option to go for. Without the 30% ruling we need to apply a mix. A mix of salary and dividend. The mix is required because the managing director needs to meet minimum income criteria.
Income criteria managing director shareholder
The annual income of a managing director in 2015 cannot be lower than EUR 44.000, unless it can be proven the company is making losses.
The managing director generating at least 90% of the turnover of the company, cannot have a lower salary than 75% of the profit of the company. Unless of course this managing director can proof that a person a similar position to his position, or nearly similar, earns a lower income. In a country where nobody shares his actual salary income, this proof is difficult to make.
When the managing director is making less than 90% of the turnover, his salary is not required to meet the 75% of the profit. However, the salary cannot be lower than EUR 44.000 nor lower than the best paid employee, unless this employee has an extremely exceptional position.
In the EUR 200.000 profit example, the salary set at 75% is EUR 150.000. The amount of wage tax due over EUR 150.000 is EUR 69.624. The EUR 50.000 profit left behind is taxed at 20% corporate income tax, being EUR 10.000. The EUR 40.000 dividend is taxed at 25%, being EUR 10.000, hence a net dividend of EUR 30.000 can be expected.
A EUR 200.000 profit paid in EUR 150.000 salary and EUR 50.000 dividend, yields net EUR 99.624 income.
Proving a lower income
The Dutch tax office takes the position that your income is at least 75% of your profit. Only if you can proof that a nearly similar position pays less salary, you can use that lower amount.
You could decide to find a company that can make a file on this salary. If you know that our prime minister earns EUR 144.408 and a regular minister EUR 125.607 gross annually including holiday pay, you could argue that your job is less exhausting, hence lower rewarded. Put that in a file pay yourself this salary.
You can ask the opinion of the Dutch tax office, but the Dutch tax office does not give an opinion when the taxable event has not been finalized. That implies you can ask for an opinion about the 2015 annual salary in February 2016. The outcome of that opinion will be the start of your future salary.
Orange Tax Services
The aim of the above article is to have the managing director shareholder meet his or her obligations with respect to setting the correct salary in 2015. The tax office does monitor the salaries paid in this position and penalties are issued, in case not enough salary was paid. Penalties that can break the company.