Dividend and tax, often addressed, not always properly set up. What are important aspects in the relation between dividend and tax?
To start, what is a dividend? A dividend is the payment of the profit of the company. That implies the company made a profit. The corporate income tax return is done and paid. Then the general reserve where the profit has been allocated to, can pay a dividend.
The above sounds logic, but we encounter many situations where shareholders ask for a dividend, while the company had not yet made a profit at all.
There is a risk in paying a dividend. If a dividend is paid and the company gets in financial issues. That implies, the company cannot pay for its obligations. If the dividend payment is part of the financial issue cause, the dividend was illegally paid. This is an offence and not taken lightly.
Some are confused about the percentage of dividend tax, there is 15% and the Box 2 income tax percentage. Both apply, let me explain.
The meeting of shareholders determine in a shareholder resolution that a dividend can be paid. Within one month from that decision the dividend tax return needs to have been filed and paid.
The amount of dividend withholding tax is 15%. The dividend tax return offers the possibility that the BV company pays for the dividend. What does that imply?
Example. If you for instance decide on a EUR 10.000 dividend, the taxation is EUR 1.500. EUR 8.500 is paid to the shareholder and EUR 1.500 to the Dutch tax office. But if the BV pays for the dividend, the shareholder receives EUR 10.000 in his or her bank account. When then the BV pays the dividend tax, that is also an advantage for the shareholder. In other words, again a dividend. Hence this dividend needs to be grossed up and then in this example the dividend tax is EUR 1.764. The paid dividend for the bookkeeping is EUR 11.764.
In the situation the BV company had only made EUR 10.000 profit overall, the above grossing up is not possible. There is simply not enough after taxed profit in the BV to have the BV pay for the dividend.
Box 2 taxation
The dividend is paid to you, the BV withheld 15% taxation. Then in the income tax return this dividend is reported again and you are asked to pay Box 2 tax. How is that possible?
The 15% dividend tax is an upfront taxation, but not the final taxation. The final taxation is the Box 2 tax rate (26,9% in 2022). Hence the balance between 15% withheld dividend tax and the Box 2 taxation, is to be paid.
Ready to pay a dividend?
Almost. Before a dividend is being paid the check needs to be done if the shareholder’s salary is in line with legislation. The salary cannot be less than the minimum salary of a shareholder director (EUR 48.000 in 2022). Neither can it be less than a person doing similar work that has no shares in the company.
If the salary is not correct, it needs to be adjusted and then maybe the dividend evaporated. If the salary is correct, the dividend can be formalized.
Tax is exciting
We think tax is exciting. A dividend payment needs attention. Can a dividend be paid, are the formalities complied with. We understand the eagerness for a lowerly taxed company payout. However, it not done correctly, it can become much more expensive than you anticipated.