During a retirement pension audit, the dividend received was reclassified as salary, but why?
With start-up companies it is a common practice for business owners and management to receive a low salary in the first few years. During a pension audit, it was determined that the owner and managing director had not been paid a typical salary for the industry and market, but an increased dividend instead. This dividend was therefore reclassified as a salary. A Federal Court ruling has confirmed that dividends can be reclassified as salary where the owner does not receive any, or only an unreasonably low salary, while at the same time receiving a dividend that is unreasonably high in the light of the amount invested. The consequences of this are additional social security contributions based on the amount of the calculated salary, including interest on arrears. The reclassification of dividends as salary may also apply under tax law, and then results in higher income taxes (dividends are taxed at a lower rate than salaries due to partial taxation).
We recommend that you consult with experts to determine what are normal salaries in your industry and market, and define an appropriate dividend policy.
Authors: Fabian Lüscher / David Gisin
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