In the business world, strategic financial decision-making plays a crucial role in the success and sustainability of a company and must also be in line with the requirements of tax compliance and corporate compliance. Among the options available to managers for the improvement of remuneration by the company are an increase in their own salary, provided that this is not linked to remuneration for their directorship, or the distribution of dividends. Beyond the economic and employment implications, it is essential to analyse the tax advantages associated with each of these decisions.
Increased salaries for partners: Tax implications and advantages.
Increasing salaries for a firm’s partners can offer several tax advantages that contribute to sustainable growth and financial strength.
Firstly, the salary, for corporate tax purposes, is considered a deductible expense, which reduces the company’s taxable base, and always bearing in mind whether the salary is received for work performed by the partner himself or for remuneration as a director, in which case, there would be some specifications to take into account. In either case, this tax deduction can be significant, as it decreases the entity’s overall tax burden.
In addition, higher salaries may generate additional benefits by increasing contributions to social security and retirement plans.
Dividend payouts: Optimising accountability to shareholders.
In contrast to salary increases, dividend distributions also have key tax advantages that can influence a company’s financial decisions; however, it should be noted that there are a number of corporate requirements to be complied with, such as those set out in Articles 274 and 275 of the Spanish Companies Act (Ley de Sociedades de Capital):
- After the distribution of dividends, there must not be an equity imbalance, i.e. the net assets of the company must not be less than the share capital.
- In the event of losses from previous years, the profit must be used to cover such losses.
- 10% of the profit must be allocated to the legal reserve.
On the other hand, the dividend distribution policy can also be beneficial in terms of tax flexibility. By allocating dividends, the company can adapt its profit distribution structure according to its objectives and market conditions. This allows for more agile and efficient management of financial resources, especially in volatile economic environments.
Strategic considerations for sound decision making: Tax efficiency in the area of personal income tax and corporate income tax.
The choice between increasing salaries or distributing dividends should not be based solely on tax advantages. Factors such as the company’s financial situation, long-term goals, talent retention and shareholder perception should be carefully considered.
As far as personal income tax (IRPF) taxation is concerned, it should be borne in mind that salary will be taxed as employment income in the general tax base at a maximum rate of 47%. On the other hand, dividends will be taxed as income from movable capital in the savings base at a rate of 19/28%.
Likewise, and as already indicated, as far as corporate income tax is concerned, the salary, and provided it is not remuneration for the position held as a director for which certain requirements must be met, will be deductible in corporate income tax, whereas dividends will not produce a saving in corporate income tax.
In conclusion, both salary increases and dividend distributions offer valuable tax advantages for companies and their shareholders. It is crucial to conduct a cost-benefit analysis that includes not only the short-term tax implications, but also the long-term impact. In many cases, a balanced combination of both strategies may be the most prudent option.
Jesús Raya Zamora.
