Differentiation between salary and dividend for employee shareholders

Case 1: Dividend vs. wage (basic case)

X and Y are doctors and run a GP practice through Medikus AG, which they each own 50%. In addition to the two shareholders, two salaried doctors and various practice assistants work in the practice.

In 2021, X and Y (for the 2020 financial statements) would like to pay themselves the entire open reserves consisting of the 2020 annual profit as dividends of CHF 500,000 each.

Other numerical bases:

• Wealth tax value as at 31.12.2020: CHF 2,000,000
• Salary X and Y CHF 120,000 each, 100% workload
• Salary A (employed doctor, 70%) CHF 110,000
• Salary B (employed doctor, 100%) CHF 160,000

Questions

1. Could the compensation office object to the division between salary and dividend?
2. What are the tax consequences of a (social security) reclassification of dividends as wages at company and shareholder level?
3. a. How could the social security complaint be avoided?
   b. Does it help if X and Y draw the entire profit as wages?

Case 2: Substantive dividend (modification to case 1)

X and Y are a married couple. They took over the practice 10 years ago (2011). They have always drawn a salary of over CHF 250,000 in the years 2014 to 2018. X and Y, although this would have been possible with annual profits of up to CHF 200,000, have never paid themselves dividends. From 2019, they reduce their salary to CHF 120,000. At the end of 2020, a sale of the practice is on the horizon. To ease the company in view of this, X and Y would like to pay a dividend of CHF 1,000,000 in 2021 for the 2020 financial year.

• Property tax value as at 31.12.2020: CHF 2,700,000
• Salary X and Y CHF 120,000 each, 100% workload; previously CHF 250,000 (for largely the same job)
• Salary A (employed doctor, 70%) CHF 110,000
• Salary B (employed doctor, 100%) CHF 160,000

Question

Is the compensation office allowed to offset wages?

Case 3: Asymmetric dividends

A, B, C and D hold shares in IT-Consult AG. A and B founded the company at the time and each hold 30%, B and C joined later and each hold 20%. All four receive salaries that are considerably higher than the salary determined according to the salary scale and which also appear to be above average in comparison with the rest of the industry.

As of 31 December 2020, the asset tax value was CHF 4,000,000; the annual profit for 2020 was CHF 420,000. In 2021, the shareholders decided to distribute a dividend of CHF 400,000 for the 2020 business year. However, as in previous years, this dividend was not distributed according to share ownership, but according to an internally agreed profit contribution key. Thus, A and B receive a higher share of the profit because the company's licence income from a programme programmed by A and B themselves before the founding is included.

Questions

1. Is such an asymmetric dividend permitted under commercial law?
2. What are the tax consequences of an asymmetric dividend?
3. What is the situation under social security law?

Case 4: Monetary benefits

A is the sole shareholder of Networking AG. After several years of losses, he finally achieves high turnover and profits in this company. In order to achieve these, he travels a lot, meets with customers and cultivates his network with great effort. He receives a rather low salary from the company in relation to the turnover and no dividends. During a tax audit, the auditor notices in particular the high travel and entertainment expenses, and also criticises the costs of a vehicle used purely for private purposes. For tax purposes, some of the expenses are not allowed as deductions. A total of around CHF 700,000 is set off, as the tax authority assumes a hidden distribution of profits to A. The tax authorities then impose a fine. A grudgingly accepts the ruling and the fines because he is under a lot of stress and does not have the capacity to give the tax authorities a detailed breakdown of the expenses and their justification.

A short time later Networking AG receives a ruling from the compensation office in which the expenses charged are regarded as wages and AHV contributions are subsequently levied on them. A is surprised because, according to his trustee, with a wealth tax value of over CHF 10 million (due to the high profits) the low salary would not be objectionable even with a dividend of CHF 1 million.

Question

Is the compensation office allowed to offset wages?

Case 5: Wage sacrifice

The sisters X and Y have jointly developed a new product in the field of cosmetics and at the end of 2019 they found Z GmbH, where they are employed as managing directors. For the purpose of financing the first start-up phase, they have contributed a large part of their savings to the limited liability company and decided not to pay themselves any compensation during the first 1-2 years. In the financial years 2019 and 2020, the GmbH will not yet generate any profits and accordingly no dividends will be paid. Only in the course of 2021 do the first profits become apparent and the sisters receive an offer to sell the GmbH to a competitor for CHF 1 million. As part of the sales contract, the sisters commit to continue working for the GmbH for a period of at least two years.

Questions

1. Do X and Y achieve a tax-free capital gain on the sale of their GmbH shares (without taking into account the aspect of indirect partial liquidation) or could part of the capital gain be reclassified as taxable wages?
2. What are the consequences under social security law?