Article written by Marketing Team
You are a director and shareholder of your limited company or partnership. You pay yourself a modest salary and top it up with dividends. This approach may seem sensible: dividends benefit from partial taxation and are not subject to social contributions. But beware: if the balance between the two is not right, the compensation fund may reclassify some of your dividends as salary. With retroactive AVS contributions, default interest and sometimes a tax recalculation to follow. Here’s how it works, and how to avoid nasty surprises
Why dividends are fiscally attractive
To understand the issue, you first need to understand the mechanics. When your company makes a profit, that profit is first taxed at the corporate level (corporate income tax). If you then decide to distribute part of that profit as dividends, you are taxed a second time as an individual (income tax). This is what is called double economic taxation.
To mitigate this effect, Switzerland has introduced partial taxation of dividends for qualified shareholders, that is, those who hold at least 10% of share capital or membership interests. Since the Business Tax Reform of 2020, only 70% of the dividend is subject to federal direct tax. At cantonal level, harmonisation law sets a minimum of 50%. In Geneva, for example, taxation covers 70% of the dividend at cantonal and municipal level.
Another significant difference: dividends are not subject to social contributions. Neither AVS, nor DI, nor EL, nor UI, nor occupational pension contributions. On a payment of CHF 100,000, this is savings of the order of CHF 12,500 in social contributions (combined employee and employer portions). The temptation is therefore strong to favour dividends over salary.
Let’s take a concrete example. You run a limited partnership in Geneva. Your company generates net profit available of CHF 200,000. Two scenarios are open to you: pay the entire amount as a bonus, or combine a bonus of CHF 120,000 and a dividend of CHF 80,000. In the second case, social contributions are reduced by several thousand francs, income tax benefits from the dividend allowance, and the company pays slightly more corporate income tax (the dividend not being deductible, unlike salary). The net overall gain is often in the order of 5 to 15% depending on the cantons and amounts involved.
But this optimisation has limits. The dividend neither feeds your state pension, nor your occupational pension (LPP), nor your rights to unemployment or invalidity benefits. And above all, it is governed by an anti-abuse provision that many directors underestimate.
The reclassification mechanism: how it is triggered
The principle is set out in the AVS law: any remuneration arising from dependent gainful employment is considered to be determining salary, subject to contributions. Dividends, as a return on capital, are in principle excluded. But when the boundary between return on capital and remuneration for work becomes blurred, the compensation fund intervenes.
In practice, reclassification generally occurs during an employer audit. Compensation funds carry out periodic reviews of their members, typically every five to seven years. The auditor examines the payroll declared, compares it with the profit distributed, and evaluates the overall consistency.
The examination procedure follows a two-stage process, defined by the Determining Salary Guidelines (DSD) and confirmed by Federal Court case law. Both conditions are cumulative: the dividend must be disproportionate and the salary must be manifestly too low.
First step: assess the proportionality of the dividend. The benchmark used is the ratio between the dividend paid and the tax value of the company’s shares (not the nominal capital). If this ratio exceeds 10%, the dividend is presumed disproportionate under the DSD. Attention: the tax value of the shares is calculated according to Circular 28 of the Swiss Tax Conference, which combines yield value and substantive value. For a profitable SME, this value can be considerably higher than the nominal capital. Conversely, for a recent or low-profit company, the tax value may be low, making the 10% threshold easier to exceed.
Second step: assess salary consistency. If the dividend is deemed disproportionate, the fund then examines the salary. It compares this with the usual remuneration in the sector for an equivalent position, taking into account training, experience and company size. The funds rely in particular on the Swiss Earnings Structure Survey and the Salarium calculator of the Federal Office of Statistics. If your salary is significantly below the median reference wage, the auditor proceeds with reclassification.
The reclassified amount corresponds to the difference between your actual salary and the usual sector salary, as established by statistical data. The surplus dividend beyond this correction is not touched: it remains treated as return on capital.
What it costs in practice
Reclassification is not a simple administrative adjustment. Its consequences are financial, immediate and sometimes substantial.
Retroactive social contributions. The fund collects AVS/DI/EL contributions on reclassified amounts, both employer and employee portions. In total, approximately 10.6% of the amount (5.3% borne by the company, 5.3% borne by you as an employee). On a reclassification of CHF 70,000, that is approximately CHF 7,420, not counting unemployment insurance (UI) if you are subject to it.
Default interest at 5% per annum. The contributions are due from the date they should have been paid. If the audit covers the past five years, cumulated interest can represent a considerable amount. Using our example of CHF 70,000 reclassified each year for five years, interest alone exceeds CHF 5,000.
A cascading tax impact. If your tax assessments are not yet final, the tax authority can also carry out a recalculation. The reclassified portion moves from partial taxation (at 70% federally) to full taxation as salary. You therefore pay more income tax. On the company side, the reclassified amount could in theory be deducted as a personnel expense. But this correction is only possible if the company’s taxation has not yet become final. In practice, it frequently happens that the company can no longer benefit from this deduction: the correction then operates in one direction only, to the detriment of the director.
Anticipatory tax: a cash flow timing issue to remember. Let us recall that all dividends are subject to 35% anticipatory tax, which the company withholds at source and remits to the Federal Tax Authority. The shareholder recovers this withholding by correctly declaring their dividends in their tax return. But in the case of reclassification, if part of the dividend is recharacterised as salary, the question of reimbursement of the corresponding anticipatory tax can become complicated, particularly if tax periods have already closed.
The particular case of asymmetric dividends
In many SMEs, shareholders do not all receive the same dividend per share. This is called asymmetric dividends. This is the typical case where a shareholder-director receives more than their passive co-shareholders, not in proportion to their capital stake, but because of their operational activity in the company.
The Federal Court recently clarified the treatment of such situations. When the difference between the amounts paid to different shareholders is explained by individual work performance (not by different participation rights), the asymmetric portion actually constitutes work remuneration. The compensation fund can then reclassify it entirely as salary, without even going through the standard 10% tax value test.
The Federal Court departed from normal practice by considering that only a symmetric dividend corresponding to a reasonable return on capital (approximately 2.5% of capital according to Swiss company statistics) could be recognised as genuine return on capital. Everything else should be examined as potential salary.
This is a major point of attention for family SMEs. When three family members each hold a third of the capital but only one works actively in the company, an asymmetric dividend in that person’s favour will be difficult to justify except as work remuneration. The risk of reclassification is then very high. The solution is either symmetric distribution (same amount per share for all), supplemented by appropriate salary for the active shareholder, or capital restructuring.
What's on the horizon: the Federal Council report from October 2025
The issue is at the heart of federal concerns, and the rules of the game could change. In October 2025, the Federal Council published a report in response to the motion of Councillor of States Eva Herzog (22.4450).
The report makes a clear finding: tax reforms from 2009 (Second Corporate Tax Reform) and 2020 (Business Tax Reform) have strengthened the incentive to pay dividends rather than salary. The number of capital companies continues to increase, whilst sole proprietorships are stagnating. For 2018, the Federal Council estimates the loss of AVS revenue linked to this trend at a maximum of CHF 182 million per year.
The report identifies a key weakness in the current system: to reclassify a dividend, the compensation fund must today prove that the salary is abnormally low compared to sector standards. This requirement, confirmed by the Federal Court, is difficult to implement within a mass processing framework. Result: many problematic situations slip through the net.
The approach favoured by the Federal Council is radical in its simplicity: eliminate the obligation to prove that the salary is too low. Concretely, any dividend exceeding a certain threshold of return on capital would automatically be considered salary and subject to contributions, without the fund having to demonstrate anything about the level of remuneration. This measure must be developed further as part of the next AVS reform.
The Federal Council, on the other hand, has provisionally ruled out the idea of reclassifying majority shareholders as self-employed (as is the case in several neighbouring countries), judging this measure too onerous and beyond the intended objective.
In plain terms: the margin for manoeuvre that exists today could be significantly reduced in the years to come. It is wise to plan ahead.
How to find the right balance
The right split between salary and dividends depends on your personal situation: age, pension needs, capital structure, company profit, family situation, canton of residence. There is no universal formula. But some guidelines help you stay in a comfort zone.
Your salary must be consistent with your role. This is rule number one. A full-time director who pays themselves CHF 40,000 in annual salary whilst distributing CHF 300,000 in dividends inevitably attracts attention. The reference is what a third party would earn in the same role, in the same sector, with the same experience and training. In practice, for an SME director generating significant turnover, a salary between CHF 100,000 and CHF 200,000 is generally considered consistent, depending on the sector and company size.
Watch the dividend/tax value ratio. If your dividends exceed 10% of the tax value of your shares, you are entering a watchlist zone. This threshold is not an absolute limit, but it is the point at which compensation funds can initiate an examination. Remember to have the tax value of your shares recalculated regularly, as it evolves with the company’s results and equity.
Integrate pension provision into your thinking. A salary that is too low has direct consequences for your social protection. First, your state pension is calculated on your average determining income: an artificially low salary over several years can create gaps that cannot be recovered. Second, your occupational pension contribution is proportional to your insured salary: less salary means less retirement capital and less scope for tax-deductible buybacks. Third, your benefits in case of invalidity (DI and occupational pension) are also indexed to your declared salary. By the time you reach 50, these gaps become difficult to fill.
Think about pillar 3a. The maximum deduction for pillar 3a is linked to the exercise of gainful activity and AVS membership. Too low a salary can reduce your ability to fund your pillar 3a, or make that deduction less attractive if your marginal tax rate is low. See our article on this subject for more details.
Document your reasoning. In the event of an audit, being able to present written analysis explaining how you determined your remuneration (sector benchmarking, tax analysis, pension needs, company context) is your best protection. It is not a legal obligation, but it is a strong argument against an auditor.
Review every year. The right split is not set in stone. It must evolve with company profit, the tax value of your shares, your family situation and regulatory developments. What was optimal three years ago may not be today.
The role of your fiduciary
The salary/dividend split is not a parameter you set once and forget. It is an annual trade-off that crosses taxation, pensions, employment law and business strategy. It is also an area where mistakes are costly, often several years later, when the audit arrives.
If you have any doubt about your current balance, or if you have never done this exercise with your fiduciary, it’s probably the right time to discuss it.