Delimitation of salary and dividend in Swiss social security law

Abstract of the article

The distinction between salary and dividend is crucial in social insurance law, as only earned income is subject to contributions. The compensation offices are responsible for economic qualification and check whether an appropriate salary is paid and the dividend is not excessive. Reclassification is possible under certain conditions. Tax authorities assess the qualification independently, but often follow the classification under social security law. A careful wage and dividend policy prevents subsequent claims.

Significance of the distinction between wages and dividends in social security law

The correct distinction between salary and dividend is a key issue for owners of corporations in Switzerland. It has a direct impact on the amount of social security contributions (AHV/IV/EO/ALV) and can lead to considerable additional claims by Social Security if handled incorrectly. In owner-managed companies in particular, the question often arises as to which part of the profit is deemed to be a relevant salary and which is deemed to be capital income.

Social security contributions are levied exclusively on earned income. This includes wages and income from self-employment. Capital gains, in particular dividends, are generally not included in income subject to contributions. However, the boundary between these two types of income is often blurred. Uncertainties regularly arise, particularly in the case of shareholders who are also operationally active in the company.

Whether a payment qualifies as earned income or capital gains (i.e. dividends) depends on its economic link. The designation in the accounts or in the tax assessment is not decisive for the compensation funds. Distributions from the net profit of a public limited company can also be a salary subject to contributions if they are justified by the employment relationship.

Due to lower profit tax rates for corporations and the lack of a pension effect of high wages, there is now an incentive for profitable, owner-managed companies to distribute profits in the form of dividends rather than increase wages from an overall tax perspective.

Practice and Jurisprudence

In the case of persons who are both shareholders and employees of a company, the distinction is particularly challenging. It can happen that payments are described as dividends, although they actually represent remuneration for the work performed. In such cases, the compensation offices can reclassify dividends as wages, which results in additional social security contributions.

The Federal Supreme Court has repeatedly confirmed that it is basically up to the compensation offices to make this assessment independently. At the same time, it attaches great importance to the tax qualification. According to Jurisprudence , a deviation from the tax split between salary and dividend is only permissible if, on the one hand, no salary or an unreasonably low salary is paid and, on the other hand, an obviously excessive profit is distributed. Both conditions must be met cumulatively. Offsetting is only permitted up to the amount of a salary customary in the industry. This Jurisprudence was confirmed again in 2019 (Federal Supreme Court ruling 9C_4/2018, 9C_18/2018 of January 24, 2019).

Criteria of the compensation offices for the assessment

The compensation offices use various criteria to assess whether a salary is deemed appropriate. In particular, they take into account the type of activity and the associated level of responsibility, the education, professional experience and industry knowledge of the insured person as well as the comparison with salaries of employees without participation. The assessment may also take into account the development of salaries in the company and the classification of the function, such as whether it is an operational management task or the administration of a holding company. The compensation offices use the Salarium salary calculator from the Federal Statistical Office (FSO) as a guide. However, it does not replace an individual check, as these statistics are based on average values.

The Federal Supreme Court itself does not specify a fixed limit for when a dividend is considered excessive. However, the directives of the Federal Social Security Office (FSIO) state that a dividend is considered disproportionately high if it amounts to ten percent or more of the tax value of the participation rights. As the cantonal valuation methods differ and the SSK circular no. 28 on the valuation of securities without market value for wealth tax purposes is merely a recommendation, the application of this limit may vary from canton to canton. A dividend may therefore be considered excessive in one canton, while it is still considered permissible in another.

Audit system of the compensation offices for high dividends

The audit by the compensation offices is carried out in two steps. First, they check whether the distributed profit exceeds ten percent in relation to the tax value of the participation. If this is not the case, no further investigation is carried out. If the distribution is higher, the salary actually paid is compared with a comparative salary customary in the industry. Only if the salary is unreasonably low will it be reclassified as a salary subject to contributions.

Reclassification is excluded if the salary paid is deemed appropriate. This also applies if a high dividend is distributed at the same time. In certain cases, it is also accepted in practice that dividends from companies without employees or without salary expenses are not reclassified if the parties involved receive a fair market salary from another employer. In this respect, the approach of the compensation offices remains schematic.

Determining the salary customary in the industry is challenging for the compensation offices. The assessment is particularly difficult in the case of multiple functions or a lack of comparable persons. In addition, employers only report salaries and not dividends paid out. A check is regularly only carried out as part of an employer check and therefore with a considerable delay. If an excessive dividend is found, the compensation office can demand additional social insurance contributions up to the amount of a normal industry salary.

Tax treatment after reclassification under social security law

A reclassification of a dividend as a salary by the compensation office is generally not binding for the tax authorities, as the tax qualification is carried out independently. However, if the social security authorities reclassify distributed profits as wages, this is regularly followed up for the purposes of income tax, provided that both the capital company and the person involved have not yet been definitively assessed for tax purposes.

Conclusion

The distinction between wages and dividends in social security law is challenging. In many cases, excessive dividends are only recognized at a late stage, if at all. On the one hand, this leads to considerable legal uncertainty for the persons concerned and, on the other hand, to high costs, as it is often no longer possible to verify this for tax purposes, which can result in multiple burdens. An early review of the salary and dividend policy by specialists is therefore recommended. In this way, subsequent claims for additional contributions can be avoided and planning security created.