It quite common to assume that that dividends are always a better option than salary from a tax point of view, however this is not true in most situations. It is not possible to give a general answer to the question of whether it is better for an entrepreneur to take out income as dividends or a salary, that would be applicable to all situations. 

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When comparing different salary vs. dividend outcomes, the first thing to consider is entrepreneur's annual need for money. In other words, one should first find out how much funds are needed to be withdrawn from the company, and only then can the optimal source of income be calculated. 

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Due to the progressive nature of the income taxation system i Finland, it can however in many situations be assumed that salary should be withdrawn at least until the point where the tax rate on the salary exceeds the minimum tax rate on dividend income. 

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The corporate tax rate in Finland is currently 20 % while the capital income tax rate is at least 30%. Under certain conditions, only 25 % of dividends from non-listed companies are taxed.. This means that the minimum total tax rate for a natural person’s dividend income is 26%. *

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Correspondingly, the tax rate for an employee with an annual income of 40 000 € is about 26 %, and it is easy to think that tax-reduced dividends are a viable option only after that. Due to the progressive nature of the income tax, the average tax rate of the beneficiary is however of little use in tax planning. This is because the beneficiary pays very little tax on first euros earned, but instead a lot on the last ones, usually up to 40-50 %. For this reason, the total tax rate of the dividends should not be compared with the average tax rate of salary income, but it should instead for each income category be assessed whether the next euro would be more advantageous to withdraw as a salary or as a dividends. 

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The marginal tax rate on salary income rises very sharply at an annual income rate of around 20 000 €, 20 000 €, why any additional income after this amount is often better to withdraw as tax-reduced dividends, as long as the necessary prerequisite are met. 

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Calculating the optimal combination of dividend and wage is however rarely that straightforward, because the following things among others also usually have a significant effect on the outcome:

• The company's net assets and liquidity

• The company's financing costs and return on invested capital

• The company's profits and possibilities to deduct salary expenses from its taxable income

• The entrepreneur's other possible income and deductions

• Other assets in the entrepreneur's possession that can be liquidated, as well as possible associated tax consequences

• The entrepreneur's plans and goals regarding his/her own long-term savings

 

​Successful tax planning for an entrepreneur requires understanding of both personal and business income taxation, as well as the entrepreneur's short- and long-term financial goals and requirements. With proper and careful planning, unnecessary and expensive mistakes can be avoided, and therefore it is always a good idea to analyze the different options and outcomes together with a taxation and accounting specialist.