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Dividend or salary? Recently, compensation offices have leaned more towards assuming that earned income is salary

If there is an obvious disparity between an employee’s salary and their work performance, especially when compared to other employees within the same company, the compensation office can reclassify a dividend as salary under social-insurance law.
Dividend or salary? This is a key question for the compensation office.

The Swiss Federal Supreme Court was faced with the following facts: two doctors in a group practice each received an annual salary of CHF 170,000 and each distributed a dividend of CHF 250,000 to themselves.

The OASI compensation office reclassified the dividends as salary to the extent that the dividend exceeded 10% of the taxable value of the corresponding shares.

At the same time, the compensation office issued information about a change to its practices. For practical reasons, it said that it would in future dispense with individual case analyses and would instead base its calculations exclusively on the dividend yields.

The Swiss Federal Supreme Court rebuffed the compensation office’s change of practice. It was not acceptable, the court ruled, for the compensation office to change the law in order to increase its contributions. Furthermore, the court pointed out that the compensation office can only amend the salary/dividend split provided that two conditions are cumulatively met:

  • A disparity must exist between the taxpayer’s salary and their work performance – as determined via a third-party comparison with other companies as well as an internal comparison of the salaries of employees without an equity share in the business.
  • There must be a disparity between the employed capital and the employee’s salary.

In this case, the court ruled that there was an obvious disparity between the taxpayers’ salaries and their work performance, especially when based on an internal comparison within the company. (Source: BGE 9C_182018 dated 24/1/2019)

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