Dividends or salary: the underlying question

Every shareholder who works in their own company eventually faces the same question: is it more efficient to draw a salary or to distribute profits as dividends? It is one of the most frequent questions in business tax advisory work, and also one of the questions that most often receives oversimplified answers that do not hold up to serious analysis.

The answer is neither salary nor dividend. It depends. And understanding what it depends on is precisely what distinguishes an efficient remuneration structure from one that generates more tax cost than necessary or, worse, contingencies that surface years later in the context of a tax audit.

Why the equation is different for the company than for the shareholder

The first element that complicates the comparison is that salary and dividends receive a radically different treatment under Spanish Corporate Income Tax (Impuesto sobre Sociedades).

A salary paid to the shareholder who works in the company is, where the relevant requirements are met, a deductible expense that reduces the company’s taxable base. A dividend, by contrast, is never deductible: article 15.e) of the Corporate Income Tax Act expressly excludes from deductible expenses any remuneration paid out of equity. Dividends are distributed out of profits that have already been taxed at the Corporate Income Tax rate.

This means that when comparing salary and dividends, two equivalent forms of transferring money from the company to the shareholder are not being compared. What is being compared is an expense that the company bears before taxation against a distribution that takes place after taxation. Any efficiency analysis must incorporate both levels of taxation, not only the shareholder’s.

Salary carries a higher tax burden, but the company can deduct it

At the shareholder level, salary is integrated into the general taxable base of Personal Income Tax (IRPF) and is taxed at progressive rates, which depending on the level of income can reach significant marginal rates. To this must be added the cost of Social Security contributions, which in the case of a shareholder-director enrolled in the Special Self-Employed Workers Regime (RETA) is no longer a fixed amount chosen by the contributor but a variable linked to net income, following the reform of the contribution system by actual earnings introduced by Royal Decree-Law 13/2022.

Dividends, by contrast, are taxed within the savings tax base, at rates currently ranging from 19% on the first 6,000 euros to 30% on amounts exceeding 300,000 euros, following the amendment introduced by Law 7/2024. This rate differential against the general tax scale is what makes dividends attractive from the shareholder’s perspective when their income falls within the upper brackets.

That advantage at the shareholder’s Personal Income Tax level, however, has to be weighed against the cost to the company of distributing a dividend instead of deducting a salary. Profits that have been taxed at the Corporate Income Tax level and are subsequently taxed again in the shareholder’s Personal Income Tax carry an accumulated tax burden that is not always lower than that of salary, particularly where the company’s effective Corporate Income Tax rate is reduced.

A requirement that many companies fail to meet

Before considering which option is more efficient, there is a preliminary question that often remains unresolved: the remuneration of the director is valid, and deductible, only where it is properly contemplated in the company’s bylaws. Article 217 of the Spanish Companies Act (Ley de Sociedades de Capital) requires that the office of director be expressly remunerated by the bylaws and that the bylaws determine the applicable remuneration system.

Where the bylaws do not contemplate the remuneration, or do so in an imprecise manner, the Spanish Tax Agency may challenge the deductibility of the salary at the Corporate Income Tax level on the basis of article 15.e) LIS. The outcome is that the company does not deduct the expense and the shareholder is still taxed on the income: precisely the opposite of what was intended.

This is the kind of contingency that goes undetected until a tax audit takes place, and that may affect several tax years simultaneously.

Related-party transactions: the remuneration must be justified

Where the shareholder holds an interest equal to or greater than 25% of the share capital, the remuneration received from the company falls within the related-party transactions regime of article 18 LIS. This regime requires that the agreed remuneration reflect the market value, that is, the price that independent parties would have agreed upon under normal conditions.

A remuneration significantly outside market parameters, in either direction, may be subject to adjustment by the Tax Administration. In addition, failure to comply with the documentation obligations established under this regime may trigger specific penalties independently of the outcome of any valuation adjustment.

Conclusion

The choice between salary and dividends is neither a one-off nor an irreversible decision, but it is far from neutral. The real tax cost of each option depends on variables that interact with each other: the effective Corporate Income Tax rate, the shareholder’s income level, the applicable Social Security contribution and compliance with the formal requirements that condition deductibility. Modifying any one of those variables may change the outcome of the analysis.

What does remain constant is that a remuneration structure without proper technical support is always more expensive, whether through excess taxation or through contingencies that materialize late.

At Vicens Advisors we analyze in each case which remuneration structure is most efficient, taking into account the shareholder’s position, the market remuneration corresponding to the functions performed, the effective Corporate Income Tax rate available and the tax incentives applicable in each financial year. The objective is to adjust the remuneration year by year so that it meets both the applicable regulatory requirements and the highest possible tax efficiency at any given time.

For any query regarding the remuneration of the shareholder or the structure of your company, the Vicens Advisors team is at your disposal:

info@vicensadvisors.com · +34 971 55 40 11 · www.vicensadvisors.com

This article is provided for general information purposes only and does not constitute individualized legal or tax advice. For any specific matter, please consult a qualified tax advisor.© Vicens Advisors, S.L. All rights reserved. Any total or partial reproduction of this content, by any means or procedure, without the express written authorization of its owner, is prohibited. Any unauthorized use will constitute an infringement of intellectual property rights under applicable law