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Tax on dividends for small businesses

Tax on dividends is a topic in many emails we receive in January, so we are writing this blog article to address the interest in this. For companies wishing to take advantage of the potential tax benefits of dividends, it is important to understand more about the taxation of dividends. In Sweden, the taxation of dividends can vary depending on the type of limited company and the size of the dividend received. This blog post will cover the basics of dividends in limited liability companies, provide an overview of the rules and regulations and how to ensure dividends are taxed correctly. We will also look at the potential tax savings that can be made by making a dividend. This is a topic of crucial importance for small business owners in Sweden who want to ensure maximum return from their business.

1. What is a dividend?

A dividend is a payment of unrestricted equity to shareholders in a limited company, usually in the form of accumulated profits of the company. Dividends are normally paid to shareholders in proportion to their shares in the company. If the limited company has different types of shares, dividends can be handled differently for the different types, but this is very unusual for smaller companies. Shareholders must pay tax on the dividends they receive, and the tax rate is 20% for most shareholders in limited liability companies. The so-called 3:12 rules govern how much tax you have to pay and at what tax rate.

2. How are dividends for limited liability companies taxed according to the 3:12 rules?

Briefly, the 3:12 rules for taxation of dividends concern how much dividends you may receive from your limited company at lower taxation. The tax rate for this dividend is currently 20%. If you receive a dividend that is greater than the allowed dividends (utdelningsutrymme) specified in the 3:12 rules, the excess amount is taxed as income from labor, i.e. in the same way as salary. There is also a ceiling amount for how much you can be taxed for as income from labor, but it is such a large amount that it is rarely relevant for small business owners. Worth noting is that dividends are made from taxed profits, so before the dividend is made, corporate tax has been paid on the profits. Corporate tax is currently 20.6%.

3. How much dividend can I withdraw?

Technically, a company can decide on a dividend up to and including the free equity determined in the most recent annual report. For small business owners, however, this is not always attractive, as dividends at lower taxation can only be made up to and including the allowed dividend established under the 3:12 rules. So for small business owners, the question is usually how much dividends can be made at a lower taxation.

The maximum dividend that can be made for lower taxation is the lowest sum of:

  • The accumulated allowed dividends according to the shareholders K10-appendices. It is an appendix that belongs to the private income tax return. The allowed dividends is personal and not the company’s. If you are several shareholders and all of them did not become shareholders in the same year, the allowed dividends per share will not be the same. If the ambition is that all shareholders should only receive low-taxed dividends, then it will therefore be the shareholder with the least allowed dividends per share that will be limiting.
  • The established unrestricted equity from the most recent annual report. It is normally the accumulated profit in the company, but can also be e.g. the share premium reserve if you have ever issued new shares. If you don’t have any accumulated profits yet, you can’t make any dividends. So, start-ups have to wait until the first annual report is set.

Let’s take a make an example. If you are the sole owner of the company and have an unrestricted equity, normally the accumulated profit, of SEK 200,000, but the allowed dividends from the K10 appendix is SEK 195,250, then SEK 195,250 is the maximum amount that can be paid as dividends to lower taxation.

The allowed dividends you get according to the 3:12 rules is calculated by one of two different rules, which you choose yourself. The simplification rule is a standard amount that can be appropriated regardless of what has happened in the company, and that amount was SEK 187,550 in 2022 and is SEK 195,250 in 2023. The main rule states, simplified, that the allowed dividends is half of the total paid salaries in the company. In order to qualify for this rule, you must first draw a minimum salary yourself. The minimum amount is 6 income base amounts (IBB) + 5% of the total wages in the company. If you have many employees, there is also a ceiling amount of 9.6 IBB. This means that as long as you have drawn a salary of 9.6 IBB, you qualify for the main rule regardless of how big the total salaries in the company are. The allowed dividends are distributed according to the shares you have in the company, so if you use the simplification rule and own 50% of the company, your dividend space for 2023 will be SEK 195,250 x 50% = SEK 97,625.

4. When can I make a share dividend?

Dividends can be made when the company’s owners have held a general meeting and decided to pay dividends. This can either be done during the ordinary annual general meeting which decides to determine the annual report for the previous financial year, or during an extra general meeting which can be held at any time during the year. During the extraordinary general meeting, it is still the unrestricted capital from the previous annual report, which is limiting, one cannot determine unrestricted equity earned during the current year or decide on a dividend on the same.

5. What is meant by qualified shares?

For smaller companies, this is usually not relevant, but it can still be good to be aware of. What we covered in this article is dividends for qualified shares in limited companies, which is what the 3:12 rules concern. If it is not a limited company, and if the shares are not qualified, then other rules apply. A share is considered qualified if the shareholder (or a close relative) has been “active in the company to a significant extent”. The work efforts with which you contributed must have been of great importance to the company’s results.

In addition to this, the rules say that your shares are not qualified if outsiders (shareholders whose shares are not qualified):

  • Owns at least 30 percent of the company’s shares
  • Has the right to a dividend corresponding to his holding.

The assessment of whether the shares are considered qualified or not is based on the situation during the current tax year and the last five tax years. This means that if you sell 30% of the shares to shareholders who are considered outsiders, your shares are still qualified for the next five years. This rule is also sometimes used to avoid taxation from labor income, if you have made a very large profit, by putting the company idle for five years and then withdrawing the entire remaining profit for capital taxation.

In summary, dividends can be used to keep your tax costs down. How much dividends you are allowed to make is governed by the distribution space from the 3:12 rules and the accumulated profit of your company. Decisions on dividends can only be made for free equity (accumulated profit) as determined in an annual report.

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