Taxes on dividends
Introduction to taxes on dividends
Dividends are one of the main advantages of starting a limited company compared to a sole proprietorship for those starting a smaller business, so understanding taxes on dividends is understanding how to get the most out of your business financially. In this article, we will cover everything you need to know about tax on dividends, including how it works, which rules apply, and how you can optimize your taxation according to the Swedish tax rules.
Tax on dividends: Overview
In limited companies, in addition to salary, you can also pay dividends as compensation to yourself. Dividends are distributed to all shareholders in proportion to their ownership, so you cannot decide on different dividend amounts to different shareholders in anyway you want.
The tax on dividends is 20% as long as it is within the allowed dividends that you can credit within the so-called 3:12 rules, and which is calculated on your K10 appendix in your private annual tax declaration. Dividends can be made from the accumulated profit established in the annual report. Corporate tax is currently 20.6%, so the total tax on dividends will be 36.48%.
The 3:12 rules and their significance for tax on share dividends
The so-called 3:12 rules are a central part of the taxation of dividends in Sweden. They aim to create a balance between the taxation of income from labor and income of capital gains for owners of small businesses. These rules limit the possibility of converting income from labor to income from capital with the aim of reducing tax. It may seem strange that there are rules that can be used to reduce tax, but basically it’s about small business owners investing both time and money in their businesses, and then there needs to be rules that help define what percentage of the return from the company that is considered to come from labor, and how much is considered to be return on invested capital.
Allowed dividends: How it is calculated and how it affects your tax
The low-tax dividends you can make in your company is limited by the minimum value of:
- The determined unrestricted equity in the latest annual report. It normally means the accumulated profit that the company has. If you have no accumulated profit, you cannot make any dividends.
- The allowed dividends defined according to the 3:12 rules and calculated in the K10-forms of the company’s partners that belong to their private annual tax declarations
So, if your company has an accumulated profit of SEK 250,000, but you only have SEK 187,550 in allowed dividends, then you can make a capital taxed dividend of SEK 187,550 at most. You can make a dividend of SEK 250,000 if you want, but then SEK 187,550 of it will be taxed as income from capital and SEK 62,450 as income of labor.
Common misconceptions about tax on dividends
There are some common misconceptions about tax on dividends that we intend to help clear up.
- It is always beneficial to take as much dividend as you can
There are great tax advantages to taking dividends when you already have a good income from labor. If you have an income that exceeds the cut-off point for state income tax, it is always advantageous to pay dividends. In case of lower income from labor, it may be advantageous to raise the salary rather than to pay dividends. This is to ensure earnings for the general pension and income qualifying for sickness benefits. With really low income from labor, the tax on dividends can even be higher, because the tax on lower income is low.
- You cannot withdraw more dividends than the allowed dividends space
You can absolutely pay more dividends than you have in allowed dividends. If you do, however, it is not taxed as capital income, but as income of labor. This is not as beneficial as income from capital, but it is still more beneficial than taking a salary, because there are no social taxes to pay for dividends.
- You can take dividends whenever you want as long as the company is profitable
Even if the company is very profitable, you must always wait until the profit is established in an annual report. This means that you cannot start paying dividends in a newly started company, regardless of how profitable your business is. It also means that it is not enough to wait until the end of the financial year, but the annual report must also be established first.
Our general recommendation is to focus on building a profitable company and to be able to withdraw salary up to the break-even point of state tax (613,900 SEK in 2023, or 683,200 SEK if you turned 66 at the beginning of the year) before the dividends are paid. The allowed dividends can be saved for the future, so when the company is so profitable that there is money left after you take salary up to the state tax break-off point, then you will have saved a lot of allowed dividends and can save a lot of tax by paying a dividend then instead. If your business is not expected to consistently generate a salary that reaches state tax, you can consider paying a dividend anyway, but in that case we recommend at least withdrawing salary to the highest pensionable income (SEK 557,250 in 2023) first. If you prefer to withdraw money now rather than during retirement, it is financially beneficial in the short term to pay dividends even if your salary does not reach the maximum pensionable income.
How do I fill in my K10 appendix?
The K10-appendix is a part of your private annual income tax return, and you can find it in the Income tax return 1 e-service if you log on to www.skatteverket.se. You can access it under the heading Attachments. There are two different rules you can choose between when filling in the K10-appendix.
The simplification rule is a rule with a standard fixed amount that you receive in allowed dividends. It was SEK 187,550 in 2022 and SEK 195,250 in 2023. The simplification rule has no requirements to meet, so it can always be used, but you may only use it for one business that you own.
The main rule has a salary requirement that you have to meet in order to be used, and this rule gives you a higher allowed dividends than the simplification rule does. The wage requirement is 6 IBB + 5% of your company’s total cash gross wages. If you have no other employees in the company, you need to withdraw a salary of at least SEK 469,263 throughout 2023 to meet the salary requirement. This rule must be used if you already used the simplification rule in another company that you own during the same year. You can choose which rule to use every year, you don’t have to use the same one every year.
When you have determined which rule you want or need to use, you can fill in the K10 appendix
The simplification rule
- Enter your company’s registration number in the field “Company’s registration number” if this is the first time you are filling in the attachment. After that, it will be pre-filled for next time.
- Tick the Simplification Rule.
- In the “Number of shares owned at the beginning of the year” field, enter the number of shares you owned on the date indicated, which is January 1 of the year before the time of annual tax declaration. You can write either the number of shares that you own, or the percentage of the shares if it is a whole number. If the company has 500 shares and you are the only shareholder, then you can enter 100 or 500 as long as you are consistent with this in the follow-up questions.
- In the field “Total number of shares in the entire company at the beginning of the year” you either fill in how many shares the company has in total, alternatively 100 if you have entered a percentage shares in the previous field.
- If you have received dividends during the year, it is entered in the field “Dividend received”, if it is not already printed. You must declare decided dividends and not paid ones. So, if you e.g. decided on a dividend in December but paid it in January, then it must be declared in the year for December.
- Click “Save”, and then “Back”.
- Click on “Simplification rule – Dividend”
- On this page, you normally only need to click on “Summarize” and then “Save” and “Back”. The exception is point 1.4, which must be filled in if you sold or gave away shares as a gift during the year. But that is complicated and not covered in this article.
The main rule
This rule is more complex than the simplification rule, and it’s hard to write a simplified article that doesn’t risk getting you to fill it in the wrong way in some situations. Therefore, we recommend that you take help if you qualify for the main rule, and we are of course happy to help. Click here to access our contact form.
When you are done with your K10-appendix, you get new allowed dividends that you can use to get more favorable taxation. You can either use it already in the same year for which you declare income, or you can save it for the future.