Distribution of Profits

[sandyh2001in]

Can someone please explain, if below example to calculate Dividend distributions makes sense?


Assume , 47771 Eur left in a limited company as Profit.

You pay 12.5 % as Corp tax leaving 41800 eur

This if distributed as dividend, will attract Dividend Withholding tax at 20 percent, resulting in a payment of 33400 eur to Director.(DWT tax paid by company = 8400)


Assuming Directors income is ZERO from all other sources for that year (so that these Dividends form his only income), what kind of tax is to be paid on the dividend income?


A) Will this be 20 percent (because Director has no other income)

0.2 * 33400 = 6680

Director gets credit for the tax already paid by company as Divident Withholding tax, so essentially gets a credit of 8400.

NET = 6680 - 8400 = -1720 (Refund of tax)

NET payment = 33400 + 1720 = 35120 EUR

OR


B) Will this be 41 percent

0.41 * 33400 = 13694 eur

Director gets credit for the tax already paid by company as Divident Withholding tax, so essentially gets a credit of 8400.

So NET tax = 13694 - 8400 = 5294

NET payment = 33400 - 13694 (marginal income tax) + 8400 (credit for DWT) = 28106 EUR


(Not considering PRSI/USC, for sake of calculation)



Im asking as the Revenue website says this:

Dividend Withholding Tax at the standard rate of income tax applies to dividend payments and other distributions made by an Irish resident company , with some exceptions. Irish individual shareholders are taxable on the gross dividend at their marginal rate of tax but are entitled to a credit for the tax withheld by the company paying the dividend and to a refund of the balance where the withheld tax exceeds their tax liability.

 

[mandelbrot]

Im asking as the Revenue website says this:

Dividend Withholding Tax at the standard rate of income tax applies to dividend payments and other distributions made by an Irish resident company , with some exceptions. Irish individual shareholders are taxable on the gross dividend at their marginal rate of tax but are entitled to a credit for the tax withheld by the company paying the dividend and to a refund of the balance where the withheld tax exceeds their tax liability.

Neither of your calculations is correct, but A is closer to the mark. The first 32,400 of income in a year is taxable at the standard rate, the excess is taxed at 41%. If you have earned Zero, your marginal rate (the rate you pay on your next €1 of earnings) is 20%. Your marginal rate doesn't become 41% until you hit 32,400+.

Your figures suggest the director hasn't drawn any salary from the company. In the Irish tax system it makes absolutely NO sense to pay a dividend instead of salary to a proprietary director.

Why? Because dividend is not tax deductible in the company, but salary is.

Using the figures from your query (assuming 2011):

1st Option - pay salary.
47,771 cash profit in the company.
Pay a gross salary to the director of this amount.
The director will pay 11,132 in tax on this under PAYE.
The company will pay no corporation tax, as salary is a deductible expense.
So the outcome is that the director has 36,639 in his pocket (47,771 - 11,132).

2nd option - pay a dividend.
47,771 cash profit in the company.
Company pays Corporation tax of 12.5% - 5,971.
Pay a dividend to the director of 41,800, deducting the appropriate withholding tax (and remitting it to Revenue), and paying out the net amount to the director.
The director is taxable on the GROSS dividend (41,800) on his own tax return, therefore his tax liability is 8,684.
He will get credit for the withholding tax deducted by the company (8,360), so he will owe an additional 324 in tax at tax deadline time.
The outcome is that the director has 33,116 in his pocket (47,771 - 5,971 - 8,684).

 

[sandyh2001in]

2nd option - pay a dividend.
47,771 cash profit in the company.
Company pays Corporation tax of 12.5% - 5,971.
Pay a dividend to the director of 41,800, deducting the appropriate withholding tax (and remitting it to Revenue), and paying out the net amount to the director.
The director is taxable on the GROSS dividend (41,800) on his own tax return, therefore his tax liability is 8,684.
He will get credit for the withholding tax deducted by the company (8,360), so he will owe an additional 324 in tax at tax deadline time.
The outcome is that the director has 33,116 in his pocket (47,771 - 5,971 - 8,684).

director is married single income. His tax on 41800 should be 0.2*41800 that is 8360 yes? If he gets credit of 8360 then he pays no PAYE, and only PRSI USC yes?

 

[mandelbrot]

director is married single income. His tax on 41800 should be 0.2*41800 that is 8360 yes? If he gets credit of 8360 then he pays no PAYE, and only PRSI USC yes?

Under the alternative where you pay salary of 47,771:

There is no corporation tax as the company profit is reduced to nil.

Your income tax return is as follows:

41,800 @ 20% = 8,360
5,971 @ 41% = 2,448
Total tax = 10,808
Tax credits = (3,300)
Tax payable = 7,508
PRSI (4%) = 1,911
USC = 2,663

Net position: 47,771 - 7,508 - 1,911 - 2,663 = 35,689 in your hands


Just for completeness - Under the alternative where you take the money by dividend:

The company pays over the withholding tax to Revenue, as it is legally obliged to do. The director gets taxed on the full 41,800. If he is married, no other income, he will be taxed as follows:

41,800 @ 20% = 8,360
Less Tax credits = (3,300)
Tax payable = 5,060
PRSI (4%) = 1,672
USC = 2,245
Withholding tax credit = (8,360)
Balance due = 617


You had 47,771 (stuck inside the company).
The company paid 5,971 in Corporation Tax.
You then paid 8,360 (deducted by the co. for you) + 617 (due on your tax return).
You now have 32,823 in your hands.

 

[sandyh2001in]

Nice one!
With the above two calculations of yours in mind, what would you do if
1. In 2011, you have exhausted your personal income tax standard rate cutoff of 41800 and you are left with 47771 as profit in company as at 31/12/11
2. If you pay this 47771 as backdated salary of 2011 in order to escape Corp tax etc, you payout tax at 47 % and retain 53 %
3. However if you decide to retain this in company , and pay it out as dividends in 2012 , as per your calcs above, you retain 32823 of the 47771 which is 69 % retention. Good thing is you distributed your profits, so you wont pay surcharge on CT.
4. If you wish to use this 47771 as salary in 2012 from profit of 2011, you first pay CT of 5971, then as you didn't pay distributions you will pay after 18 months , surcharge of 3105
Available net for salary is 38695. PAYE is 4438, PRSI is 1548 USC is 2027, Net is 30680 that is 64 % retention
Assume no other salary payment for 2012 for 3 and 4 above, if you don't need big salary year on year , this way you can keep building up company profits, avoiding surcharge by distributing profits , and avoiding the murderous tax rates right?

 

[mandelbrot]

Nice one!
With the above two calculations of yours in mind, what would you do if
1. In 2011, you have exhausted your personal income tax standard rate cutoff of 41800 and you are left with 47771 as profit in company as at 31/12/11
2. If you pay this 47771 as backdated salary of 2011 in order to escape Corp tax etc, you payout tax at 47 % and retain 53 %
3. However if you decide to retain this in company , and pay it out as dividends in 2012 , as per your calcs above, you retain 32823 of the 47771 which is 69 % retention. Good thing is you distributed your profits, so you wont pay surcharge on CT.
4. If you wish to use this 47771 as salary in 2012 from profit of 2011, you first pay CT of 5971, then as you didn't pay distributions you will pay after 18 months , surcharge of 3105
Available net for salary is 38695. PAYE is 4438, PRSI is 1548 USC is 2027, Net is 30680 that is 64 % retention
Assume no other salary payment for 2012 for 3 and 4 above, if you don't need big salary year on year , this way you can keep building up company profits, avoiding surcharge by distributing profits , and avoiding the murderous tax rates right?

Sorry but you've exhausted my willingness to engage in this with you! The conventional wisdom in this area is that it is never tax efficient to pay a distribution when a tax deductible salary can be paid.

In your proposal above, you don't recognise that you can create a loss in the company in 2012 by paying (or accruing) a large salary, and this loss can be carried backwards to reduce the taxable income of the company in 2011.

Maybe someone else here will jump in and keep running numbers for you, but this is advice people pay for, and if your accountant is any good they should be advising you as to your options.

 

[sandyh2001in]

Thak you mandelbrot

 

[Joe_90]

I'm with mandlebrot.

Your proposal does not take account of a profit in year 2. If there is a profit you will pay 12.5% tax on it to avoid a 6.5% surcharge.
If there is no profit and you don't use salary to create a loss then you are paying 12.5% in Year 1 to avoid a 6.5% surcharge.

 

[sandyh2001in]

Thanks for this.
My prime intention is to cap directors salary at standard rate of 41800, so that he always pays tax at 20 percent rate. If profit exceeds 41800, balance is retained. Due to retention and non distribution , That balance reduces to 81 percent of original value after corporation tax and surcharge liabilities . That balance is extracted at the standard rate in subsequent months and also in the form of tax free expenses. Applying approx 20 percent tax on reduced 81 percent still gives you about 65 percent of money back.

In 2012 profit may be made, but that also keeps getting retained year after year, and when eventually extracted pays back 65 percent.

Intention is to pay anything but the higher rate of 47 percent. There is no hurry or need for instant gratification.

 

[WindUp]

I'm with mandlebrot.

Your proposal does not take account of a profit in year 2. If there is a profit you will pay 12.5% tax on it to avoid a 6.5% surcharge.
If there is no profit and you don't use salary to create a loss then you are paying 12.5% in Year 1 to avoid a 6.5% surcharge.

+1
speak to your accountant --- pension is probably the most efficient way of tax planning here