Transfer of corporate profits to private assets

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Corporate profits can be distributed to shareholders in the form of wages or dividends (payout strategy) or can be drawn tax-free in the form of a capital gain in the event of a sale (retention strategy).

Distribute or retain?

There are basically two different distribution strategies: profits can be retained within the company (retained) or transferred to the shareholders. The retention strategy aims at capital gains, which are tax-free when selling a privately held corporation. Within the distribution strategy, a shareholder who is an employee has the option to disburse the profits in the form of wages or dividends.

Retention Strategy

The retention strategy saves income tax on the retained profits. On the other hand, non-operating funds accumulate in the company. Profits that have been retained over a longer period complicate the sale of a company, as the buyer must also finance the surplus funds. Moreover, it is sometimes unclear whether the profits come from operational activity or from asset effects such as interest income.

Distribution Strategy

The distribution strategy provides more transparency in this regard. Another advantage of a distribution is that the withdrawn funds are no longer exposed to entrepreneurial risks. However, when profits are distributed in the form of dividends, double taxation occurs: first, a tax on the profit of the corporation (profit tax) and then again on the dividend paid to the owner (income tax). In the case of distribution in the form of wages, social security contributions are also due in addition to income tax. For more information on the distribution strategy, please read our article Wages vs. Dividends.

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