Tax optimization of an entrepreneur means optimizing her personal and her company’s taxes in a way that the lowest possible overall tax rate is achieved by legal means.
In the short term, it’s about how the profit for the financial year is taxed, the division between capital and earned income as well as finding an optimal and sound balance between paying salary and distributing dividends. In the long run, tax optimization focuses on ownership and corporate structures as well as on different kinds of arrangements which aim to ensure that the structure is optimal from a tax point of view especially in situations where the entrepreneur is planning to make an exit through a business acquisition, succession, or dissolution.
Tax optimization is not the same thing as tax minimization, as the purpose of optimization is to find the most efficient solution from a tax and business point of view, always considering the company's operating environment as well. In many cases, however, tax optimization achieves the same result as tax minimization.
Tax optimization of entrepreneur’s taxes
Entrepreneur’s annual tax optimization aims at distributing funds and taking assets from the company at the lowest possible tax cost. A limited liability company pays 20 per cent corporate income tax of its profit for each financial year. When a company pays salaries or distributes dividends to its owner, the owner is subject to either earned income tax or capital income tax.
When calculating only the entrepreneur’s taxes, the tax rate on dividend income is at its lowest 7,5 per cent and at its highest almost 40 per cent. However, the effective tax burden of the dividend is 26 per cent at its lowest and over 50 per cent at its highest when including the corporate income tax of 20 per cent. The marginal tax rate of the entrepreneur’s salary could, in turn, rise to 60 per cent. The salary is deductible in the company’s taxation whereas a dividend is not.
From a tax optimization perspective, the type of income the owner raises from his company is therefore of great importance. The most advantageous form can be planned and calculated by considering the personal situation of the entrepreneur and by taking into account the taxes paid by both the entrepreneur and the company.
During the life cycle of a company, it is possible to execute Mergers and Acquisitions (M&A) transactions that serve organizing company's operations and are also fiscally appropriate. Also, for example, timely succession can be a very effective optimization tool to minimize the amount of gift tax, inheritance tax and capital gains tax, considering the conditions for business continuity. Taxes of all parties should be considered when executing M&A transactions of successions.
Tax optimization considers the entire life cycle of the company and thus also the taxation of the next generation that continues the business. The most effective overall tax rate is generally achieved through long-term planning that begins with the corporate income tax and ends with the personal taxation of the business successor.
tax optimization – fiscales heps you
Fiscales helps businesses, owners, investors, and individuals to optimize their taxation. Finding a suitable tax solution starts by reviewing the customer's situation following a tax optimization plan which is executed together with the client.