When determining a managing director's salary, the tax office examines whether it is within reasonable limits. The salary is compared with that of an external managing director in a comparable position and industry. Important factors in this assessment include the company's revenue and profit, industry-standard salaries, and the managing director's responsibilities and workload.
Is the CEO salary appropriate?
There are no fixed limits, but the following values can be used as a guide:
- Small businesses with a turnover between 50,000 and 150,000 euros usually pay their managing directors between 30,000 and 60,000 euros annually.
- Companies with a turnover between 150,000 and 500,000 euros typically set the salary between 50,000 and 100,000 euros.
- For medium-sized companies with a turnover of 500,000 to 1 million euros, salaries usually range between 70,000 and 120,000 euros.
- In medium-sized companies with a turnover of 1 to 10 million euros, annual salaries between 120,000 and 250,000 euros are common.
- There are no fixed upper limits for large companies, but the tax office ensures that the salary is in reasonable proportion to the company's profits.
Tax advantages
The structure of a managing director's salary can have significant tax implications. A managing director's salary is treated as a business expense, thereby reducing the company's taxable profit. This means that both corporate tax and trade tax are reduced, resulting in a Tax savings of around 30 percent.
However, the managing director's salary is subject to personal income tax. This tax rate is progressive, meaning that higher salaries are taxed at up to 45 percent. To optimize the tax burden, it may be advisable to combine the managing director's salary with profit distributions.
A managing director's salary is taxed as regular income from employment, while a profit distribution is subject to capital gains tax. This amounts to a flat rate of 25 percent plus the solidarity surcharge, resulting in an effective tax burden of approximately 55 percent. In many cases, a high salary is therefore more tax-advantageous than a profit distribution, as it reduces the company's tax burden, and the managing director pays less tax due to the progressive income tax than with a flat-rate capital gains tax.
Risks: Hidden profit distribution
An excessive salary payment can be considered a hidden profit distribution by the tax authorities. This is the case if the salary is deemed unreasonably high because it is significantly above the industry standard. A hidden profit distribution also occurs if the managing director receives special payments not specified in the employment contract or if he or she is granted excessive additional benefits. Examples include luxury company cars, high pension contributions, or unusually high bonuses.
If the tax office discovers a hidden profit distribution, this has significant tax consequences. The excessive portion of the salary is no longer recognized as a business expense, meaning the company must subsequently pay corporate and trade tax on this amount. At the same time, the excessive amount is treated as capital gains for the managing director and subject to a 25 percent withholding tax. This results in double taxation, which should be avoided at all costs.
Optimization options for managing director salaries
There are various tax planning options available to maximize tax benefits and avoid hidden profit distributions. Regularly reviewing salary levels is essential to ensure they are in line with industry standards. Salary comparisons and industry studies can be used for this purpose.
Transparent documentation of all compensation decisions is also important. The managing director's contract should clearly specify not only the base salary, but also all bonuses and special benefits. This can avoid later disputes with the tax office.
It is also advisable to seek tax advice. An experienced tax advisor can help you optimally structure your CEO's salary to take advantage of tax benefits and minimize legal risks.
Conclusion
Managing director salary is a central component of corporate management and should be set carefully. It impacts not only the company's tax burden but also the managing director's personal tax burden. A balanced salary structure can help leverage tax benefits while ensuring legally compliant and economically viable compensation.
Through careful planning, regular reviews, and professional tax advice, financial benefits can be achieved and potential tax pitfalls avoided. Ultimately, prudent salary structuring contributes to the company's long-term economic stability.
