The tax authority checks whether an executive salary is set at an appropriate level. To do this, the salary is compared with that of a third-party executive in a comparable position and industry. Important factors in this assessment are the company’s revenue and profit, industry-standard salaries, and the executive’s responsibility and scope of work.
Is the executive salary appropriate?
There are no fixed limits, but the following values can serve as a guide:
- Small businesses with revenue between €50,000 and €150,000 typically pay their executives between €30,000 and €60,000 annually.
- Companies with revenue between €150,000 and €500,000 typically set salaries between €50,000 and €100,000.
- For medium-sized companies with revenue between €500,000 and €1 million, salaries typically range between €70,000 and €120,000.
- In mid-market companies with revenue between €1 and €10 million, annual salaries between €120,000 and €250,000 are typical.
- For large corporations, there are no fixed upper limits, but the tax authority ensures that the salary is in an appropriate proportion to company profits.
Tax benefits
The design of the executive salary can have significant tax implications. An executive salary is treated as a business expense, which reduces the company’s taxable profit. This means that both corporate income tax and trade tax are reduced, resulting in tax savings of around 30 percent.
However, the executive’s salary is subject to income tax at the personal level. This is structured progressively, meaning that higher salaries are taxed at up to 45 percent. To optimize the tax burden, it may be advisable to combine the executive salary with profit distributions.
An executive salary is taxed as regular income from employment, while a profit distribution is subject to capital gains tax. This amounts to a flat 25 percent plus solidarity surcharge, resulting in an effective tax burden of approximately 55 percent. In many cases, a high salary is therefore more tax-efficient than a profit distribution, as it reduces the company’s tax burden and the executive pays less tax through progressive income tax than with a flat capital gains tax.
Risks: Hidden profit distribution
An excessive salary payment can be classified by the tax authority as a hidden profit distribution. This is the case if the salary is deemed to be unreasonably high because it is significantly above industry standard levels. A hidden profit distribution also exists if the executive receives special payments that are 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 authority detects a hidden profit distribution, this has significant tax consequences. The excessive portion of the salary is no longer recognized as a business expense, so the company must retroactively pay corporate income tax and trade tax on this amount. At the same time, the excessive amount is treated as capital income for the executive and is subject to 25 percent capital gains tax. This results in double taxation, which should be avoided at all costs.
Optimization options for executive salary
To maximize tax benefits and avoid hidden profit distributions, there are various design options. Regular review of salary levels is essential to ensure they correspond to industry-standard values. Salary comparisons and industry studies can be used for this purpose.
It is also important to maintain transparent documentation of all compensation decisions. The executive employment contract should specify not only the base salary, but also all bonus payments and special benefits in detail. This can prevent later disputes with the tax authority.
Additionally, it is advisable to seek professional tax advice. An experienced tax advisor can help structure the executive salary optimally to take advantage of tax benefits and minimize legal risks.
Conclusion
The executive salary is a central component of business management and should be set carefully. It affects not only the company’s tax burden, but also the executive’s personal tax burden. A balanced design of the salary can help leverage tax benefits while ensuring legally secure and economically sound compensation.
Through careful planning, regular review, and professional tax advice, financial benefits can be achieved and potential tax pitfalls avoided. Ultimately, intelligent salary design contributes to the company’s long-term economic stability.