Getting money out of your company across borders: salary, dividends, royalties or loans

For an owner living in the same country as their company, the choice between salary and dividends is familiar. Once the company is in one country and the owner in another, every payment has two tax systems looking at it: the company's, which decides whether the payment is deductible and whether tax must be withheld, and the owner's, which taxes what arrives. The treaty between the two countries, if there is one, decides how much each side may take.

The four main routes

• Salary or director's fees. Usually deductible for the company. Employment income is generally taxable where the work is physically done, so a founder working from their home country is often taxed there even if the company is abroad. Social security follows its own rules and can apply in either country.
• Dividends. Paid from profits that have already borne corporate tax, and not deductible. The company's country may withhold tax on the way out; rates vary widely and are often reduced by treaty. The UK does not generally withhold tax on dividends; many other countries do.
• Royalties or licence fees. Deductible for the company if the owner, or the owner's company, really owns the intellectual property and the fee is at a market rate. Withholding tax often applies, again reduced by treaty. Tax authorities examine these closely where the IP was created inside the paying company.
• Loans. A loan is not income, so it is not taxed as such when paid, but most countries have rules for loans to shareholders. In the UK, a loan from a close company to a shareholder that is not repaid within nine months of the year end triggers a temporary corporate charge, refunded when the loan is repaid, and a cheap loan can be a taxable benefit.

Treaties, withholding tax and paperwork

A double tax treaty typically caps the withholding tax on dividends, interest and royalties, and requires the country of residence to give credit for tax paid at source. Within the EU, directives can remove withholding on qualifying payments between associated companies altogether. The relief is rarely automatic: the paying company usually needs a certificate of residence or a specific form before it can apply the lower rate, otherwise it withholds the full domestic rate and the owner has to reclaim the excess, which can take a long time.

Treaty benefits also have conditions. Most treaties now include a principal purpose test, which denies benefits where obtaining them was one of the main purposes of an arrangement. The recipient must usually be the beneficial owner of the income. A holding company with no staff, no decisions and no real activity in its country is unlikely to pass these tests.

A mix, set once a year

For most owners the answer is a combination: a salary that reflects the work done and secures social security and pension rights, dividends for the balance, and royalties or management fees only where there is a real asset or service behind them. The mix should be set before the financial year starts, documented through board minutes and agreements, and reviewed when either country changes its rates.

Before you sign

• Before signing an employment contract, service agreement or licence with your own company, check where the income will be taxed and whether withholding applies.
• Obtain certificates of residence and treaty forms before the first payment, not after.
• Price royalties and fees at market rates and keep the transfer pricing evidence.
• Treat shareholder loans as loans: written terms, interest where required, and a repayment plan.

If you are about to change how you pay yourself, or your company and your home are about to be in different countries, call us before you sign. The first 30-minute consultation is free, and every request is answered within 24 hours.

General information, not advice. Tax rules change and depend on your facts. Greyridge Global coordinates and delivers cross-border tax and corporate work through appropriately licensed professionals in each jurisdiction. Legal, tax, immigration, fiduciary, and regulated services are provided by qualified advisors engaged for your matter. Nothing on this page is tax or legal advice.