Dividend now versus reinvestment — a tax strategy

When a company makes a profit, the owner faces a strategic choice: take it as a dividend now, or leave it in the business and reinvest it in growth. The choice has a direct tax dimension — but it does not end there.

The tax mechanics

Company profit is taxed at 10% corporate income tax, whether it is distributed or retained. Only on an actual distribution to an individual owner does a further 5% dividend taxbecome due. In other words:

While the profit stays in the company it bears only 10%; the moment it is taken out, the total burden becomes around 14.5%.

The case for taking the dividend now

• Liquidity for personal needs or investments outside the business — diversifying risk beyond a single company.
• Certainty against changes in tax rates — money already taken out is taxed and settled, whatever the law does next.
• Building personal capital that is not exposed to the risks of the business (creditors, claims against the company).

The case for reinvesting

• Deferring the 5% dividend tax — the reinvested sum works in full, undiminished, until it is taken out.
• Faster growth through internal funding instead of interest-bearing debt.
• A stronger balance sheet (equity) when applying for bank finance or EU funding that requires co-financing.

A practical rule

If you have a clear reinvestment plan whose expected return beats what the money would earn if taken out and invested elsewhere, retaining it in the company is normally more tax-efficient. If you have no such plan and the profit will simply sit as idle cash, taking a reasonable part as a dividend is the more logical course — dead cash in the company brings no advantage, it merely defers the tax.

The balanced approach

There is no universally right answer — the decision must combine the tax arithmetic with the owner’s actual investment strategy. A combination of a partial dividend (for personal liquidity and diversification) and partial reinvestment (for growth and balance sheet strength) is often the most balanced approach, and it is what we recommend to most owners of stable companies.

Tax traps when distributing a dividend

A distribution requires a resolution of the general meeting or sole owner, and profit shown in the annual financial statements — you cannot distribute in advance “by feel”. Drawing cash from the company without a basis can be reclassified by the Revenue Agency as a hidden distribution of profit, which carries penalties. The same goes for loans to the owner that are never repaid — in certain circumstances these are treated as hidden distributions and taxed accordingly. Every withdrawal must therefore have a clear legal basis and documentation.

Frequently asked questions