Value means different things to different people. Entrepreneurs consider income a value. Whether it’s a monthly income or the income from a business sold, everything can be utilized. Their economic and fiscal balance has to be optimized though. There are various options to take in order to achieve this. Management of cash surpluses, occupational pension plans, and the distribution between salaries and dividends. If you’re unsure about what to do, you can always contact the Piguet Galland asset advisory team. Since they have a lot of expertise on the subject, it might be beneficial to hear them out before making an informed decision.
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For the entrepreneur, the value depends on the income, generated month after month, and the capital gain realized if the business is sold. It is this capital that feeds the assets. As such, it deserves to be exploited to its full potential and developed with a view to achieving results. First of all, their economic and fiscal balance must be analyzed and optimized.
Occupational pension plans, management of cash surpluses, and the distribution of income between salaries and dividends are various instruments that facilitate this optimization. The conundrum of choosing between salaries and dividends is quite symptomatic of the difficulties that entrepreneurs may encounter in making the most appropriate choices. Many prefer dividends on the grounds that they are less taxed and are not subject to social security contributions. However, the payment of dividends reduces the employee share and, with it, the 2nd pillar contributions that ensure retirement capital. It should be remembered that income subject to AHV contributions can be insured under the occupational pension scheme up to CHF 846,000, with various tax exemption options, unlike dividends.
Occupational pension provision offers undeniable advantages. The tax breaks associated with the compulsory and non-compulsory schemes for up to five years after the normal retirement age can quickly amount to hundreds of thousands of francs. In principle, all contributions paid can be deducted from taxable income. In addition, assets held in the 2nd pillar are exempt from taxation until the benefits mature. Contributions include both ordinary contributions and the purchase of years, which have the advantage that they can be used in various ways. They offer an interesting recourse in the management of surplus cash at the time of the transfer of the company. The tax authorities can reclassify them as dividends and subject them to income tax at 60% of the amount that should have been received in that form. Why neglect them when it is possible, in advance, to convert these surpluses into salaries and to neutralize them fiscally by buying back years? The entrepreneur who is sensitive to these points will anticipate the capital flows that he will receive overtime. It will thus be easier for him to ensure an ideal distribution between the capital that will ensure his lifestyle and that which will constitute his retirement savings. He will be able to prepare and carry out the life projects that are important to him more serenely.
Wealth management involves this compulsory financial planning process, which allows substantial gains to be made. Let’s take a practical example. Married and living in Geneva, Frédéric Chardonne, 51, owns a communications agency, registered as a sole proprietorship. His annual income amounts to CHF 280,000. His assets consist mainly of a flat, the market value of which is around CHF 1,200,000, an occupational pension plan, and a securities portfolio, consisting mainly of European equity funds, valued at CHF 750,000. The pension plan ensures salaries up to CHF 126,900 and the equity portfolio is fed by work income. The asset analysis that accompanies the financial planning reveals serious flaws in the asset structure, starting with the company name. Its book value is CHF 750,000, but the sale price could approach CHF 2 million. Although the 2nd Corporate Tax Reform has brought some improvements since 2011 for this kind of situation, there is still a significant tax burden on the capital gain. Considered as income, it is also subject to AHV contributions at a rate of 9.65%. Since the sale of shares is not taxed in principle, especially if the restructuring dates back more than 5 years, the conversion into a limited liability company is recommended. Secondly, rather than feeding the securities portfolio with taxed salaries upstream, it is more advantageous to set up a supplementary pension plan. This plan combines annual contributions of around CHF 35,000 and purchases of up to CHF 100,000 per year over 11 years. The cumulative net tax gain is therefore almost CHF 500,000. With the implementation of this new program, the pension capital available for retirement by 2027 will increase from CHF 1.1 million to over CHF 2.7 million.
This is the concrete result of this planning work. In doing so, the entrepreneur focuses on capturing the essential value that he will create throughout his career.
If your asset situation raises questions that you are unable to answer, or if you would like to benefit from our expertise before making informed choices, the Piguet Galland asset advisory team is at your disposal for a private diagnosis.