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This isn't about some exact country, it's more about the general idea (which, I believe, is very similar in most of the world). But if you need some context, let's say that we're talking about a Limited Liability Company in the Netherlands (i.e. BV in Dutch).

Some company sold goods worth €100k, it did spend €10k on day-to-day stuff (like office rent, website hosting) and its employees expect €30k to be paid as salaries. Shareholders will distribute all the profits as dividends.

So, how are all the (major/common) taxes applied? In what order and on what portions are they calculated?

If we assume corporate tax of 25%, dividend tax of 15%, personal income tax of 40% and VAT of 20%, then is the following calculation correct?

For VAT we take the entire revenue: 100000 * 0.2 = 20000

This amount is subtracted from the revenue, which leaves us with €80k.

Then we must also subtract all the salaries: 80000 - 30000 = 50000

Company also withholds personal income taxes (and other minor stuff, like social security and pension contributions) from those 30000, so that employees get only a fraction of that sum.

And also we subtract the day-to-day operation costs: 50000 - 10000 = 40000

This remainder is taxed using the corporate tax: 40000 * 0.25 = 10000

Now we subtract that as well and this way we get the profit, right? 40000 - 10000 = 30000

And then, just for the distribution of that money, the company pays again, but now the dividend tax? 30000 * 0.15 = 4500

And this remaining €25.5k is what is distributed among the shareholders.

If, for the sake of simplicity, we have just one, which holds 100% of the shares, then it all goes to that shareholder, which in turn will pay personal income tax on that money: 25500 * 0.4 = 10200

So in the end the take-home for this shareholder will be: 25500 - 10200 = 15300

Is the idea of this calculation correct?

  • 3
    It depends totally on the jurisdiction. You may be surprised to hear in most USA states for example, an LLC is nothing more than a "pass through" entity. (There is utterly no difference in any tax calculation or payment if you just do business as "Misty Smith", or, you bother to form Misty Software LLC.) Certainly issues such as profit dividend treatments vary greatly around this globe, too ! – Fattie Sep 23 '20 at 22:17
  • VAT is calculated on the ex-VAT price. If your revenue including VAT is €100,000 and the VAT rate is 20% than the VAT payable is €16,667, not €20,000. If you want nice round numbers for your example, the revenue including VAT should be €120,000, which would include €20,000 of VAT. – Mike Scott Sep 24 '20 at 19:11
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I can't give you a precise ordering, but let me explain some misconceptions.

VAT is not revenue to the company. So if customers spend E100,000 on company products, E80,000 being for the products and E20,000 in VAT, then only E80,000 is considered revenue to the company. The company is simply collecting the rest on the government's behalf and passing it on to them.

Similarly it is irrelevant that the company withholds personal income taxes. The company subtracts the gross salaries as a cost. So if the company pays someone E50,000 gross salary the cost is E50,000, whatever is deducted from that salary. (If E10,000 was withheld then E40,000 would be sent to the employee and E10,000 to the tax office). Companies may also have to make social security contributions for their employees, which is different from withholding their contributions and would be an additional cost.

Once you have subtracted all the costs you have "profit before taxes" which is an entry you will find on company statements of accounts. Taxes are taken based on that value. Once you have subtracted the taxes you get "profit after tax", which is the actual amount of money the company has made (oversimplifying a bit)

Dividends are paid out based on the profit after tax. The company does not pay tax on the dividends. The person receiving the dividends may pay tax on them, just as the employee pays tax on their salary.

So approximately:

  • Revenue to the company is E80,000 (with E20,000 being sent to the government for VAT)
  • Costs to the company are E30,000 in salary and E10,000 in other costs.
  • Profit before tax is E40,000
  • E10,000 is paid in corporate tax.
  • E30,000 is the profit after tax, which may be distributed to shareholders as dividend. They may pay personal taxes on it.

Remember this is very, very simplified, and may not apply to any given situation. Consult professionals for your jurisdiction.

  • Besides, remember that the "other costs" might include VAT payments which can be subtracted from the VAT passed to the tax authorities. – glglgl Sep 29 '20 at 10:05

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