Director pay
The alternative that is deductible for the company.
OpenCompanies · Profits and shareholder pay
Dividends from an SRL
SRL dividends start from one rule: the company's profit is not the shareholder's money until a distribution has been resolved. And once it is, the way it leaves the company determines how much of it actually reaches you, with differences that add up to a good deal over a year.
01 · The conditions
When SRL profits can be distributed
Distribution is not unrestricted. It requires a profit that actually exists and is available, shown in duly approved financial statements, and compliance with the limits the Italian Civil Code sets to protect the company's creditors.
- Financial statements approved by the shareholders' meeting: without approval there is no distributable profit.
- Legal reserve set aside in the required proportion until the legal limit is reached.
- Past losses covered: as long as the capital is eroded by losses that have not been made good, distribution is barred.
- Non-distributable reserves respected: some reserves, by their nature or because they are restricted, cannot be distributed.
- Shareholders' resolution ordering the distribution, stating the amount and the payment date.
Taking money out of the company without a distribution resolution is not a dividend: it is a loan to the shareholder, which must be repaid, or a withdrawal that risks being reclassified, with tax and civil law consequences.
02 · How it is done
The distribution resolution
The distribution of the year's profits is normally resolved at the same meeting that approves the financial statements, but nothing prevents it being resolved later on reserves already built up.
Approving the financial statements
The shareholders' meeting approves the financial statements and takes note of the result for the year.
Allocating the result
The meeting resolves the allocation to the legal reserve, any allocation to other reserves and the part to be distributed.
Minutes
The resolution must be minuted, stating the amount per share and the payment date.
Payment and withholding
When paying, the company applies the required withholding tax and pays it over with an F24 (the Italian tax payment form) by the deadline.
The shareholder's right to the dividend arises with the resolution, not with the end of the financial year. Until then the profit belongs to the company and, as such, is available to meet the company's obligations.
03 · What is left
How SRL dividends are taxed
For individuals who hold the shareholding outside a business activity, dividends are subject to a final withholding tax applied by the company when it pays them.
Because it is a final withholding tax, the dividend does not form part of the shareholder's total income: it is not added to other income, it does not push up the marginal rate and it does not have to be declared.
Bear in mind, though, that the profit has already been taxed in the hands of the company. The overall burden is the sum of the two stages, and it needs to be compared with that of the alternatives.
| Recipient | Treatment | Note |
|---|---|---|
| Individual, not a business owner | Final withholding tax | Does not form part of total income |
| Individual, business owner | Partly included in business income | According to the set percentages |
| Limited company | Partly excluded from the taxable base | To avoid chain double taxation |
| Società semplice (simple partnership) | Specific transparency regime | Attributed to the partners under its own rules |
| Foreign recipient | Withholding tax, possibly reduced under a tax treaty | Requires proof of tax residence |
04 · The choice
Director pay or dividend: which works better?
It is the recurring question for anyone with an SRL (Italian limited liability company) with a few shareholders who work in the business. There is no answer that always holds: it depends on the size of the profit, the shareholder's other income and their social security position.
| Aspect | Director pay | Dividend |
|---|---|---|
| Deductible for the company | Yes, it reduces taxable income | No, it distributes profit that has already been taxed |
| Taxation of the recipient | Progressive rates on total income | Final withholding tax |
| Social security contributions | Due, split between the company and the director | Not due as such |
| Personal tax deductions | Can be used against ordinary tax | Cannot be used |
| Pension credit | Yes | No |
| Flexibility | Can be resolved and changed during the year | Tied to the available profit |
| Access to personal credit | Provable, regular income | Less readily recognised by banks |
The mix that often works
In practice people rarely choose one or the other exclusively.
- Director pay high enough to use up the available personal tax deductions
- Pay that secures a social security position and a provable income
- The rest distributed as a dividend, if the profit allows
- The balance point shifts every year with the expected income
05 · Distributing during the year
Interim dividends and distribution of reserves
Distributing before the end of the financial year is possible only within narrow limits, and for SRLs the conditions are stricter than for joint-stock companies (SpA).
- The distribution of interim dividends is allowed only where the legal conditions are met, and they are not met in most small SRLs.
- The distribution of profit reserves built up in previous years, on the other hand, can be resolved at any time, at a dedicated meeting.
- Capital reserves follow a different regime from profit reserves, under both civil and tax law: the distinction must be checked before resolving.
- A distribution made without the required conditions exposes the directors to liability and may oblige the shareholders to pay it back.
In small SRLs, the practical way to advance cash to shareholders during the year is not an interim dividend, but the distribution of reserves from previous years or director pay paid out periodically.
06 · What to avoid
The most common mistakes
These are management mistakes, not calculation errors, and they almost always come to light during an inspection or a change in the company's ownership structure.
- Withdrawing without a resolution, creating a debt from the shareholder to the company that builds up over the years.
- Distributing while there are uncovered losses, with liability for the directors and an obligation to pay the money back.
- Failing to apply the withholding tax or paying it late: the company is liable for it itself.
- Confusing profit reserves and capital reserves, with different tax effects for the shareholders.
- Using the company card for personal expenses: it is not a distribution, it is a non-deductible cost and potentially income to be reclassified.
- Not checking the social security position of a shareholder who works in the business, for whom contributions may be due regardless of dividends.
Frequently asked
The questions that keep coming up
Can I take money from the company when I need it and sort it out at the end of the year?
Technically every withdrawal must be classified: it is either pay, a documented expense reimbursement, a shareholder loan to be repaid or a resolved distribution.
A shareholder current account that grows year after year without being repaid is one of the situations examined most closely during an inspection, and it is also a problem if you sell your shares.
Do dividends have to be declared on the tax return?
For an individual who is not a business owner, no: the withholding applied by the company is final and settles the tax on that amount.
Dividends received as part of a business activity or by foreign recipients are a different case and follow their own rules.
Do I pay INPS contributions on the dividend?
The dividend as such is not a basis for social security contributions. Be careful, though: a shareholder who works in the company in a commercial sector must pay contributions to INPS (the Italian social security institute) on the share of business income attributed to them, and this applies whether or not anything is distributed.
So it is not true that distributing dividends instead of pay wipes out the contribution burden: it depends on the position of each shareholder.
If the company has profits but no cash, can I still resolve a distribution?
Formally yes, if the profit is available: the resolution gives the shareholder a right to payment, which can remain unpaid.
It is a choice to weigh carefully, though, because it creates a debt from the company to its shareholders that forms part of its financial position and must be taken into account in its organisational structures.
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Director pay, dividend or both: the mix can be calculated
It depends on the expected profit, the shareholder's other income and their social security position. It is a calculation you do once and that holds for years.