Taxation of limited liability companies is based on earnings for the accounting period – taxable income minus deductible expenses. Expenses include the pay of the company’s owner and possible employees, and other production-related expenses.
It is important to understand that, in the case of limited liability companies, an owner-manager and company are two distinct parties with their own obligations to pay tax. In other words, corporate tax must be paid on a limited liability company’s profit. The corporate tax rate for limited liability companies is currently 20 per cent.
If the limited liability company pays salary to employees, tax on the salaries is paid as withholding tax. Tax is also due on any dividends paid out. The company must also charge customers for VAT on its goods and services and pay this to the state.
Prepayment taxes are paid throughout the accounting period
Limited liability companies pay prepayment taxes on their income, either once a month or twice in the accounting period. The tax amounts depend on income in previous accounting periods. Tax paid by a new limited liability company is based on an estimate of taxable income derived from the business plan and profitability calculations.
If prepayment taxes do not cover the tax payable on actual income, the limited liability company can make an additional prepayment or pay back taxes later to cover all taxes due.
Any overpayments are paid back to the company later, as tax refunds. If your limited liability company’s income becomes much smaller or higher than forecast, you should contact the Finnish Tax Administration and adjust the estimate.
Paying a dividend may be more cost-effective than paying salary
Dividends paid out by limited liability companies are taxed as part of the personal tax liability of shareholders.
Taxation of dividends is affected by whether the dividends are paid by a listed or unlisted company. Dividends paid by unlisted companies are taxed as shareholder’s capital income and/or earned income, but part of the dividend is tax-free. The size of these elements depends on the mathematical value of the share based on the company’s net worth and on the amount of dividend paid.
As a rule of thumb, if the company’s net worth is high, a dividend payment may be more beneficial than salary in terms of the personal taxation of an entrepreneur holding shares in the company. Net worth is the amount left after deduction of liabilities from the company’s financial assets.
Taxation of limited liability companies is highly complex. A good accountant will help an entrepreneur to navigate the twists and turns of taxation, and manage it in the best way for the company. A good accountant is an important source of support for any entrepreneur, helping them to focus on their core competencies.
Learn more about income taxation
Learn more about taxation of dividends
New entrepreneur: how to set up a business and manage its taxes
Olavi Tuomi, Leading Tax Specialist at the Finnish Tax Administration, was interviewed for the article.