Sole proprietorship or umbrella company - tax implications

Hi all,

I’m about to start a contract. I’ve been asked if I prefer to work under an umbrella company or as self-employed (sole proprietorship legal form).

The main differences, as far as I understand, are the ones linked to insurances and pension (as self-employed there is no accident insurance, no pillar 2 contributions, etc…)

I have two main questions:

  • The total amount of taxes I’m expected to pay is the same more or less? (given the same taxable income)
  • If the income is more than 100k per year, as self-employed I’m expected to pay 7% VAT. Is this calculated before taxes? (so that the self-employed total taxes will be ~ umbrella taxes + 7%) If yes, why should I go this way?

Aside, what would be the benefit of having my GmbH company instead of the sole proprietorship legal form in terms of taxes?

In terms of taxes the GmbH needs to file it’s own taxes independent from yours. Sole Proprietorship would be fully part of your taxes. What people often do is to setup a GmbH to receive amount Y, pay corporate taxes on that (iirc ~10%) and then pay yourself amount X to have a rather low income and therefore low personal taxes. That way also stuff like cars can be accounted for as company property and wouldn’t need to show up in your wealth.

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Thanks a lot for your answer. I understand, it makes sense.

Do you know by any chance why people should go with self-employed if they earn more than 100k per year? (since they have to pay the same taxes and 7% VAT)

They really shouldn’t. If you’re over 100k turnover you have the option to be exempted by the VAT and that comes with most of the bureaucracy/accounting that a GmbH comes with.
As said the idea would be to form a GmbH, receive e.g. 120k in salary and pay yourself only 80k, the difference stays in the company and will be taxed at a lower rate.

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Ah ok, perfect! It definitely makes sense then.
Thanks for the explanations!

Can you explain this? My understanding is that with a revenue of 100k+ you normally have to pay VAT. Below 100k you’re exempt (but can opt-in). And this applies to both sole proprietorships as well as GmbHs. I.e. the inverse of your statement. There are exceptions for certain types of revenue but no such exception has been mentioned in this thread.

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Well you have to separately account for it and be able to state how much VAT you paid with your company. The paid VAT afaik get’s deducted from your the companies tax burden. That’s why you can have VAT-free transactions between two companies.

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I think I now understand what you mean. The customer company can deduct the VAT, so for B2B contracts VAT has no net effect (if the rate/price in the contract is specified excl. VAT). Technically, @kagoda’s company would not be VAT-exempt, though, which is the statement that confused me.

@kagoda To be clear, the VAT aspect is virtually identical for sole proprietorships and GmbHs. A GmbH does offer more flexibility in terms of keeping a part of the profit in the company, which may result in overall lower income taxes, however, it depends on a lot of factors.

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To be correct, you would have 120k turnover (net invoices sent to customer, not including VAT) in the GmbH, and pay yourself an 80k salary. The remaining 40k stay in the company, and you pay profit tax on it (percentage depends on the canton where the company is domiciled). You can pay yourself the 36k (assuming 10% profit tax for the GmbH) as dividends, but those will later be taxed with your personal tax rate. Also, you have to initially send 35% withholding tax to the ESTV (-12.6k) before paying out, which means you can pay out 23.4k net out of the 40k. The withholding tax will be credited to your taxes you have to pay in the next year.

Not necessarily, see above. In some cantons, paying yourself a higher salary vs. paying yourself dividends is almost the same end amount.

Also, if you want to pay yourself dividends, you have to make sure that your salary as a managing director is appropriate. Some years ago, that meant 10k gross salary per month (Nidwalder model), now you have to check Lohnsalarium to get current numbers. Only then you can pay out a super-dividend.

A big advantage of the sole proprietorship: you don’t need to create an annual balance sheet. The costs of running a GmbH are a bit higher, especially when using a tax advisor.

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They will be taxed as income, however, as dividends from a qualified investment, the effective tax rate would be reduced. You also don’t pay (~10%) AHV on dividends.

:+1:

Yes, you save the AHV/IV/EO part for the dividends, but you’ll have to pay BVG for it. Overall, it’s almost the same as if paying yourself a higher salary (depending on the canton, your personal tax rate etc) due to the double taxation (profit tax for company + personal tax rate).

And what happens when you want to shut down the company (GmbH)? If you left the money in there, how do you get it out? Are you taxed on that?

You can either sell your company to someone else and this person pays you the money, or you can pay out the profit as dividends (as already told above). Afaik, there’s not other way. Otherwise, people would create GmbHs on an annual basis and just avoid paying taxes :wink:

So if I understand correctly, the money you put into the GmbH (which was already taxed, as it’s part of your wealth) then gets taxed again when you want to take it out?

Nope. The downpayment of 20k initially can be taken out again if the company is closed, from what I know. I’m talking about the profit the company made while doing operations. This profit can’t be taken out without having to pay taxes.

Thanks a lot for the discussion, it’s very helpful!

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