Ways to Withdraw Funds from a Limited Liability Company (s.r.o.)

Unlike sole proprietorships, withdrawing funds from a limited liability company (s. r. o.) is subject to stricter rules. There are several ways to withdraw funds from a limited liability company. Here are the four most common methods.

An employee's salary or compensation for performing a position

The first option is to receive a salary or compensation for serving as an executive director. If you choose an employment contract, the minimum wage is currently €580. With this wage, you’ll pay €81.20 for health insurance, €199.23 for social insurance, and €25.54 in taxes. Of course, it’s also possible to pay yourself your entire monthly profit as a salary.

There is no minimum amount for compensation for serving as a managing director. It is therefore possible to set your compensation as low as 50€ per month. At this remuneration level, health and social security contributions total only €24.17 (€7 for health insurance and €17.17 for social security). If you claim the tax-exempt allowance per taxpayer, you do not pay income tax on employment income.

If you choose this option, you pay your salary or compensation after the month to which it relates has been posted, ideally by transferring the amount from the company’s account to the managing director’s bank account. The tax and social security burden for this option is 36%–47%, depending on the amount of the monthly salary or compensation.

From an administrative standpoint, it is necessary to register with the social insurance agency (before the contractual relationship begins), with the health insurance provider within 7 days, and for employment tax by the end of the month following the month in which the employment relationship began (the contract took effect). It is also necessary to submit monthly reports to the social security and health insurance agencies and summaries to the tax office.

Dividends

After preparing the financial statements and paying taxes, you will be left with the net income after taxes. You can pay out this amount as a dividend. All that’s required is for the shareholder or the general meeting to approve the payment. A 7% tax is levied on dividends paid (currently, this can be done through withholding—the company pays the tax directly and sends the managing director the amount net of tax).

Cash Withdrawals

Paying dividends is not mandatory, which is why companies’ financial statements often show large amounts of retained earnings. By doing so, business owners defer paying dividend taxes until a later date. This approach is not prohibited, but it carries risks. These funds remain the company’s assets and can be frozen by a bailiff or recovered through legal action.

Another risk is that, in the event of a tax audit, the tax authority tends to assess additional tax on loans that the company would normally collect and subsequently report as taxable income. The risk of an additional tax assessment increases in proportion to the length of time these funds have been “withdrawn” from the company, or to the amount “withdrawn.”

Loans to a Partner

Since a partner and a limited liability company (s.r.o.) are related parties under the Income Tax Act, transfer pricing procedures must be applied (i.e., market prices must be used). For a loan, the market interest rate is determined, and the limited liability company pays 21% tax on that amount. It is also important to note that neither loans nor loan repayments may be made in cash; they must be processed through a bank account.

After the end of the tax period and the decision on the distribution of profits, it is possible to offset the loan provided in this manner against the dividend paid and pay only the difference into the account. The date by which withholding tax must be paid or a withholding tax return filed is determined based on the offset date.

So which option is the best?

Excluding cash withdrawals, the best option is to distribute profits in the form of dividends. The tax rate in this case is 26.53%. The disadvantage of this option is that you have to wait for the tax return to be filed and the financial statements to be approved. An alternative to waiting is to record the withdrawals on an ongoing basis as loans bearing market-rate interest.