Why profit allocation is a strategic decision
In a Swiss GmbH, the profit for the financial year does not automatically belong to the shareholders: it remains company equity until the general meeting of shareholders decides how to allocate it. Every year, after the accounts are closed, entrepreneurs and managing directors must answer a concrete question: how much to distribute as a dividend, how much to set aside as reserves, and how much to leave available for operational reinvestment.
The choice affects liquidity, investment capacity, bank ratings and overall tax burden. Excessive distributions can undermine solvency; excessive allocations to reserves can penalise shareholders who depend on income from their equity stake. In SMEs, where shareholders and management often overlap, striking the right balance requires a clear accounting view and documented decisions.
This guide explains the Swiss legal framework, the accounting rules under Swiss GAAP FER and the tax implications, with a practical path from closing the balance sheet to paying the dividend.
Legal basis: who decides and within what limits
Profit allocation in a GmbH is governed by arts. 801, 804 and 798 CO, with reference by analogy to the rules on reserves and dividend distribution applicable to AGs (arts. 672 et seq. and 675 et seq. CO by analogy). Here are the essential principles:
| Aspect | Applicable rule | Practical implication |
|---|---|---|
| Decision-making authority | General meeting of shareholders (art. 804 CO) | The managing director proposes; shareholders approve by written or recorded oral resolution |
| Legal reserve | 5% of annual profit until 50% of share capital (art. 801 CO by analogy with art. 672 CO; 20% for holding companies) | Mandatory allocation, not distributable as a dividend |
| Statutory reserves | Provided for in the articles of association | Additional restricted percentage; check the articles of association |
| Limit on distribution | Art. 798 CO by analogy with arts. 675 et seq. CO; art. 820 CO (over-indebtedness) | Profits may not be distributed if the company is over-indebted or if the distribution would cause over-indebtedness |
| Source of the dividend | Balance sheet profit and freely available reserves | Legal reserves and mandatory allocations may not be distributed |
| Proportionality | Based on equity interests, unless the articles provide otherwise | A shareholder with a 30% stake receives 30% of the approved dividend |
Three possible uses of profit
After mandatory allocations, the remaining profit can follow three main paths, often combined in the same financial year:
Dividend to shareholders
Distribution of cash or assets in kind to equity holders. Direct remuneration of risk capital. Subject to the shareholder's personal taxation.
Voluntary reserves
Allocation of profit to equity without immediate distribution. Strengthens the equity base and the ability to absorb future losses.
Operational reinvestment
Profit remains in the company and finances investments (machinery, software, hiring). Does not require a dividend resolution, but investment planning consistent with the balance sheet.
Reserves: types and accounting function
Reserves are not a generic «cushion»: in accounting, each allocation has a precise place on the liabilities side of the balance sheet and distinct rules on distributability.
Legal reserve from profits
Mandatory by law. In every profitable financial year, until the legal reserve from profits — together with the legal reserve from capital — reaches 50% of registered share capital, 5% of net profit must be allocated (at most the amount needed to reach that threshold). On share capital of CHF 20,000, the combined threshold is CHF 10,000 (CHF 4,000 for holding companies). It may not be distributed as a dividend; it may be used only in cases provided for by law (e.g. covering losses).
In accounting terms: debit «Appropriation of profit» / credit «Legal reserve from profits».
Statutory reserves
Some GmbH articles of association provide for additional allocations (e.g. 10% of profit up to a defined maximum). Always check the articles of association before the resolution: the articles may impose restrictions not required by law.
In accounting terms: separate «Statutory reserve» account from the legal reserve.
Voluntary reserves (retained earnings)
The portion of profit that is neither distributed nor restricted remains in «Retained earnings». This is the most flexible reserve: it can be converted into a dividend in subsequent financial years by resolution of the general meeting, always subject to capital maintenance rules.
Typical SME strategy: keep 2–3 months of fixed costs in retained earnings before making substantial distributions.
Dividend distribution: step by step
A GmbH dividend is not paid «at will»: it follows a formal process that protects shareholders, creditors and managing directors.
- 1
Closing the accounts and sustainability check
The managing director prepares the annual balance sheet. Before proposing a dividend, they verify that the company is not over-indebted (art. 820 CO by analogy with art. 725b CO) and that the proposed distribution would not jeopardise the satisfaction of creditors. If in doubt, consult the auditor or fiduciary.
- 2
Proposal for profit allocation
The managing director presents a detailed proposal to the general meeting: allocation to the legal reserve, any statutory reserves, proposed dividend amount and retained earnings. The proposal must state the gross amount per shareholder based on equity interests.
- 3
Resolution of the general meeting of shareholders
Shareholders approve the balance sheet and profit allocation. The resolution must be minuted and kept with the approved balance sheet. Without a valid resolution, payments to shareholders may be reclassified as a loan or irregular remuneration.
- 4
Accounting and payment
On resolution: debit «Retained earnings» / credit «Liabilities to shareholders for dividends». On payment: debit the liability / credit bank account, withholding 35% withholding tax on the gross dividend and remitting it to the FTA within the statutory deadlines. Document every transfer with reference to the resolution and financial year.
- 5
Tax reporting
The company issues shareholders a certificate of withholding tax deducted. A natural person shareholder domiciled in Switzerland declares the gross dividend on their personal tax return and may credit the 35% withholding tax; for qualifying participations, they benefit from partial taxation as provided by law. For foreign shareholders, treatment depends on double taxation treaties.
Numerical example: GmbH with profit of CHF 80,000
GmbH «Alpina Tech GmbH», share capital CHF 20,000, current legal reserve from profits CHF 2,500, two shareholders at 60% and 40%. Net profit for financial year 2025: CHF 80,000.
| Item | Amount (CHF) | Notes |
|---|---|---|
| Net profit for the year | 80,000 | Starting point |
| Legal reserve from profits (5%) | − 4,000 | Brings legal reserve from profits to CHF 6,500 (combined threshold: 50% of share capital, i.e. CHF 10,000) |
| Available profit | 76,000 | Freely allocable |
| Approved dividend | − 38,000 | Shareholder A (60%): CHF 22,800 — Shareholder B (40%): CHF 15,200 (gross amounts) |
| Retained earnings | 38,000 | Funds team expansion and new ERP system |
In this scenario, the company distributes 50% of available profit and reinvests the remaining 50% without an additional allocation to separate voluntary reserves, since retained earnings already serve that function.
Tax implications: company and shareholders
In Switzerland, a GmbH's profit is taxable at corporate level (cantonal and municipal profit tax, plus direct federal tax). Distribution to natural person shareholders triggers a second level of personal taxation on income from participations.
To mitigate economic double taxation, qualified dividends are subject to partial taxation: at federal level, 70% of the gross amount is taxable (art. 20 para. 1bis DBG), while at cantonal level the taxable portion varies and is generally between 50% and 70%, subject to specific cantonal rules to be verified. A qualifying participation requires, at federal level, at least 10% of share capital; several cantons also provide an alternative threshold based on market value (often at least CHF 1 million).
Dividend vs managing director's salary
A shareholder-managing director normally receives a salary (deductible for the company, subject to OASI/occupational pension contributions). A dividend is not deductible and does not generate social security contributions, but it does not replace a market-rate salary. The Federal Tax Administration may reclassify excessive distributions if the salary is manifestly below market value.
Reinvestment and taxation
Undistributed profit remains in corporate equity already taxed at company level. Reinvesting it in operational activities (purchase of equipment, R&D) does not trigger further tax until it is distributed to shareholders. Tax deductions on investments follow ordinary depreciation rules.
Accounting entries under Swiss GAAP FER
Under Swiss accounting standards (FER / Swiss GAAP FER), profit appropriation is recorded at the time of the general meeting resolution, not at year-end closing. Here are typical entries:
| Transaction | Debit | Credit |
|---|---|---|
| Year-end closing (profit) | Income statement (various) | Profit for the year |
| Allocation to legal reserve | Appropriation of profit | Legal reserve from profits |
| Dividend resolution | Retained earnings | Liabilities to shareholders (dividends) |
| Dividend payment | Liabilities to shareholders (dividends) | Bank / Withholding tax (35%) |
In Accountex, link every profit appropriation entry to the general meeting resolution and the corresponding tax year. This ensures traceability for audit, corporate tax filing and shareholders' personal tax returns.
Reinvestment: when it pays not to distribute
Reinvesting profit is often the most efficient choice for a growing GmbH. Retained earnings finance expansion without resorting to bank debt or diluting equity interests.
Situations in which it makes sense to limit dividends:
- •Planned investments with a return above the cost of capital (new product line, accounting digitalisation, cantonal expansion)
- •Cyclical sectors where maintaining liquidity protects against revenue downturns
- •Preparation for a capital increase or entry of a new shareholder, where solid net equity facilitates negotiation
- •Shareholders already remunerated at market salary who prefer to accumulate value in the company for a future exit or share sale
Common mistakes to avoid
Payments to shareholders without formal resolution
Periodic transfers labelled «dividend» but without a general meeting resolution, balance sheet sustainability check or 35% withholding tax deduction. Risk of tax reclassification and liability of the managing director.
Distribution that breaches the legal reserve
Withdrawing mandatorily allocated profits or distributing beyond available net equity. Repayment may be demanded by creditors.
Confusing dividend and equity repayment
Partial repayment of share capital follows different procedures (capital reduction with notary and publication). It must not be treated as an ordinary dividend.
Ignoring multi-year tax planning
Alternating years with high dividends and years without distribution, in coordination with the managing director's salary and personal deductions, can optimise overall tax burden in compliance with FTA rules.
Checklist for the annual general meeting
- ✓Annual balance sheet closed and approved by the managing director
- ✓Calculation of legal reserve due and verification of 50% share capital threshold (20% for holding companies)
- ✓Verification of no current or pro-forma post-distribution over-indebtedness
- ✓Review of articles of association for additional statutory reserves
- ✓Written profit allocation proposal with gross breakdown per shareholder
- ✓Minuted and archived general meeting resolution
- ✓Profit appropriation entries recorded in the accounts
- ✓Dividend payments with withholding and remittance of 35% withholding tax
- ✓Communication to shareholders for personal tax filing
Balance between remuneration, strength and growth
Profit allocation in a GmbH is not a bureaucratic formality to defer until year-end: it is the moment when the company's financial strategy takes numerical form. Dividends, reserves and reinvestment coexist on the same balance sheet and require a deliberate, documented decision consistent with the actual balance sheet position.
With orderly accounting, compliant general meeting resolutions and a multi-year view of tax burden, the entrepreneur can remunerate their risk capital without compromising the company's investment capacity. Tools such as Accountex make it easier to link year-end closing, profit appropriation and tracking of payments to shareholders, keeping the accounting and tax cycle under control.