How to take an income from your business

The best entrepreneurs may not be driven by profit, but it is usually the happy by-product of a well-run and successful business. When a business is firmly established and making money, entrepreneurs need to decide how they will structure their remuneration efficiently, in line with their needs and the company’s performance. When thinking about remuneration, it can be helpful to consider legal obligations, social protection, governance aspects, cash‑flow and long‑term goals.

Every business owner faces a dilemma about drawing an income from their business. Every euro spent on a salary or distribution of dividends is a euro not spent on investing in the growth of the business – exploiting new opportunities, hiring bright new salespeople, or developing new markets. On the other hand, everyone needs to pay their personal bills, no matter how ambitious they are for their business.

The simplest structure for a business in Luxembourg is a sole proprietorship, i.e. operating as a sole trader. Here, the decision on how to draw money from the business is straightforward. Income flows directly to the business owner and is taxed as personal income, at rates ranging from zero to 42% (excluding long-term care contribution), and reported on the personal tax return. The business owner is responsible for employer and employee social security contributions.

For, sole traders remuneration choices are generally simpler, though administrative and accounting considerations remain. Tax is due in line with the date income is received, so businesses do not need to consider timing strategies for their remuneration. The only real variables will be when invoices are issued and expenses recorded. While generally simpler than a corporate structure, sole traders still face considerations such as tax obligations, VAT requirements, allowable professional expenses and social security contributions.

More options for private limited companies

However, most entrepreneurs prefer the structure of a private limited company or SARL (Société à Responsabilité Limitée), which accounts for around two-thirds of companies in Luxembourg. It is also possible to use the simplified SARL structure, a low-cost alternative for micro-enterprises with up to five employees, with lower share capital requirements and fewer administrative hurdles.

The owner of a SARL or simplified SARL has more flexibility in how they pay themselves.

The owner of a SARL or simplified SARL has more flexibility in how they pay themselves. The company is legally distinct from its owner. The company will pay corporate income tax in the grand duchy on its profit, which in 2025 was at a rate of 23.9% in Luxembourg City, incorporating municipal business tax (reduced rate applicable for smaller businesses and micro-enterprises). Allowable business expenses (i.e. costs necessary and directly related to running the business) can be set off against income, reducing the company’s taxable profit. Business owners should ensure that only genuine business expenses are claimed and avoid mixing personal and business expenses.

Then a business owner must choose whether to pay themselves a salary or dividends. Salaries are deemed an allowable business expense under certain conditions, deductible from the company’s income, reducing its taxable profit. When received by the entrepreneur, salary payments are subject to personal income tax and social security contributions in the same way as any other type of employment income. The business owner can adjust the level of their salary based on cash-flow, legal obligations, social security protection needs and overall financial stability, with taxation being only one factor.

Dividends received by a business owner are generally subject to withholding tax and then taxed as investment income, with the exact treatment depending on the company’s tax status and the shareholder’s personal situation.

Distributing profit as dividends

The alternative is to distribute profit as dividends. Paid out of a company’s profit, dividends are not deductible from the company’s taxable income. Dividends are generally subject to withholding tax and are then taxed, in the personal income tax return, as investment income when received by the business owner. In most cases, only part of the dividend is included in the taxable income due to exemptions intended at mitigating economic double taxation, while the remainder is taxed at the individual’s progressive rates (ranging from zero to 42%, excluding long-term care contribution). The exact tax treatment will depend on the company’s tax status and the shareholder’s personal situation.

Dividends can offer flexibility, as they may be distributed on an ad hoc basis in response to the ebb and flow of the business. However, their distribution will depend on the company’s distributable profits, governance rules and overall financial health, and should always consider the owner’s broader financial and social protection needs.

Long-term ambition

The calculation will be specific to each individual and each company. It also matters where the entrepreneur’s long-term ambitions lie. If they want to keep money in the business to invest in future growth, they may prefer to pay themselves a smaller salary and no dividends. If the company is more of a services business with little or no upfront capital investment, an ‘income in, dividends out’ model may make sense.

Some advisors note that above certain income thresholds, a SARL may offer flexibility depending on activity, risk, governance needs and personal circumstances, and also ensuring that personal assets are protected from the company’s financial risks. There are additional administrative costs associated with setting up a SARL, but the expenditure is usually worthwhile at higher income levels.

The right combination may not be one or another, but a combination of both. For example, a business owner may want to pay a certain level of salary, perhaps to cover key personal expenses and maintain a level of social security contributions, but rely on dividends for the remainder of their income. Salary provides stable income and social protection, but its level will depend on the company’s financial capacity and on the legal requirements. Dividends, which require distributable profits and formal approval, can be made in line with the profitability of the business and personal income needs. They offer flexibility but do not generate pension or social security rights, and must be distributed in line with governance rules.

A well-considered remuneration approach can support both personal stability and sustainable business development. Reviewing the distribution of profit annually is helpful, especially to ensure alignment with changes in business performance or personal circumstances.

Every euro spent on salaries or distribution of dividends is a euro not invested in the growth of the company – exploiting new opportunities or markets, or hiring sales staff – but however ambitious entrepreneurs are for their business, everyone needs to pay their personal bills.