Newsletter – Salary paid in the form of employee shares

Strengthening of the possibility of paying salary in the form of employee shares
On 26 April 2018 the Danish Parliament adopted a bill linked with the existing rules on share-based salary pursuant to section 7P of the Danish Tax Assessment Act. The Act is already binding on agreements regarding grant of shares etc. entered into on 1 January 2018 or later.
The new rules make it possible – in addition to the 10 % limit under section 7P of the Tax Assessment Act – to increase the limit from 10 % to 20 % for that part of the salary which can be paid in the form of shares or purchase options/subscription rights to shares, where the shares are only taxed as equity income for the employee and where taxation is postponed until the employee sells his/her shares.
However, the application of the 20 % limit has a significant limitation compared to the 10 % limit, namely the condition that a minimum of 80 % of the company’s employees must be offered the employee share scheme and that the scheme must be offered on equal terms. It is, however, possible to limit the circle of employees subject to certain general criteria, which are similar to the rules applicable i.a. under the former section 7A scheme, cf. below.
The adopted bill implements parts of the initiative regarding “better conditions for grant of employee shares” in the Government’s political arrangement with Det Radikale Venstre (Danish Social-Liberal Party) and Dansk Folkeparti (Danish People’s Party) regarding commercial and entrepreneurial initiatives from November last year.
The new and extended special rule requires a “general” scheme.
With effect from 1 July 2016 a special rule was (re)introduced enabling companies to pay employees with shares and purchase options/subscription rights on favourable terms, where taxation is both eased and postponed. According to the special rule, an employer is – subject to a number of conditions – entitled to offer shares and/or purchase options/subscription rights etc. for up to a value of 10 % of the employee’s annual salary, where taxation of the employee takes place as equity income (up to 42 %) and not as salary (up to 56 %).
In addition, taxation is postponed until the employee sells the acquired shares so that the sales amount can be used for the tax payment. Consequently, the grant of shares etc. or the exercise of purchase options/subscription rights does not trigger taxation when the rule is applied. It is a requirement that an agreement has been entered into with each employee. Furthermore, the employer does not have tax relief for the value of the employee shares.
The adopted bill extends the special rule with the consequence that the employer is entitled to offer shares and/or purchase options/subscription rights etc. at a value of up to 20 % of the employee’s annual salary provided that the scheme is offered to a minimum of 80 % of the company’s employees and provided that it is offered on equal terms, including at the same percentage of the annual salary of the employee in question, with the same terms for exercise and with the same type of instrument etc.
Instead of implementing a “general” scheme, companies are still entitled to grant shares etc. of up to 10 % of the annual salary to certain selected employees.
The meaning of limitation in accordance with general criteria, 80 % and equal terms
The circle of employees for whom the access to acquiring shares and/or purchase options/subscription rights etc. on equal terms must be open can be limited in accordance with general criteria, which follow from case law pursuant to the then current section 7A of the Tax Assessment Act on general schemes. Potential criteria may be i.a. that only employees with a certain specific seniority or minimum working hours are taken into consideration and that a certain minimum performance (performance and result) is accepted in certain cases. Several criteria may be applied as long as the delimitation can be regarded as general on an overall basis.
Once the circle of employees has been defined, the company is free to choose those 80 % of its employees who will be offered the scheme on equal terms.
The condition regarding equal terms means that it is not possible only to offer certain employees more than 20 % of the annual salary in shares etc., or to offer schemes which differentiate e.g. regarding the share of the annual salary, the type of instrument or the time of and conditions for exercise. Nor is it possible to offer one group equity income at a value of 20 % of the annual salary and to offer another group equity income at a value of e.g. 12 % of the annual salary. The terms must be equal.
Holding companies
It is not possible, neither according to the former rules nor according to the new rules, to grant shares and/or purchase options/subscription rights etc. to others than the employees themselves. If the employees wants e.g. the subscription rights – and not least the shares to be subscribed on the basis of the subscription rights – to be owned by a holding company, which may often be an advantage, this can only take place by transferring the subscription rights to a company. Such transfer must take place at market value and can consequently not take place without a certain immediate taxation of the employee. However, this is not necessarily a disadvantage.
Additional initiatives regarding employee shares
According to the political arrangement, a number of new bills will be introduced over the next couple of years which will improve the terms for employee shares considerably.
The plan is to implement a special scheme aimed at new, smaller companies which are given the possibility of offering up to 50 % of the annual salary in shares etc. at equity income taxation in individual schemes, i.e. without having to meet the requirement that 80 % must be offered in such scheme. A bill with this content has been introduced.
An additional interesting part of the political arrangement aims at increasing the level of freedom of contract regarding vesting agreements, which is now limited by the Danish Stock Option Act. Moreover, the intention of the arrangement is to enable companies and employees to agree that employee shares, which have not yet been vested at the time of resignation, may lapse when the employment is terminated and that freedom of contract is established when entering into agreements on repurchase of shares at market price in the event of resignation. Such bill has not been introduced.
For additional information and advice please contact Henriette la Cour, Attorney-at-law/hlc@nrlaw.dk.
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