On 12 May 2016 the Danish Parliament adopted a bill (L 149 B) which (re)introduces rules on taxation of employee shares etc. in a new section 7P of the Danish Tax Assessment Act. The adopted law text largely corresponds to the bill introduced in March, see the short summary below.
The new rules will apply to agreements regarding grant of employee shares etc. entered into on or after 1 July 2016.
The rules apply to
Share options, warrants, Restricted Stock Units, Performance Stock Units, Share Matching programmes, shares granted free of charge, purchase of shares at a favourable price and various kinds of Employee Stock Purchase Plans (ESPP). The rules will apply to both individual and general share programmes.
The overall contents of the Act – taxation
When applying the rules, taxation is changed from tax on salary/personal income (which is taxed with a maximum of approx. 56 %) to tax on capital gains (taxed with 27/42 %). In addition to this, tax is postponed until the employee sells his/her shares.
The employer does not have a right to deduction of the value of the granted employee shares etc. covered by the new rule in section 7P of the Tax Assessment Act.
The rules are limited to
The rules are limited to apply to share-based payments etc. at a value corresponding to a maximum of 10 % of the annual salary. If the 10 % limit is exceeded, that part of the granted employee shares etc. which can be contained within 10 % of the annual salary will be covered by the beneficial rules in section 7P of the Tax Assessment Act, whereas that part of the granted employee shares etc. which falls outside the 10 % limit will be covered by the rules in sections 16 and 28 of the Tax Assessment Act.
According to the explanatory statements, the term ‘annual salary’ means the annual salary during the year when the parties enter into an agreement on the grant of shares etc. It must be regarded as certain that the share-based payment, if applicable, which falls outside the scope of section 7P of the Tax Assessment Act, can be added to the annual salary.
It is stated in the explanatory statements to the Act that existing practice for the valuation of share options and warrants will apply to share options and warrants comprised by section 7P of the Tax Assessment Act. This means that the Black-Scholes formula is applicable if the share options and warrants carry a right to acquire shares in a company listed on the stock exchange. If the share options or warrants carry a right to acquire shares in a company which is not listed on the stock exchange, the interpretative notes state that you can apply the rules and principles which follow existing practice, including the application of the so-called Assessment Council formula.
Additional formal requirements
The rules apply if a number of requirements is met. One of the main requirements is that the employee and the employer company must agree that the rules of section 7P of the Tax Assessment Act are to apply.
The agreement must contain a number of specific details (e.g. information on whether the remuneration consists of shares, share options or warrants, and information on the name of the company in which shares have been or can be acquired), but there are no requirements to the agreement as to form or language.
The employee shares etc. must be granted by the employer or a group company as part of the employment.
The employee shares granted may not be transferred (except for inheritance).
Employer’s obligation to report
Increased obligations to report are introduced for the employer, who must i.a. report the acquisition price and identity of the share-based payments etc. to the Danish tax authorities. Furthermore, reporting must take place at the time of entering into the agreement on application of the rules. In return there is no requirement for lawyer’s or auditor’s statements stating that the scheme meets the requirements for using the special rules.
For additional information and advice please contact Henriette la Cour, Attorney-at-law/hlc@nrlaw.dk
