The Danish Parliament adopted new Section 7P of the Danish Tax Assessment Act to provide tax preferential treatment for certain share-based payments to Danish employees effective July 1, 2016. Under the new legislation, shares acquired pursuant to equity compensation awards (up to 10% of the affected employee's annual salary) meeting certain requirements will not be subject to taxation until the shares are subsequently sold, at which time the amounts will be taxable as capital gains rather than as employment income. In brief, the requirements under the new Section 7P regime include:
- the employee and the employer must conclude an agreement that the new rules will apply at the time when the award agreement originally is granted;
- the value of the equity award may not exceed 10% of the employee's annual salary at the time of entering into the agreement;
- the equity award must be paid by the employer company or a group company;
- the equity award must be settled in shares, etc. in the employer company or a group company;
- the shares may not belong to a particular share class;
- equity awards must be non-transferable; and
- equity awards must entitle the employee (or the grantor) to acquire (or supply) shares.
As a tradeoff for the tax preferential treatment, companies granting equity compensation awards under the new Section 7P regime will be unable to claim a local tax deduction for such costs. However, companies also will avoid the payroll costs associated with the equity awards (on the basis that the taxable income realized at sale will be classified as capital gains income rather than employment income).