The Danish Ministry of Taxation has launched a public consultation on a bill proposing to reintroduce tax advantages for share-based salary (share options, warrants etc.) for employees. See our previous article about this here. If passed by the Danish Parliament, the bill will come into force and be effective for allotments after the 1 July 2016.
Share-based salary for employees is currently taxed at the time of exercise, or in connection with share options at the time when the employee acquires the right to the shares. Share-based payment is taxed in the same way as any ordinary salary income at a maximum of approx. 56%.
Overall, the bill reintroduces the former tax rules regarding share schemes for employees which was found in the Tax Assessment Act, Section 7 H.
If the bill (that will be introduced as new regulation in the Tax Assessment Act, Section 7 P) passes, the following will apply:
- Share-based salary for employees will ‒ contrary to the current scheme ‒ be taxed as share income and not as salary income. The maximal taxation will thus be at either 27% or 42% (depending on the amount of the gain) and not at up to 56% as is the case of salary income.
- Taxation will take place on exercise/sale. This way, employees will only be taxed on the actual gain.
- The company will – contrary to today – not have any right of deduction in regards to the value of the share salary granted.
Conditions for Application of the new Rules:
- The company and the employee must have made an agreement. Specific requirements apply to such agreement;
- The employees will at the most be able to receive shares, rights of purchase or rights of subscription without income taxation of a value of no more than 10% of the employee’s annual;
- Shares, rights of purchase and rights of subscription must be granted by the company or an affiliated company;
- The shares, rights of purchase or rights of subscription received may not be in a specific share class;
- The shares, rights of purchase or rights of subscription received may not be transferred to any third party (with the exception of inheritance); and
- The company is obligated to submit information to the Central Tax Administration’s (“SKAT”) income register (“eIndkomst”) when the rights of purchase or the rights of subscription are exercised for acquiring shares, or when shares are acquired directly. There is, however, no proposal to reintroduce the former requirements that the company’s accountant or attorney had to certify the agreements between the company and the employees, and that these should be submitted to SKAT.
In essence, the bill corresponds to the employee share scheme that was previously found in the Tax Assessment Act’s Section 7 H. The bill will, however, imply a different structuring and minor adjustments compared to the former arrangement.
Companies will have the option of deciding whether the arrangement should be offered to all employees or only chosen ones. If the bill is passed, the changes will result in essential material fiscal benefit for the employees.
The loss of the right of deduction in the value of the given share-based salary will be of essential importance to those companies that use share-based salary and will in many cases probably mean that the companies – in order to contain the costs – will offer share-based salary of a lesser value than as of yet.