Equity-based compensation in Denmark

Equity-based compensation

What are the prevalent forms of equity compensation awards in your jurisdiction? What is a typical vesting period? Must the arrangements be offered to a broad group of employees, or can the employer select the participants?

The prevalent forms of equity compensation are stock option awards (see question 10) and deferred share awards free of charge (also, depending on their nature, known as restricted stock unit awards or performance share unit awards) (see also question 16). The typical vesting period varies a great deal, but three to four years is quite normal. Equity-based compensation can be offered to only selected participants provided the selection criteria do not violate employees’ rights under discrimination legislation.

Must equity-based compensation be granted by the company’s board of directors (or its committee) or can the authority be delegated to officers or employees of the company? Are there limitations or requirements that apply to delegation?

Equity-based compensation to members of the executive board must be granted by the company’s board of directors.

For equity-based compensation to other employees, the authority to grant any awards can be delegated to the members of the executive board. However, for grants in the form of warrants (ie, a right to subscribe for new shares), the board of directors must determine the total number of warrants that may be granted and generally also all the terms and conditions governing the award.

Are there forms of equity compensation that are tax-advantageous or disadvantageous to employees or employers?

Equity based compensation in the form of shares, share options and warrants awarded to employees in the course of their employment may be taxed under the 7P tax scheme. Under the 7P tax scheme, equity based compensation will not be taxable for the employee until when the employee sells the shares acquired. When the employee sells the shares, the proceeds will be taxable as capital gains and not as personal income. The tax is thus capped at 42 per cent and not at approximately 56 per cent, if taxed as employment income. The relatively low taxation is counterbalanced by the fact that the value of the equity-based remuneration is not deductible for the employer.

In order to qualify for the 7P tax scheme, a number of conditions must be met. The overall content of these conditions are as follows:

• at the time when the equity-based compensation is awarded, the employer and the employee must agree in writing that the award is subject to the 7P tax scheme. The terms of this agreement must comply with a number of conditions;
• the value of the equity-based compensation awarded may - as a starting point - not exceed 10 per cent of the employee’s annual pay (annual pay being the sum of the employee’s cash remuneration plus any employer pension contributions and the taxable value of any benefits). However, if the equity-based compensation is offered on equal terms to at least 80 per cent of the employer’s employees, the value of the equity-based compensation awarded may not exceed 20 per cent of the employees’ annual pay. If the value exceeds the 10 or 20 per cent threshold, the excess will be taxable under the less favourable general rules;
• the equity-based compensation must be awarded by the employer company or one of its group companies;
• the equity-based compensation must consist of either shares - or share options and warrants entitling the holder to acquire shares - in the employer company or one of its group companies;
• share options and warrants may not be transferred to a third party, except on the holder’s death; and
• the employer must report various particulars about the equity-based compensation to the Danish tax authorities.

For equity-based compensation not being subject to the 7P tax scheme, the value of the awards will be taxed in the same way as other forms of employment income. Awards of stock options and warrants will normally meet various requirements in order to be taxed on exercise but some awards may be taxed on grant, which will generally be tax-disadvantageous to the employee. Depending on the terms governing the award, deferred share awards will either be taxed on grant or on vesting, in practice, most often on vesting.

Does equity-based compensation require registration or notice? Are exemptions, or simplified or expedited procedures available?

No, but when an award becomes taxable, the employer must report the award and its taxable value to the Danish tax authorities. Further, if equity-based compensation is to be taxed under the 7P tax scheme (see question 19), the employer must also report the award to the Danish tax authorities when the award is made.

Are there tax withholding requirements for equity-based awards?

No, but certain reporting requirements apply (see question 20).

Are inter-company chargeback agreements between a non-local parent company and local affiliate common? What issues arise?

Inter-company chargeback agreements between a foreign parent company and a Danish affiliate are quite common. From a group perspective, and when considering the relevant tax legislation applicable to both foreign parent companies and Danish affiliates, it may be tax-advantageous to apply an inter-company chargeback agreement. When such an agreement is applied, the chargeback amount will - depending on the nature of the relevant equity compensation award - normally be based on the value of the award at the time of either vesting or exercise.

Are employee stock purchase plans prevalent or available? If so, are there any frequently encountered issues with such arrangements?

It is possible to apply employee stock purchase plans but such plans are not common. From a legal perspective, employee stock purchase plans are generally treated as stock option plans and there are no frequently encountered issues that apply specifically to employee stock purchase plans.