Allocation of employee shares 2023/2024: The rules on allocation of employee shares are found in section 7P of the Tax Assessment Act and essentially provide the following benefits for employee shares allocated under the scheme:
The taxation date for the value of the shares received is deferred to the income year in which the shares are sold.
The value of the allocated shares is taxed on the sale of the shares as share income instead of as salary income. Taxation is therefore 27% up to the lower limit of DKK 58,900 (2023), DKK 61,000 (2024) and 42% of the value above. For married couples, the lower limit is double DKK 117,800 (2023) and DKK 122,000 (2024). The employee is taxed on the profit - i.e. any amounts paid by the employee for the share must be deducted when calculating the profit.
As a counterpart to the attractive tax status for the employee, the employer company has no deduction for the value of the shares, unlike what applies to ordinary salary payments.
However, under certain circumstances, deductions can be obtained for the employer company's costs of establishing the scheme, including consultancy costs.
The conditions for applying the rules on the allocation of employee shares in section 7P of the Tax Assessment Act include
The scheme can accommodate a maximum allocation of shares/subscription rights with a value of up to 10% of the employee's annual salary at the time of allocation. If access to acquire shares is open on equal terms to at least 80% of the employees, the maximum allocation will increase to 20%.
- For new, smaller companies, the scheme can include a maximum allocation of shares/warrants with a value of up to 50% of the employee's annual salary at the time of allocation, provided that a number of criteria are met, including criteria regarding number of employees and turnover.
- An agreement must be entered into that meets a number of formal requirements, including in relation to the description of the remuneration, the instrument granted, the denomination or nominal value of the shares and any conditions for the employee's acquisition of the right.
- The shares/subscription rights must be granted by the employer company or an affiliated company and must entitle the holder to shares in the employer company or an affiliated company.
- The shares may not constitute a special class of shares.
- The shares are non-transferable, however, transfer by inheritance is not considered a transfer.
The following rules apply to employee share agreements entered into after July 1, 2016:
- The award agreement must be entered into no later than at the same time as the award in order for the scheme to apply.
- The company providing the consideration must report the acquisition to E-Income. Reporting must be done both at the time of agreement and at the time of allocation.
- No auditor's or lawyer's certificate that the scheme is covered by the rules on tax exemption is required.
- If the employee leaves Denmark and loses their tax liability to the country, the shares must be taxed (expatriate taxation).
It's important to note that the rules require an agreement between employer and employee that meets a number of requirements.
If the agreement does not meet the requirements, the shares will fall outside the scope of section 7P of the Tax Assessment Act, after which the award will be taxable as salary income. This entails a significant risk for the employee who is covered by a share reward program without the employer being aware of the formal requirements.
It is recommended that share awards are always discussed with a lawyer and accountant prior to roll-out to ensure the most appropriate arrangement for both employer and employees.
If you have any questions about the article or tax law in general, you are always welcome to contact CLEMENS' tax law experts.
