Bill to reintroduce tax-privileged equity compensation tabled

The Danish Minister for Taxation has just tabled a bill to reintroduce tax-privileged equity compensation.

Until November 2011 employer companies were able to pay employees share-based salaries with significant tax privileges. On 30 March 2016 the Danish Ministry of Taxation tabled a bill (Bill No 149) to reintroduce the previous rules. If the bill is adopted in its tabled form, it must be expected, given the popularity of the previous rules, that it will be of great practical importance. According to the bill, the rules will only come into effect in respect of agreements on equity compensation entered into on 1 July 2016 or later.

Individual employee shares are currently taxed as ordinary salary income when the shares are acquired. Call options for or subscription rights to shares granted as a part of an employment relationship are also taxed as salary income but in general only when exercised. Tax of up to about 56% is levied in respect of shares as well as call options and subscription rights

If the tabled bill is adopted with its current contents, tax will not be levied in future in connection with neither the granting of shares nor the exercise of call options/subscription rights. Instead the employee will only be subject to taxation on the gains from the sale of the shares, if any, and then only as equity income by 27% or 42%, depending on the share income amount.

There is consequently no tax exemption but a significant deferral of taxation and a tax reduction compared to the current tax on salary.

The proposed rules essentially correspond to the previous rules laid down in section 7H of the Danish Tax Assessment Act that were repealed as part of the Danish Finance Act (the National Budget) for 2012 by the former Danish government. The proposed rules entail that shares as well as call options and subscription rights for shares up to a value that is equal to 10% of the employee's annual salary may be granted to the individual employee if a number of fundamental conditions are fulfilled, including in particular that the equity compensation is given in an employment relationship, that the employee and the employer agree that the rules must apply and that call options and subscription rights which have been granted cannot be disposed of (for instance cash settlement may not take place).

As was the case under the previous rules, the company giving the equity compensation will not have a right to deduct the equity compensation expense. According to the bill, the company will also have to meet a number of reporting obligations relating to the equity compensation subject to the new rules.
The company will decide whether all employees or only some employees will be offered to acquire employee shares.

According to the bill, the new rules will come into force on 1 July 2016 and will apply to agreements on equity compensation entered into from such date and onwards.

If the bill adopted as tabled, we expect that the outcome will be of great significance for the structuring of incentive schemes in future.

Please do not hesitate to contact us for further information about the bill and about how we can assist you with incentive schemes.

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