Doubts about the scope of application of tax-advantaged employee share ownership plans

The Danish tax authorities set the stage for a close interpretation of the rules on tax concessions in respect of employee share ownership plans in a recommendation for a binding assessment notice.

New (reintroduced) rules on favourable taxation of individual employee share ownership plans entered into force on 1 July 2016.

The result of the rules, which can be found in section 7P of the Danish Tax Assessment Act and which have previously been dealt with here, is that shares and call options and subscription rights to shares that an employer company grants to its employees as a part of a remuneration package can be taxed in certain circumstances as share income (taxation of 27% or 42% of any gains in connection with a sale) as opposed to salary (up to about 56% on acquisition) and that taxation will only be imposed when the shares are sold.

Danish companies and employees have started using the rules to a wide extent which has resulted in the first decisions by the Danish tax authorities. One such decision, the Danish National Tax Board's binding assessment notice in TfS 2016, 573, was about whether an option agreement was subject to the new rules of section 7P of the Tax Assessment Act. The Danish tax authorities and the Danish National Tax Board concluded in the specific case that the conditions had been fulfilled.

However, the Danish tax authorities' recommendation to the National Tax Board in the binding assessment notice included a surprising statement regarding taxation of call options (and subscription rights) that may only be exercised to acquire shares in connection with stock exchange listings or in connection with a change of control in the company.

The statement shows that it is the Danish tax authorities' opinion that such plans are to be considered to be exit bonuses for handling the shareholders' interests and not remuneration for work performed for the company.

In other words, the Danish tax authorities are of the opinion that such plans are not to be subject to the new tax-advantaged rules. It means that the Danish tax authorities set the stage for a close interpretation of the scope of application of the new rules.

The Danish tax authorities' statement that salary benefits, if conditional on exit, are not to be considered to be salary from the employer company in terms of tax can also have far-reaching consequences, also in other areas than the tax-advantaged employee share ownership plans.

Attorney and Plesner Partner Jef Nymand Hounsgaard and Assistant Attorney Lise Winther Jensen have written about the binding assessment notice and the importance of the Danish tax authorities' opinion as expressed in the recommendation to the Danish National Tax Board in an article about the tax treatment of exit bonuses in the most recent issue of the Danish tax journal "Tidsskrift for Skatter og afgifter" (TfS 2017.75).

Read the article (in Danish) "Den skattemæssige behandling af exitbonus i lyset af TfS 2016, 573" (in English: the tax treatment of exit bonuses in the light of TfS 2016, 573)

(Reproduction permitted by Karnov Group Denmark A/S)

Latest news on Tax Law

Tax Law