By Berkay Sönmez
Employee shares
In many Danish companies, employee shares are offered as part of the compensation package, providing employees with the opportunity to achieve financial gain and become co-owners of their workplace. But how are employee shares actually taxed, and what tax advantages can you benefit from?
What are employee shares?
Employee shares, also known as stock compensation, are often used as a retention tool in companies and serve as an incentive for key employees.
Employee shares are an agreement between the employee and the employer, where the employee is given the opportunity to buy or receive shares in the company they work for. Often, these shares are contingent on employment at a certain point in time or on the company's performance.
The purpose of employee shares is to increase employees' personal and financial interest in the company by allowing them to become shareholders. For many companies, stock compensation can be an attractive way to attract and retain employees.
Compensation in the form of employee shares
Shares and purchase or subscription rights must be given as compensation in order to be covered by one of the taxable rules regarding employee shares. Compensation means that the shares or purchase/subscription rights are received as part of the employment relationship, either for free or at a price lower than the market value at the time the stock compensation agreement is made.
What is a share, purchase right, and subscription right?
The term shares refer to both shares and ownership interests covered by the capital gains tax rules.
A purchase right to shares is a right, but not an obligation, to buy a certain number of shares at a predetermined price at a future time or during a future period.
A subscription right to shares (warrant) is a right, but not an obligation, to subscribe to new shares at a predetermined price at a future time or during a future period.
A general term for purchase and subscription rights is options.
Taxation methods of employee share
The tax treatment of the employee and the employer depends on which regulation the stock compensation is granted under. Therefore, it is advantageous to choose the compensation that involves the least tax payment.
The taxation of employee shares depends on which legal provision they are granted under:
· LL§16 – taxation at the time of vesting
· LL§28 – deferral of tax to the exercise date
· LL§7P – deferral of tax to the sale date
Each provision has conditions that must be met before it can be applied. If the conditions for the application of LL §28 and LL §7P are not met, taxation will instead occur under LL §16.
The conditions for the taxation methods are described below.
Taxation under LL §16 – General tax rules
If an employee receives shares, purchase, or subscription rights without using LL §28or LL §7P, the general tax rules apply (LL §16).
The employee is taxed at the time of vesting of the shares, purchase- or subscription rights. The taxation is based on the difference between the value of the share, purchase- or subscription right at the time of vesting and any payment made by the employee. The net value is taxed as personal income, up to 56% including the labor market contribution (Salary income). Thus, there is no difference between receiving payment in shares or ordinary salary.
The employee must ensure that their advance statement information is adjusted/payment of the tax, as the employer does not withhold income tax and labor market contributions on the taxable amount. This must be done before December 31 of the tax year to avoid unnecessary interest to the tax authorities.
For purchase and subscription rights (options), the employee receives shares upon exercising the options, where the purchase price is the value at the time of vesting. The same applies to shares.
When the employee subsequently sells the shares, the profit is taxed as equity income with a tax rate of 27%/42%, depending on the employee's equity income.
The profit is calculated as the difference between the value of the shares at the time of vesting (purchase price) and the selling price of the shares.
Taxation under LL §28 - Deferral of tax to the exercise date
Only the allocation of purchase- and subscription rights is covered by this provision.This means that you cannot be covered by this provision if you have received shares.
If an employee receives purchase- and subscription rights as part of their employment, taxation can be deferred from the time of vesting to the time of exercise. All individuals who contribute personal services to the company can be covered by this provision.
The employee is taxed at the time of exercising the purchase- and subscription right. The taxation is based on the difference between the price paid to exercise the purchase- and subscription right (exercise price) and the value at the time of exercise of the shares (market value).
The net value is taxed as personal income, up to 56% including the labor market contribution (employment income).
The employee must ensure that their advance statement information is adjusted/payment of the tax, as the employer does not withhold income tax and labor market contributions from the taxable amount.
When the employee subsequently sells the shares, the profit is taxed as equity income with a tax rate of 27%/42%, depending on the employee's equity income.
The profit is calculated as the difference between the value of the shares at the time of exercise (purchase price) and the selling price of the shares.
Taxation under LL §7P – Deferral of tax to the sale date
This provision does not apply to board members or other individuals who contribute personal services to the company.
If an employee receives purchase- and subscription rights or shares as part of their employment, taxation can be deferred from the time of vesting to the time of sale. The advantage of this scheme is that the taxation is deferred until the employee sells the shares, and the entire taxation is treated as equity income.
There are several conditions for applying this provision, including:
· It must be stated in the contract that the scheme applies.
· The value must not exceed 10%, 20% (if the agreement is made with at least 80% of the employees), or 50% of the employee's annual salary (for startups) at the time the agreement is made.
· It must not be a special class of shares.
· It only applies to employees (not board members).
Taxation occurs when the employee sells the received shares, purchase- and subscription rights as equity income with a tax rate of 27%/42%.
The profit is calculated as the difference between the employee's payment and the selling price of the shares.
Shares are considered acquired at a value of 0 DKK if they are received as part of a gross salary reduction.
Contact us
Do you have questions about the taxation of employee shares, or do you need advice on how best to handle the tax aspects related to employee shares? We are ready to assist you!