By Berkay Sönmez

Taxation of employee shares

In many Danish companies, employee shares are offered as part of the pay package. This can enable employees to make financial gains and become co-owners of their workplace. Still, how are employee shares actually taxed and what tax benefits can be enjoyed from them?

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What are employee shares?

Employee shares, also called stock pay, are often used as a retention tool in companies, or as an incentive to key employees in companies.

Employee shares are an agreement between an employee and an employer, whereby the employee is given the opportunity to buy or receive shares in the company he or she works for. Often they are conditional, depending on employment at a given time or the company’s results.

The purpose of employee shares is to increase personal and financial interest in the company, by allowing employees to become shareholders in the company. For many companies, stock pay can therefore be an attractive way to attract and retain employees.

Remuneration in the form of employee shares

Shares together with purchase and subscription rights must be given as consideration in order to be covered by one of the taxable rules on employee shares. Remuneration means that the shares, or the right to purchase and subscribe are received as part of an employment relationship. This can be either free of charge or by offering the employee the opportunity to purchase shares at an amount lower than the market value at the time the share pay agreement begins.

What are shares, purchase and subscription right?

In the case of shares, it must be understood both as stocks and shares  subject to the rules of Aktieavancebeskatningsloven.

A stock option is a right, but not an obligation to purchase a number of shares at a predetermined price, at a future time or during a future period.

A warrant is a right, but not an obligation, to subscribe for new shares at a predetermined price at a future time or in a future period.

Options is a collective term for purchase and subscription rights.

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Taxation methods of employee share schemes

The tax treatment of employee and employer depends on the regulatory framework, according to which the share salary is awarded. Therefore, it is advantageous to choose the remuneration that involves the least possible tax payment.

The taxation of employee shares depends on which legal provision it is assigned according to:

• Paragraph 16 of Ligningsloven — taxation at the time of acquisition
• Paragraph 28 of Ligningsloven — deferral of taxation until the time of exercise
• Paragraph 7P of Ligningsloven — deferral of tax until the time of sale

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For each provision, there are certain conditions, that must be met before the provision can be applied. If the conditions for the application of §28 and §7P of the Equation Act are not met, taxation will instead be applied in accordance with Section 16 of the Equation Act.

The conditions for the methods of taxation are described below.

Taxation under LL §16 — General rules of the Tax Code

If an employee receives shares, purchase or subscription rights without applying LL §28 and §7P, the general rules of the Tax Code apply (LL §16).

The employee is taxed at the time of legal acquisition on the share consideration. The actual taxation is made on the difference between the trading value of the share, and any co-payment. The net value is taxed as personal income at up to 56% incl. labour market contribution (wage income). Thus, there is no difference between receiving pay in shares or ordinary wage income.

The employee themself must arrange for their advance registration/tax deposit because the employer does not include A-tax and labour market contribution (AM-bidrag) of the taxable amount. If this is competed before 31 December of the tax year, paying unnecessary interest to the Danish Tax Agency will be avoided.

In the case of purchase and subscription rights (options), the employee receives shares upon exercising the options. The purchase price of the options is the value at the time of acquisition. The same is true for stocks.

When the employee subsequently sells the shares, taxation is the same as stock income, with a tax of 27%/42% dependent on the employee's stock income.

The profit is calculated as the difference between the value of the shares at the time of acquisition (purchase price) and the sale price of the shares.

Taxation of LL §28 — deferral of tax until the time of use

Only the allocation of purchase and subscription rights are covered by this provision. This means that if you are granted shares, you cannot be covered by this provision.

If an employee receives purchase and subscription rights as part of an employment package . taxation may be deferred from the moment of acquisition until the time of exercise (use). Anyone who makes a personal effort for the company in question may be subject to the provision.

The employee is taxed at the time of exercise of the right of purchase and subscription. The actual taxation is made by the difference between the price 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 at up to 56% incl. labour market contribution (wage income).

The employee themself must arrange for their advance registration/payment of tax, as the employer does not include A-tax and labour market contribution of the taxable amount.

When the employee subsequently sells the shares, taxation is considered stock income with a tax of 27%/42% dependent on the employee's stock income.

The profit is calculated as the difference between the value of the shares at the time of exercise (purchase price) and the sale price of the shares.

Taxation of LL §7P — deferral of tax at the time of sale

This provision does not apply to directors or other persons, who make a personal contribution to the company.

If an employee receives purchase and subscription rights or shares as part of a renumeration package , taxation may be deferred from the time of acquisition until the time of sale. The advantage of this scheme is that the time of taxation is postponed until the employee actually sells the shares. Also, the entire taxation considered to be share income for the employee.

A number of conditions are attached to the application of this scheme, including:

• The contract must state that the scheme applies
• The value must not exceed 10%, 20% (if the agreement is concluded to at least 80% of employees) or 50% of the annual salary (for startups), that the employee has at the time of the agreement.
• It must not be a special share class
• It applies only to hired employees (not to the board of directors).

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Taxation of the employee occurs only when there is a sale of the received shares, purchase and subscription rights are taxed as share income with a tax of 27%/42%.

The profit is calculated as the difference between the employee's own payment and the sale price of the shares.

The shares are deemed to have been acquired at DKK 0 if they are received as part of a gross salary reduction.

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Disclaimer

The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.