- 20 Feb 2016
A favourable tax regime for share-based remuneration was repealed in November 2011. Under the regime, shares, share options and warrants could be awarded without being taxable until the shares acquired were sold, and the shares acquired were taxable as capital gains and not as personal income. Now, a consultation has been launched on a draft bill which will essentially re-introduce the favourable regime.
For purposes of implementing a part of the Finance Act 2016, the Danish Ministry of Taxation has launched a consultation on a draft bill to re-introduce a favourable tax regime for shares as well as share options and warrants awarded to employees in the course of their employment. The regime will govern general as well as individual employee share schemes.
The new regime will be implemented in a new provision in section 7P of the Danish Tax Assessment Act, and corresponds more or less to the former – and much used – regime in section 7H of the same Act, which was repealed in November 2011.
Under the new regime, it will be possible to postpone the date on which the employee will be taxed. Thus, any shares, options or warrants awarded will not be taxable for the employee on the award or exercise date, but on the date when the employee sells the shares acquired. The employee will thus have an interest in holding on to the shares longer.
When the employee sells the shares, the proceeds will be taxable as capital gains and not as personal income. The tax is thus capped at 42% and not at the approx. 56% for personal income.
The relatively low taxation is counterbalanced by the fact that the value of the share-based remuneration is not deductible for the employer. The award of share-based remuneration which is taxable under the new regime will therefore be costlier for the employer.
Given the experience gained from share-based remuneration awarded under the former regime of section 7H of the Danish Tax Assessment Act, however, the non-deductibility will most likely often mean that the value of the share-based remuneration awarded to an employee will be reduced to ensure that the actual cost of the share-based remuneration to the employer will not increase, compared with a situation where the share-based remuneration was not taxable under the new regime.
Such a reduction in the value of the share-based remuneration awarded will greatly reduce the advantage involved in the tax rate being capped at 42%, but there will usually still be a minor tax advantage involved compared with a situation where the share-based remuneration was taxable as personal income.
In order to qualify for the new regime, a number of conditions must be met, the most important of which being:
- The employer and the employee must agree in writing that the share-based remuneration awarded are subject to the new regime. The terms of this agreement must comply with a number of conditions.
- The value of the share-based remuneration awarded may not exceed 10% of the employee's annual pay, annual pay being the sum of the employee's cash remuneration plus any employer pension contributions and the taxable value of any non-pay benefits. If the value exceeds the 10% threshold, the excess will be taxable under the less favourable general rules.
- The share-based remuneration must be awarded by the employer company or one of its group companies.
- The share-based remuneration must consist of either shares – or share options and warrants entitling the holder to acquire shares – in the employer company or one of its group companies.
- Share options and warrants may not be transferred to a third party, except on the holder's death.
- The employer must report various information about the share-based remuneration to the Danish tax authorities.
The latter condition differs from and replaces the condition of the former regime in section 7H of the Danish Tax Assessment Act, according to which a specified declaration had to be issued by the employer company's lawyers or auditors and submitted to the tax authorities.
The new regime is expected to enter into force on 1 July 2016, but will only apply to agreements concerning award of share-based remuneration which are concluded on 1 July 2016 or later.
The deadline for submitting consultation responses expires on 1 March 2016 and the Danish Minister for Taxation will then introduce the Bill in the Danish parliament. Norrbom Vinding will follow and comment on the introduction of the Bill and its passage through the parliament.