Tax Rules for Employee Shares

June 2004

There are today three special schemes for taxation of employee shares. The schemes are described in sections 1 - 3 below.

Alongside the three special schemes, ordinary tax rules apply. The ordinary rules should be applied in single cases where the conditions of the special schemes are not met. The ordinary rules imply that the employee is taxed at the time when he/she acquires the share, the purchase option or the subscription right. The company is entitled to deduct the expense.

This booklet describes the key features of the three special schemes.

1. Individual share remuneration

This scheme is summarised as follows:

• Taxation is effected at the time when the employee shares are sold.
• Taxation as capital gain not as salary.
• The company is not entitled to deduct the expense.

The scheme was introduced in 2003. The background was that under the former rules the employee had to pay tax on purchase options and subscription rights granted upon the exercise of the purchase option or subscription for shares. In consequence, the employee was forced to sell some of the shares just acquired in order to raise money for paying the tax.

Conditions

The scheme applies to both shares received directly by the employee and to purchase options and subscription rights entitling the employee to purchase shares.

The employer company must enter into an individual agreement with each employee. The company itself decides which employees should be granted shares, etc. The company is not entitled to deduct the expense.

The scheme applies only to employees; i.e. it does not apply to members of the supervisory board.

The agreement must be endorsed by the company’s auditor or attorney. The auditor or the attorney guarantees that the conditions have been met.

The shares, etc are to be contributed by the employer company of the employee or a company within the same group as the employer company.

There are two limits as to how many shares, etc an employee may be granted for the individual year.

Under the first limit the employee may be granted shares, purchase options and subscription rights up to a value equal to 10 per cent of the employee’s annual salary.

Under the second limit the employee may be granted purchase options and subscription rights on shares without restriction if the exercise price is not more than 15 per cent lower than the market price of the shares to which the option/right relates. In practice this means that the limit has been observed if the employee is entitled to purchase shares at, for example, a price of 170, and the market price at the time is 200.

The first limit applies to both shares and purchase options and subscription rights. The second limit applies only to purchase options and subscription rights on shares. The limits are either/or limits.

If the employee receives shares only, the employee may receive only total shares equal to 10 per cent of his/her annual salary under the first limit. If the employee receives purchase options and subscription rights that all meet the requirement of an exercise price not more than 15 per cent lower than market price under the second limit, the employee may in addition receive shares equal to 10 per cent of his/her annual salary under the first limit. The either/or definition of the limit implies that the employee cannot both receive purchase options and subscription rights meeting the requirement of not exceeding 10 per cent of his/her salary and other purchase options and subscription rights meeting the requirement of an exercise price not more than 15 per cent lower than market price.

Where the employee and the employer company have agreed that shares, etc granted are to be governed by the new rules, the employee should not include the value in his/her taxable income.

The employee will not be taxed until the shares - received directly or acquired by exercise of a purchase option or subscription right granted - are sold. Reference is made to section 4 below for a description of the tax rules for share sale.

Overall, the scheme implies that

• the employee is taxed at a later time than if taxed under the ordinary tax rules,
• the employee him-/herself decides when the tax should crystallise (viz upon the sale), and
• taxation may be lower than in the case of taxation as salary.

2. General employee share ownership plans

This is a general scheme because it must apply to all employees. However, restriction may be exercised under general criteria, such as requirements in terms of specific employment period, working hours or seniority.

The rules apply to shares granted directly to the employee and to purchase options and subscription rights entitling the employee to purchase shares.

The scheme applies only to employees; i.e. it does not apply to members of the supervisory board.

There are limits as to the value that the employee can receive each year.

As regards purchase options and subscription rights, the value of the purchase option and subscription right granted cannot exceed 10 per cent of the employee’s annual salary. The shares acquired by exercising the purchase option and subscription right are restricted for a period of 5 years and must be placed on trust with a bank.

The employee may be granted shares of up to DKK 20,000 (in 2004) annually. The shares are popularly referred to as ‘complimentary shares’. The shares are restricted for a period of 7 years and must be placed on trust.

The company may deduct expenses for shares, purchase options and subscription rights granted.

The company is required to file with the tax authorities information to be endorsed by the company’s auditor or attorney.

The employee will not be taxed until the shares - received directly or acquired by exercise of a purchase option or subscription right granted - are sold. Reference is made to section 4 below.

3. Rules on taxation of purchase options and subscription rights at the time of exercise

The rules apply to purchase options and subscription rights entitling the employee to purchase shares.

The rules may be applied to both employees, members of the supervisory board and individuals who have performed personal services. The company itself decides which individuals should be covered.

The purchase option and subscription right must be granted by the employer company of the employee or a company within the same group. The company is entitled to deduct expenses for purchase options and subscription rights granted.

There is no limit as to the amount that the employee can receive each year.

The company is required to file information with the tax authorities.

The tax is payable at the time when the purchase option or subscription right is exercised to purchase shares. The amount is taxed as salary including social security contribution and contribution to special pension fund (imposition of the latter has been suspended in 2004 and 2005). The tax base is the difference between the price at which the shares are acquired and the market price of the shares in question.

4. Taxation upon sale of employee shares

Upon sale of employee shares, the gain is taxed under the rules applying to the sale of regular shares. In many cases the gain will be taxed as equity income. Gains below DKK 42,400 (in 2004) are taxed at a rate of 28 per cent, and gains above this amount are taxed at a rate of 43 per cent. In the case of listed shares held for at least 3 years, the gain is tax-exempt provided that the share originates from a holding of shares whose value has not within the past 3 years exceeded the so-called DKK 100,000 limit (in 2004 the limit is DKK 133,700). For married couples, the limit is DKK 267,300 (in 2004). 

Have the shares been held for less than 3 years, the gain is taxed as unearned income. This means that the gain is taxed at a rate between some 33 per cent and some 60 per cent depending whether the holder pays tax at the middle-bracket or the top-bracket tax rate and has a positive or negative net capital income.

As regards unlisted shares, gains on shares held for at least 3 years are taxed as equity income.

The employee is required to enter on his/her income tax return any profit from the sale.

In summary, whether the gain will be taxed, and if so at which amount, depends on, among other factors, the amount of the gain, how long the employee has held the share and whether the share is listed or unlisted.

For details, please contact:

Hardy Pedersen, Ministry of Taxation, Inland Revenue Department

Tel +45 33 92 45 02

Lone Friis Johansen, Central Customs and Tax Administration

Tel +45 72 22 18 18