More companies are opting to offer employee shares as part of their compensation packages. This is a popular tool for motivating and retaining employees, as it allows them to become co-owners of the company and thus share in its financial success. However, how do the tax regulations really work when it comes to employee shares and stock options? In this post, we will review the main rules regarding taxation and reporting, including the differences between Sections 16, 28, and 7P of the Danish Tax Assessment Act.
What are employee shares?
Employee shares are shares that companies can allocate to their employees, either as part of the compensation package or by offering them the opportunity to purchase the shares at a value lower than the actual market value.
Section 16 and 28 of the Tax Assessment Act
Typically, the employee is awarded a share option, with the prospect that the employee will receive shares if various conditions are met. The conditions will typically be that the employee is employed at a certain time or that the profit reaches a given amount. In this situation, it will typically be according to Section 28 of the Tax Assessment Act that a share option is awarded, and when the conditions are met, the employee will be awarded a share. The time of taxation here is the time of the awarding, i.e. when the employee receives the share (taxed as personal income at up to approx. 52%). In other cases where the employee receives employee shares as part of an employment relationship, the employee must be taxed on the value of the shares. The tax base is the market value of the shares at the time of acquisition of rights with a deduction of any personal payment, cf. Section 16 of the Tax Assessment Act.
Reporting in eIncome (eIndkomst)
The value of shares, subscription and share purchase rights covered by Section 16 of the Tax Assessment Act in the year of acquisition (income type 50 in the code 068 field) must be reported. The value of subscription and share purchase rights covered by Section 28 of the Tax Assessment Act for the exercise or surrender year respectively (income type 51 in the code 68 field) must also be reported. If the value of subscription and share purchase rights covered by Section 16 of the Tax Assessment Act at the time of reporting cannot be calculated accurately, you must put a cross (x) in field 40 and type of income 50 in the code 068 field.
The Tax Assessment Act, Section 7P
In contrast to shares which are awarded according to Section 16 and 28 of the Tax Assessment Act, taxation will be postponed until the time of sale if the share is awarded according to Section 7P of the Tax Assessment Act. In this connection, the employer and employee enter into an agreement that the share award is covered by Section 7P of the Tax Assessment Act, and this must be expressly stated in the agreement.
Conditions for being covered by Section 7P of the Tax Assessment Act
- The employing company and the employee must enter into an agreement that the rules of Section 7P of the Tax Assessment Act will apply to the awarded shares, purchase rights or subscription rights.
- The value of the awarded right may not exceed 10% of the employee’s annual salary. However, the value may amount to up to 20% of the employee’s annual salary if access to acquiring the same type of employee shares is open to at least 80% of the company’s employees. The part of the condition that deals with the 20% of the employee’s annual salary is an adjustment to the original condition and applies to agreements entered into on 1 January 2018 or later.
- The purchase or subscription rights may not be transferred.
- The award must be part of an employment relationship.
- Members of the board of directors may not apply the provision.
It is my experience that many of the larger foreign companies’ share schemes meet the conditions of Section 7P of the Tax Assessment Act but just need to have it written into the agreement that it is Section 7P of the Tax Assessment Act that applies.
Reporting in eIncome (eIndkomst)
A tick must be put in field 40 in the salary report in eIndkomst and type of income 0101 must be indicated when awarding the subscription right.
Particularly about reporting share schemes in eKapital
The rules on reporting employee shares etc. was extended after 1 January 2019. This means that the obligation to report also includes awarding shares covered by Section 16 of the Tax Assessment Act. Furthermore, acquisition of shares by exercise of purchase or subscription rights that are covered by Section 16 or 28 of the Tax Assessment Act must also be reported. The obligation to report is incumbent on both the company that provides remuneration in the form of shares and the company against which purchase or subscription rights, covered by Section 7P, 16 or 28 of the Tax Assessment Act, according to Section 8 of the Tax Reporting Act, apply.
In other words, both the company at which the employee is employed, and the parent company are subject to this obligation to report. When reporting the acquisition of shares under an employee share scheme covered by Section 7P of the Tax Assessment Act, it must be stated whether the employee has acquired the shares, the purchase rights to the shares or the subscription rights to a value corresponding to a maximum of 10% of the annual salary, or to a value corresponding to a maximum of 20% of the annual salary. See the previously mentioned conditions for Section 7P of the Tax Assessment Act.
Guidance on reporting employee shares
The Danish Tax Agency has prepared reporting guidelines for companies that offer employees shares, covered by Section 7P or 16 of the Tax Assessment Act. The guide also applies to companies vis-à-vis which purchase, or subscription rights covered by Section 7P, 16 or 28 of the Tax Assessment Act are exercised.
Reporting in eKapital must be done by 20 January 2025 at the latest
Reporting the acquisition of shares in 2024 in connection with an employee share scheme must be done by 20 January 2025 at the latest.
Do you need advice?
At Azets, we have experienced consultants who can advise you on everything within accounting, VAT and tax. We also have extensive experience in reporting in eKapital and will therefore be able to provide assistance in relation to this.
Employee Shares
What are employee shares?
How are employee shares taxed?
What is Section 7P, and what conditions apply?
How are employee shares reported?
