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By Marcus Hoy
May 25—A new method of taxing employee share allocations and stock options was approved by Denmark’s parliament May 12 and will take effect July 1. A new legal amendment (430/2016) affecting four existing laws will allow companies to sacrifice a corporate tax deduction in order to trigger favorable tax treatment for employees who choose to invest in the company. In a May 25 statement, Esben Christensen of Deloitte told Bloomberg BNA that the new rules would offer significant tax benefits to employees should companies chose to apply them.
Currently, company shares are taxed at the same level as an employee’s salary upon distribution. Under the new model, such instruments will remain tax-free until sold, after which they will be treated as capital gains as opposed to personal income. Thus, taxation of shares will not exceed 42 percent, as opposed to the highest marginal income tax rate of around 56 percent. However, should companies choose to apply this model, no corporate tax deduction will be permitted on the distribution.
A number of conditions must be met before the favorable tax treatment can be applied to employee shares and stock options. These conditions include:
• The share distribution can only be applied to salaried employees in a single company or group of companies;
• Employees can only receive shares and stock options with a value of up to ten percent of their annual salary, including company pension;
• Both the employee and company must agree to the scheme’s enactment and
• Allocated shares cannot be of a new type or class.
Following the distribution, the employer will be obliged to provide certain information to the nation’s Tax Authority (SKAT). This includes information on the type of share that is allocated, the date of the distribution and the number and value of the allocated shares. This documentation must be provided by Jan. 20 following the calendar year of the distribution. Danish companies that are members of multinational groups will be required to provide this information even if shares or stock options are issued to their employees by a foreign group company. Following the distribution, employers must maintain records of the distribution. Should any these conditions not be met, taxation will occur under the general rule.
“The general rule is that share schemes are taxed at salary level when the employee receives the shares” Christensen told Bloomberg BNA. “The new rules allow a possibility for the company and the employee to elect an alternative taxation model, which, in most cases, will be beneficial for the employee.”
Should companies choose not to apply the option, existing rules that generally allow a corporate tax deduction worth 22 percent would continue to apply, he said. “The new rules are an alternative, which gives the company an option to agree to sacrifice the corporate deduction in order to offer beneficial tax treatment to its employees” he said. “No one can force this on companies. Employers will only lose the deduction if they agree to it. If a company does not like the new rules, it can just chose not to utilize them.”
The new model, he said, was similar to a previous employee incentive scheme that was abolished in 2011. “The previous rule had a few additional conditions,” Cristensen said. “For example, it was a condition that an auditor or lawyer should validate that all conditions were met. Compared to the abolished rules, these new rules are a bit more flexible.”
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The text of the legal amendment, which affects four separate laws, is available in Danish at https://www.retsinformation.dk/Forms/R0710.aspx?id=180161.
More information on payroll issues in Denmark can be found in the Denmark country primer.
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