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HR Legal

New rules on employee shares in the making

19 March 2018

In November 2017, the Danish government, the Danish People’s Party and the Danish Social-Liberal Party agreed on several initiatives in the industrial and entrepreneurial area. The agreed initiatives aim to make it more encouraging for employers to use employee share-based remuneration and easier to understand the rules on employee share plans, while also introducing more freedom of contract in this field.

The purpose of the agreement is to create better conditions for employers by making it easier for companies to pay their employees in shares. This could especially benefit new, smaller companies with limited financial resources.

Amendment of the Danish Stock Option Act on the way

From an employment law perspective, employee shares are regulated by three different sets of rules, the Stock Option Act (SOA), the Danish Salaried Employees Act (SEA) and the Contracts Act (CA). The type of employee share plan determines which act the employee shares are covered by.

In terms of employee share plans covered by the SOA, an employee cannot be forced to forfeit options or warrants which the employee has already exercised at the effective date of the termination of the employment. However, only “good leavers” are entitled to options and warrants, which have been granted, but have not yet exercised at the time of the termination. “Bad leavers” do not have this right, unless the incentive plan provides for these rights. The contracting parties behind the political agreement plan to introduce greater freedom of contract in this area, so that it will be possible to agree in the employee incentive plan that “good leavers” will forfeit the right to options and warrants which have been granted but not yet exercised at the time of the termination.

As for employee share plans where the employee has received shares but is bound by a repurchase clause, the political agreement will make it easier to agree that the shares can be repurchased at the market price at the time of the termination (this possibility was significantly limited by the Danish Supreme Court in 2011).

Another modification of the favorable tax regulation on employee shares

Remuneration in the form of options and warrants is by default subject to income taxation at the time of exercise. If the remuneration does not meet the requirements for income taxation, or if the remuneration is given in the form of shares, the taxation happens when the right is acquired. However, if certain requirements are met, shares, options and warrants may be taxed under a certain provision in Section 7 P of the Tax Assessment Act (TAA). Among other things, this provision benefits the employees by stating that the value of shares, options and warrants is taxed as capital gains on shares and not as salary. You can read more about this arrangement here.

In order to apply 7P, it is currently one of many conditions that the value of the granted shares, options and warrants may not exceed 10 % of the employee’s annual salary at the time when the agreement is entered into. However, a new bill will enable companies to offer employee shares equivalent to 20 % of the employee’s annual salary, as long as the arrangement is offered on equal terms to at least 80 % of the company’s employees. According to the bill, the new rules will apply to agreements concluded after 1 January 2018.

Special arrangement for start-ups

The political agreement also presents a special arrangement for new, smaller companies. According to the agreement, these companies will be able to offer employee shares equivalent to 50 % of the employee’s annual salary without it having to be taxed as salary. The companies subject to this arrangement will also not be obliged to offer the same to at least 80 % of their employees. However, this it is not part of the new bill, and according to the political arrangement it will not enter into force before 1 January 2019 at the earliest.

IUNO’s opinion

Essential parts of the political agreement are yet to be elaborated but if the main elements are implemented, it will be considerably more appealing for companies to use employee shares as part of the remuneration. The new bill on allocation of employee shares will also improve the access to use employee shares.

The new rules will benefit both the companies and the employees. The companies can use employee shares as an alternative to normal remuneration and as a means to encourage the employees to deliver better work results. On the other hand, the employees get a number of tax-related advantages by receiving part of their salary in the form of employee shares.

We follow the developments of the bill and the political agreement.

The purpose of the agreement is to create better conditions for employers by making it easier for companies to pay their employees in shares. This could especially benefit new, smaller companies with limited financial resources.

Amendment of the Danish Stock Option Act on the way

From an employment law perspective, employee shares are regulated by three different sets of rules, the Stock Option Act (SOA), the Danish Salaried Employees Act (SEA) and the Contracts Act (CA). The type of employee share plan determines which act the employee shares are covered by.

In terms of employee share plans covered by the SOA, an employee cannot be forced to forfeit options or warrants which the employee has already exercised at the effective date of the termination of the employment. However, only “good leavers” are entitled to options and warrants, which have been granted, but have not yet exercised at the time of the termination. “Bad leavers” do not have this right, unless the incentive plan provides for these rights. The contracting parties behind the political agreement plan to introduce greater freedom of contract in this area, so that it will be possible to agree in the employee incentive plan that “good leavers” will forfeit the right to options and warrants which have been granted but not yet exercised at the time of the termination.

As for employee share plans where the employee has received shares but is bound by a repurchase clause, the political agreement will make it easier to agree that the shares can be repurchased at the market price at the time of the termination (this possibility was significantly limited by the Danish Supreme Court in 2011).

Another modification of the favorable tax regulation on employee shares

Remuneration in the form of options and warrants is by default subject to income taxation at the time of exercise. If the remuneration does not meet the requirements for income taxation, or if the remuneration is given in the form of shares, the taxation happens when the right is acquired. However, if certain requirements are met, shares, options and warrants may be taxed under a certain provision in Section 7 P of the Tax Assessment Act (TAA). Among other things, this provision benefits the employees by stating that the value of shares, options and warrants is taxed as capital gains on shares and not as salary. You can read more about this arrangement here.

In order to apply 7P, it is currently one of many conditions that the value of the granted shares, options and warrants may not exceed 10 % of the employee’s annual salary at the time when the agreement is entered into. However, a new bill will enable companies to offer employee shares equivalent to 20 % of the employee’s annual salary, as long as the arrangement is offered on equal terms to at least 80 % of the company’s employees. According to the bill, the new rules will apply to agreements concluded after 1 January 2018.

Special arrangement for start-ups

The political agreement also presents a special arrangement for new, smaller companies. According to the agreement, these companies will be able to offer employee shares equivalent to 50 % of the employee’s annual salary without it having to be taxed as salary. The companies subject to this arrangement will also not be obliged to offer the same to at least 80 % of their employees. However, this it is not part of the new bill, and according to the political arrangement it will not enter into force before 1 January 2019 at the earliest.

IUNO’s opinion

Essential parts of the political agreement are yet to be elaborated but if the main elements are implemented, it will be considerably more appealing for companies to use employee shares as part of the remuneration. The new bill on allocation of employee shares will also improve the access to use employee shares.

The new rules will benefit both the companies and the employees. The companies can use employee shares as an alternative to normal remuneration and as a means to encourage the employees to deliver better work results. On the other hand, the employees get a number of tax-related advantages by receiving part of their salary in the form of employee shares.

We follow the developments of the bill and the political agreement.

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Anders

Etgen Reitz

Partner

Søren

Hessellund Klausen

Partner

Kathrine

Skøtt Jespersen

Senior associate

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