Proposal of a new Danish Share Option Act with significant changes and new rules on taxation of employee shares
On 3 October 2018, the Ministry of Employment submitted a bill to amend the Danish Share Option Act so that employers and employees have greater freedom of contract to agree on the terms of a share option program. The amendment is expected to come into force on 1 January 2019 and will only apply to agreements concluded or amended after January 1, 2019. The purpose of the new bill is to ensure more flexibility in the design of share option programs. This is done by simplifying the current rules, which makes it more attractive for companies, including newly-established companies in the growth phase, to offer employees share options, etc.
In connection with the proposal for the new Danish Share Option Act, the Ministry of Taxation has submitted a bill on November 20, 2018, amending the taxation rules for employee shares and employee share options. The bill will make it more attractive for startup companies to pay their employees with shares of share options.
As a company, you can offer your employees share options and other types of stock wages. Such agreements between the employer and employee are governed by the Danish Share Option Act.
The Danish Share Option Act includes provisions on what can be agreed upon in connection with an employee’s resignation. According to the current rules, share options that are not exercised at the time of termination, will lapse if the employee resigns or is terminated due to default of contract. However, if an employee is terminated without having defaulted the contract, or if he is retiring, the employee retains the right to exercise share options on the same terms as if the employee was still employed in the company.
Freedom of contract in connection with termination
To ensure the purpose of the new bill, the current limitation of agreement will be repealed, so that the company and employee can agree on the terms of non-exercised share options in connection with the employee’s resignation. Therefore, there will no longer be distinguished between so-called ”good leaver” and “bad leavers”. Therefore, if the new bill is adopted, it can thus from January 1, 2019, be agreed upon that non-exercised share options lapse at the employee’s resignation, regardless of the justification of termination.
Furthermore, it will be possible to agree that the company may repurchase the employee’s stocks and shares, acquired by the employee on the basis of a share option program, at the time of resignation. However, the prices of the stocks and shares must at least constitute the market price at the time of the repurchase.
The bill was presented on October 3, 2018, and the first reading was on October 23, 2018 and there was broad agreement on the bill among the parties. The 2nd and 3rd readings should take place on December 4 and 6, 2018.
Taxation of employee shares and options
In connection with the proposal for the new Danish Share Option Act, the Ministry of Taxation has submitted a bill to amend the rules of taxation for employee shares and options.
According to the current rules, employee shares and options are taxed as income in their earnings. The tax is only incurred when the option is exercised or disposed of and the basis for the taxation is the option value, at the exercise or disposal date. However, it is possible to agree that shares and options will be paid as share income instead of earnings, i.e. a lower taxation percentage. In such cases, taxation will only be made when the shares or options are waived. However, the number of shares or options that can be paid as share income is limited to a maximum of 20% of the employee’s annual salary at the time of the agreement.
The Ministry of Taxation proposes that it should be possible to pay up to 50% of an employee’s annual salary at the time of the agreements as shares or options. The purpose of the amendment is to support startups, so that they are better placed in the competition for skilled labor. The scheme should therefore only apply to companies which, at the time of the agreement, have no more than 50 employees in one of the two most recent financial statements. Furthermore, these companies must not have had a net turnover of more than DKK 20 million and a balance of more than total DKK 75 million. In addition, these companies must not have been active in a market more than 5 years before the conclusion of the agreement. The scheme does not apply to passive companies (money tanks).
The bill was submitted on November 20, 2018 and the first reading of the proposal was on November 27, 2018, where consensus was reached among most parties. The bill was then sent to the Tax Committee.
If you would like advice on creating share option programs or advice on changing your existing programs, please contact Attorney-at-law and Partner, Alexandra Huber.
+45 5116 7494