This country-specific Q&A provides an overview to tax laws and regulations that may occur in Denmark.
This Q&A is part of the global guide to Employee Incentives. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/employee-incentives/
What kinds of incentive plan are most commonly offered and to whom?
A distinction should be made between ‘all employee’ plans and management incentives plans.
‘All employee plans’ are generally free or discounted share plans, including Restricted Share Units (‘RSU’) plans, and share option plans.
Management incentive plans commonly put the participant at risk and are more often performance based. A distinction should be made between publicly and privately held companies. Free shares awarded to management of listed companies are subject to a minimum holding period (in accordance with Dutch corporate governance rules). Co-invest plans are common for management in companies that are privately held. Consequently, the structure of incentive plans widely differs between publicly and privately held companies. The same goes for the legal and tax aspects one has to consider when structuring these plans.
What kinds of share option plan can be offered?
Share option plans entail that the employer is obligated to sell stocks or issue warrants (“Shares”) to the employee on a later specific day and that the employee receives a right – and not an obligation – to purchase the Shares in the employee’s company (the “Company”) on a later specific day.
Share purchase plans entail that the employer is obligated to sell stocks or issue warrants to the employee on the day of the granting and that the employee is entitled – and not obligated – to purchase Shares in the Company on the same day as receiving the grant.
If the employee chooses not to use the granted right to purchase Shares in the Company, the right lapses without any economic consequences for the employee.
Under Danish legislation, options- and purchase plans (“Incentive Plans”) are mainly regulated by the individual employment agreement. This entail that Incentive Plans can be designed in many ways.
However, when two parties agreed on an Incentive Plan, the Incentive Plan can be subject to the Danish Stock Option Act (in Danish: aktieoptionsloven), the Danish Salaried Employees Act (in Danish: funktionærloven) or an individual employment agreement.
The Danish Stock Option Act entails that an Incentive Plan under which an employee is entitled to purchase Shares in the Company on a specific day is subject to the regulation in the act. The consequences of the Danish Stock Option Act are outlined further in question 10.
The Danish Salaried Employees Act section 17a covers bonus payments under an Incentive Plan paid out to a salaried employee. In question 10, the consequences of section 17a in the act are outlined.
If an employee is not a salaried employee and the Danish Stock Options Act does not apply on the Incentive Plan, the grant is regulated by the employment agreement and the Incentive Plan entered into between the parties.
Below, different kinds of Incentive Plans are outlined.
Incentive plans subject to the Danish Stock Option Act:
Share Incentive Plan
Share Incentive Plans entail that the employee is granted a right to purchase Shares in the Company on a later specific day. The purchasing price will, normally, be set to market price, but can be set to another price based on the employer’s decision or the parties’ agreement.
Restricted Shares (the first type) entail that the employee is granted a right to receive Shares free of charge on a later specific day. If the employee is terminated prior to the specified day, the right to receive Shares lapses.
Performance Shares entail that the employee is granted a cash amount, which is withheld by the employer. On a later specific day, the employee is entitled to purchase Shares in the Company for the withheld amount. The specific day is, usually, two to three years after the granting day.
The price of the Shares is, normally, set at market price. Thus, the amount of Shares, which the employee can purchase for the withheld amount, depend on the market price of the Shares on the specific day.
Stock purchase plans
Stock purchase plans entail that an amount of the employee’s salary is deducted and withheld by the employer on a monthly basis. At the same time, the employee is granted a right to purchase Shares in the Company with the deducted amount on a later specific day.
If the employment is terminated prior to the specific day or the employee chooses not to purchase Shares in the Company, the right lapses and the accumulated deduction will be paid out to the employee.
Incentive plans subject to the salaried employees act or an individual agreement:
Phantom Shares entail that the employee is granted a cash amount equal to the difference between the market price of the Shares on the granting day and the price on a later specified day. The specified day is, usually, two to three years after the granting day.
Restricted Shares (the second type) entail that an employee is granted the right to purchase Shares in the Company on the granting day.
Normally, the plan entails that the employee will be obligated to sell back/return the Shares to the Company, if the employee resigns prior to a specific day. The specified day is, normally, one to two years after the granting day.
Matching Shares entail that an employee is offered to purchase Shares in the Company at market price. If the employee choses to purchase Shares, the Company will match the amount or value of the Shares by granting the employee with the same amount of Shares in the Company on a later specified day. The specified day is, normally, two to three years after the granting day.
What kinds of share acquisition/share purchase plan can be offered?
See question 2.
What other forms of long-term incentives (including cash plans) can be offered?
An employee can be offered a long-term bonus plan based on the employee’s performance or the Company’s collective performance.
Such bonus plans are, normally offered at the employer’s sole discretion in regards to under which circumstances the employee can be entitled to a bonus payment.
A bonus payment is subject to section 17a in the Danish Salaried Employees Act.
Are there any limits on who can participate in an incentive plan and the extent to which they can participate?
Under Danish employment legislation, all employees can participate in an Incentive Plan.
Under Danish taxation legislation, a special tax scheme (“7P Scheme”) was introduced in 2016 under the Danish Tax Assessment Act (in Danish: ligningsloven). If the 7P Scheme is applied to an Incentive Plan, the employee is taxed on the value of the Incentive Plan as share income (up to 42%) instead of as salary (up to 55 %). Furthermore, 7P Scheme entails that the taxation is postponed until the sale of the Shares.
In general, the 7P Scheme may be applied to all Share-based compensation for employees and the board of executives.
Under the 7P Scheme a higher proportional value of the share-based compensation, i.e. 20% of annual salary as opposed to 10% of annual salary in other situations, can be granted, if it is the general Incentive Plan in the Company (a plan comprising at least 80% of the employees).
The 7P scheme only applies to employees, i.e. board members cannot apply the scheme.
There are certain mandatory limits in Financial Institutions on the offering of incentive plans.
Can awards be made subject to performance criteria, vesting schedules and forfeiture?
Yes. See question 2 and 4.
What are the tax and social security consequences for participants in an incentive plan including: (i) on grant; (ii) on vesting; (iii) on exercise; (iv) on the acquisition, holding and/or disposal of any underlying shares of securities; (v) in connection with any loans offered to participants (either by the company operating the incentive plan, the employer of the participant (if different) or a third party) as part of the incentive plan.
When an employee participates in an Incentive Plan, the follow tax consequences applies:
- on the granting day; under Danish legislation the main rule is that payments paid out to an employee is taxable at the time of granting, unless a special scheme applies or unless there are vesting conditions, which entail a postponement of the taxation. Generally, vesting conditions based on economic performance criteria can postpone taxation, until it can be determined, whether the conditions are met or not. Furthermore, if the Incentive Plan is dependent on the employee being employed on a specified day, this can also postpone taxation. However, this only applies, if the condition entails that the employee must be employed for at least two years after the granting day. For options and warrants, the taxation is in general postponed, until sale of option/warrant or until exercise. Furthermore, if the Shares are subject to the 7P Scheme, taxation is postponed until the sale of the Shares.
- on the vesting day; for stocks (not shares or warrants) taxation, generally, occurs at vesting, if the stocks are subject to vesting conditions, which postpone taxation, see above.
- on the day of exercise; options and warrants for shares are, generally, taxed at the exercise time (if not sold before).
- on the acquisition, holding and/or disposal of any underlying shares of securities; the taxation occurs when the employee sell the Shares and is based on a step up in acquisition value corresponding to the value, which has been subject to taxation as salary. i.e. when the salary taxation is settled, any future capital gained will be considered share income, which is payable at sale of the Shares. Furthermore, under the 7P Scheme the taxation is triggered, when the employee sell the Shares.
- loans offered to an employee to participate in an Incentive Plan; any benefits offered to the employee as part of the loan agreement, e.g. interest rate below market rate should generally be taxable as salary.
Furthermore, the Danish social security contribution is a fixed amount and should, therefore, not be taken into consideration when designing an Incentive Plan.
What are the tax and social security consequences for companies operating an incentive plan?
An employer is in general entitled to a deduction for the expenses in connection with a granting under an Incentive Plan at the same time as the employee is taxable of the value of the Incentive Plan, see question 7. However, this does not apply, if the Incentive Plan is subject to the 7P Scheme and, thus, the employer is not entitled to a deduction.
What are the reporting/notification/filing requirements applicable to an incentive plan?
If an Incentive Plan is subject to the Danish Stock Option Act, the employer is obligated to draft an employer-declaration (in Danish: arbejdsgivererklæring). The employer-declaration shall include all the details in the Incentive Plan, including:
- the granting day,
- the criteria or conditions for granting Shares to the employee,
- the day when the employee can purchase the Shares in the Company,
- the price under which the employee can purchase the Shares,
- the employee’s rights, if the employment is terminated and
- the economic consequences for an employee to participate in an Incentive Plan.
The employer-declaration must be in Danish and should be given to the employee at the time as the Incentive Plan becomes a part of the employment agreement.
If the employee is not given the employer-declaration, the employee will be entitled to a compensation in accordance with the level in the Danish Employment Agreement Act (in Danish: ansættelsesbevisloven).
Furthermore, the employer is obligated to report payments under an Incentive Plan to the Danish tax authorities. If the granting is subject to the 7P Scheme, the employer must also register as reporting to a share-register of the Danish tax authorities. Subsequently, a grant under an Incentive Plan on which the 7P Scheme applies must be filed to this share-register. Reporting obligations also applies when a foreign group company has granted the Incentive Plan directly to the employee.
Do participants in incentive plans have a right to compensation for loss of their awards when their employment terminates? Does the reason for the termination matter?
The Danish Stock Option Act
For Incentive Plans entered into prior to 1 January 2019, the previous Danish Share Option Act applies under which Shares are subject to a good/bad leaver assessment, which cannot be deviated from to the detriment of the employee.
An employee is considered a good leaver, if:
- the employment is terminated due to the employment being terminated by the employer without this being a result of the employee’s breach of duties (e.g. redundancy or change of personnel for operational requirements); or
- the employee terminates the employment due to the employer’s breach of the employment agreement.
An employee is considered a bad leaver, if:
- the employee terminates the employment in accordance with the agreed notice period in the employment agreement; or
- the employer terminates the employment due to the employee’s breach of the employment agreement.
If the employee is considered a good leaver, the employee retains the right to exercise granted Shares when the employment lapses. If the employee is considered a bad leaver, the employee’s rights to exercise the granted Shares lapses, unless the parties have stipulated otherwise in an agreement.
For Incentive Plans entered into after 31 December 2018, the good leaver/bad leaver assessment no longer applies and the employer/employee consequently have a wide contractual discretion to decide on rights to compensation.
After 31 December 2018, the employer and the employee are considered “equals” and the protection of the employee is, consequently, reduced. The parties can, for example, agree that the employer can repurchase Shares, purchased by the employee under an agreement with the employer at market value, when the employment lapses.
If an agreement is deemed unreasonable by the courts, it can be set aside as invalid under the general clause in section 36 of the Danish Contracts Act.
The Danish Salaried Employees Act
Under section 17a in the Danish Salaried Employees Act, a salaried employee is entitled to a pro rated bonus, if the employment is terminated during the period under which the bonus is accrued.
Bonus payment not subject to the Danish Salaried Employees Act or the Danish Stock Option Act
If an employee is not subject to the Danish Salaried Employees Act and the bonus payment is not subject to the Danish Stock Option Act, the employee’s rights, in connection with the employment being terminated, depend on the wording/understanding of the employment agreement, including the bonus agreement.
Do any data protection requirements apply to the operation of an incentive plan?
The European General Data Protection Regulation applies, if the employer processes personal data regarding the employee when processing the Incentive Plan.
Are there any corporate governance guidelines that apply to the operation of incentive plans?
The Danish corporate governance guidelines, which applies for public companies, recommend that the board of directors compose a remuneration policy, which applies to the board of directors and the executive board.
The board of directors and the executive board, normally, participates in Incentive Plans and, therefore, the guidelines apply to the board of directors and the executive board’s Incentive Plans.
The recommended policy includes:
- a detailed description of the components of the remuneration package, including any Incentive Plan,
- a reason for the chosen remuneration package, including each component of the package,
- a description of the criteria underlying the balance between the individual remuneration components, and
- a description of the connection between the remuneration policy and the Company’s long-term value creation and the relevant goals for this.
Are there any prospectus or securities law requirements that apply to the operation of incentive plans?
See question 9 and 12.
Do any specialist regulatory regimes apply to incentive plans?
As mentioned, there are certain mandatory limits in Financial Institutions on the offering of incentive plans.
Otherwise, see question 9 and 10.
Are there any exchange control restrictions that affect the operation of incentive plans?
Under Dutch law, no exchange controls are currently applicable to the operation of incentive plans involving Dutch employees.
What is the formal process for granting awards under an incentive plan?
The formal process for awarding grants depends on the employment agreement. Furthermore, the process is based on the employer’s intentions of awarding an employee with grants.
If the parties want the 7P Scheme to apply on an Incentive Plan, the parties must enter an agreement, which includes a specific reference to the 7P Scheme. This agreement should be entered prior to or at the same time as the awarding of the grant.
Can an overseas corporation operate an incentive plan?
Neither the Danish Stock Option Act nor the Danish Salaried Employees Act distinguish between Danish and overseas companies, if the Incentive Plan is governed by Danish legislation.
Can an overseas employee participate in an incentive plan?
Yes. See question 17.
How are share options or awards held by an internationally mobile employee taxed?
If a mobile employee moves to Denmark after being granted with Shares and the Shares vest after the employee has become taxable as a resident in Denmark, generally, the full value of the awarded Shares will be taxable in Denmark as salary income.
If Shares awarded to a Danish resident employee vests after the employee exits Denmark, generally, a proportional part of the value will be taxable in Denmark.
If an employee has received a grant of Shares under the 7P scheme in Denmark, special rules on exit treatment applies after which the application of the 7P Scheme for mobile employees should be considered in relation to possible exit tax position.
How are cash-based incentives held by an internationally mobile employee taxed?
The tax treatment of cash based incentives is, generally, in line with the described treatment for the granting of Shares, see question 19.
What trends in incentive plan design have you observed over the last 12 months?
Due to the recently introduced 7P Scheme, new Incentive Plans are being introduced and existing Incentive Plans are being adjusted to ensure that the 7P Scheme applies on the Incentive Plan.
With regards to Incentive Plans for the board of executives, the 7P Scheme is also being introduced, but not to the same extent as with employees as to the 7P Scheme is limited to 10% of the salary.
What are the current developments and proposals for reform that will affect the operation of incentive plans over the next 12 months?
There is a proposed amendment regarding the 7P Scheme, which is expected to be passed in the end of 2018 or begin of 2019 after which it must also be approved by EU. If the amendment is passed, the 7P Scheme will apply for 50% of the salary for newly started businesses.