Better conditions for new, smaller companies in the employee share scheme

According to the rules in Section 7P of the Tax Assessment Act, it is possible under certain circumstances to grant employee shares or warrants, etc. to a greater or lesser extent without triggering salary taxation for the employee. Instead, employees are taxed upon disposal of the shares according to the rules on capital gains. The provisions in 7P aimed at new, smaller companies are expected to be eased.

The current scheme gives new smaller companies the opportunity to remunerate employees with tax-exempt granting of employee shares with a value corresponding to up to 50% of the employee's annual salary, if the company has been active for less than 5 years, has not had more than 50 employees and has had a net turnover/balance of maximum 15 million DKK. The two latter requirements must be met in at least one of the two most recent approved annual accounts.

It is proposed to abolish the 50% limit, that is linked to the employee's annual salary and replace it with a requirement for an annual basic (taxable) salary that approximately corresponds to 12 months of the highest unemployment benefit rate. This corresponds to approximately DKK 253,104 annually in 2025.

The abolition of the 50% limit will, for startup companies, remove the uncertainty with the valuation of the shares. This represents particularly good news. With the new rule for startups, it is still ensured that most of the (taxable) cash salary is not exchanged for tax-exempt employee shares. Valuation, however, will still be relevant for other employers. 

The scheme is further significantly expanded by raising the limits for which companies can utilize it:

• Number of employees: It is proposed to change the maximum number of employees from 50 to 150 so that the scheme can be utilised by companies that at the time of the agreement have not had more than 150 employees in one of the two most recent annual accounts.
   
• Turnover/balance: It is proposed to change the maximum net turnover or balance sum from DKK 15 million to DKK 200 million, so that the scheme can be utilised by companies that at the time of agreement in one of the two most recent annual accounts had a net turnover or balance sum that was not over DKK 200 million.
   
• Company's active period: It is proposed to extend the maximum period from 5 to 10 years so that the age requirement will be met if the company has been active in the market for less than 10 years before the calendar year in which the agreement of granting of employee shares is entered into.
   

The other requirements in Section 7P continue to apply, and we are happy to help determine whether the provision can be utilized.

Overall, this initiative is considered a positive opportunity to benefit small and medium-sized companies in the startup phase in recruiting and retaining employees. We will follow the development until the bill is hopefully passed. 

If the bill is passed, the expansion of the employee share scheme can only enter into force once the changes have been notified to and approved by the European Commission. The reason is that this involves an extension of a state aid scheme.