Clarity on taxation of smartwatches

Since the introduction of Smartwatches a decade ago, it has not been clear how Smartwatches should be taxed when offered to employees. However, on 19 March 2024 the Danish Tax Council issued a binding ruling, SKM2024.203SR, where it was concluded that Smartwatches should be taxed according to the special tax rules for mobile phones etc.

Generally, any fringe benefit from an employer received by an employee is taxed at the market value of the benefit. However special rules apply to telephone, mobile phones, computers and internet access when these devices are used for work purposes while also used for private purposes. If an employee is provided with one or more of such devices, now including a Smartwatch, the employee will be taxed of a total amount of 3,200 DKK in 2024 (discount applies if both spouses are taxed according to these rules).

A Smartwatch encompasses diverse functionalities, such as telephony, text/MMS messaging, calendar, internet connectivity through mobile broadband or Wi-Fi, and more. These functions closely mirror a Smartphone, which the Danish Tax Council officially classified as a phone in 2009.

The Danish Tax Agency argued in front of the Tax Council that as the phone element was not the main purpose of the Smartwatch, the Smartwatch should not be taxed according to the special tax rules for phones etc. They empathised that the main function of the Smartwatch was the watch and that the Smartwatch had additional functions that could be used when exercising, monitoring sleep and general health, as it could function as a phone.

Nevertheless, the Tax Council rejected this point of view, holding that a Smartwatch should be regarded as a Smartphone and taxed accordingly, regardless of it being equipped with eSim or not. The Tax Council's argumentation was based on the constant technological development.

It is important to emphasize that for these special tax rules to apply, a specific legitimate business rationale must underpin the allocation of a Smartwatch when a Smartphone is already available for the employee. This is especially relevant when the Smartwatch is facilitated through a gross salary arrangement which in short is a tax arrangement where the employee is able to pay for the Smartwatch with non-taxed salary. In this latter situation, it is a general assumption that the device is most likely not a work phone.

In the binding ruling the Tax Council found that it in the particular case it was important from a business perspective to offer the employees a Smartwatch as an extra phone. This even though the Smartwatches were made available through a gross salary arrangement. The Tax Council emphasized that the Smartwatch to a certain degree had functionalities which a Smartphone does not have. The Tax Council concluded that as the Smartwatch sits on the wrist it will be easier for the employee to have the Smartwatch available than having to bring a Smartphone. Therefore, having a Smartwatch the employee has a better possibility at all times to reply to customer phone calls and messages while having access to calendars etc.

However, the Tax Council also emphasized that it is a condition for accepting the Smartwatch as an extra phone that the Smartwatch in fact is not accessible to other members of the employee's household.

The binding ruling signifies a rare departure from the typically stringent approach, additionally recognising the rapid advancement of technology and the increasing complexity of devices such as Smartwatches. The binding ruling thereby represents a positive step towards more modern tax regulations adapting to a society in constant change.