Danish binding ruling on warrants - interpretation of "time of exercise"

When warrants are covered by Section 28 of the Danish Tax Assessment Act (LL § 28), the employee is taxed at the time the warrant is exercised or sold. The taxation is treated as employment income and can be subject to rates of up to 55.9% (before the top-top tax comes in effect, please see our newsletter from 5 July 2024), based on the difference (the benefit element) between the exercise price and the market value of the shares.

If the shares are later sold, the employee will be taxed at 27% or 42% on any capital gain. This gain is calculated as the difference between the value of the shares at the time of exercise and the sale price of the shares.

The exercise date is typically considered to be the day the board of directors resolves on the capital increase and issuance of new shares after the employee has informed the company that he or she wishes to exercise the warrants. In these cases, the benefit element is calculated based on the difference between the market price of the shares (closing price) on the day of the capital increase and the exercise price.

Under the new binding ruling where details in the program was explained, the exercise date was instead the day the warrant holder notified the company of his/her intent to exercise the warrants. The benefit element was then calculated as the difference between the market price of the shares (closing price) on the notification date and the exercise price. If the notification date is not a banking day, the most recent preceding closing price is used.

In the specific case under review, Section 2.6 of the warrant program stated: “The warrant holder’s notice of exercise of warrants shall be addressed to the Company, and such notice shall have legal effect from the Company’s receipt of it.”

Furthermore, Section 5.1 provided that: “The rights under the shares shall vest immediately upon exercise of the warrant (...).”

The Danish Tax Agency emphasised that the Danish Companies Act does not mandate specific procedures for exercising warrants and that a formal board resolution is not legally required for a capital increase following the warrant holder’s notification. Consequently, upon notification, the company in the particular case was obligated to issue the shares as per the warrant agreement and report the capital increase to the Danish Business Authority.

Therefore, due to the specifications in the warrant program, the exercise date should be considered the day the warrant holder notified the company of his/her intent to exercise the warrants.

If explicitly specified in the warrant program or the company’s articles of association, the exercise date should now align with the notification date. Warrant holders should be mindful of this change, as it could impact the taxable gain depending on the fluctuation of the stock market.

However, when the warrant program does not assign legal effect to the notification date, the traditional interpretation should still apply where the exercise date will be the day the board of directors resolves on the capital increase and issuance of new shares.