Danish tax council green-lights deferred §7 P election across parallel equity programmes

Section 7 P of the Danish Tax Assessment Act enables the deferral of taxation of allocated shares, purchase rights and warrants to the point in time where the shares are sold. Rather than being subject to employment income taxation of up to 60.5% if taxed under the current top top-tax regime, the remuneration is instead taxed as share income under the rules of the Capital Gains Tax Act with tax rates of 27% and 42%. 

Section 7 P of the Danish Tax Assessment Act is in general considered as the most beneficial warrant programme for the employee, but it is also fairly more regulated and relevant for a narrower scope of employees than incentives under section 28 of the Danish Tax Assessment Act. The application of section 7 P entails that;

• The remuneration must be received in the context of an employment relationship. Board members cannot be covered by the provision.
   
• The employer and employee must enter into an individual written agreement specifying that section 7 P applies, and the remuneration must be unambiguously identified in the agreement.
   
• The agreement must be entered into no later than at the time when the share-based renumeration is agreed.
   
• The value of the remuneration must not exceed 10% of the employee's annual salary in the year of agreement. An extended threshold of 20% applies where the scheme is open to at least 80% of the company's employees, and a threshold of 50% applies for employees in certain new, smaller companies.
   
• Purchase and subscription rights cannot be transferred.
   
• The remuneration must relate to shares in the employing company or a group-affiliated company and must not constitute a separate share class.

The applicant was a Danish listed company. Like many other companies, the company wanted to attract and retain key employees, and to create incentives for growth. The company operated two different share-based incentive programmes: share options and Restricted Share Units (RSUs).

The share options were granted to the management as a long-term incentive programme designed to promote retention. Each option was granted free of charge and gave the holder the right to subscribe for new shares or purchase existing shares in the company. The options vested upon publication of the company's annual report for a given year, and were expected to occur approximately three years after the date of grant, and vesting was conditional on the participant remaining employed. The exercise price was set at 110% of the share's value at the time of grant.

The RSUs were granted to members of the management and a broad group of employees and entitled the holder to receive shares in the company free of charge. If the participant remained employed for three years from the date of grant, the RSUs vested and became an unconditional promise to deliver shares, with each vested RSU giving the right to receive one share.

The share options and RSUs were granted simultaneously.

The company wanted to structure the two programmes in such a way that section 7 P warrant agreements were entered into for both programmes simultaneously, with the 10% cap applied in full under each program. Each employee would then have the right to elect at a later date which instrument the employee wanted to be subject to taxation under section 7 P. Each employee was not choosing between receiving one set of instruments or the other; rather, the employee was to make a legal election as to which instruments from the two programmes were to be taxed under section 7 P, with the possibility of "mixing" instruments from both programmes. 

Furthermore, the company wanted to streamline the process by drawing up a single agreement covering the application of section 7 P to both incentive schemes. In this way, the company could optimise administrative processes and thus allocate shares under both schemes in a single agreement, with reference to section 7 P. 

The Tax Council endorsed the Danish Tax Authority's recommendation and reasoning when assessing whether two simultaneous section 7 P agreements could be entered into with a deferred election. 

Given the close interconnection between the two agreements, the Danish Tax Agency took the view that two different incentive instruments had been agreed simultaneously, and that for the purposes of section 7 P the agreements must be viewed together and assessed as a single combined agreement. It was this close interconnection, and not merely the fact that the programmes were granted simultaneously or could be placed in the same document, that was the basis for the outcome.

The Danish Tax Agency confirmed that the structure was permissible, subject to the following conditions:

• The requirement for unambiguous identification was satisfied, as the agreement for each of the two instruments contained information on whether the remuneration consisted of shares or purchase or subscription rights, the number of shares and options respectively, and the value of the remuneration in the form of nominal value of the shares, unit value and exercise value/purchase price. 
   
• The Danish Tax Agency further noted that the framework agreement set out who was to make the election, how it was to be made, the deadline for doing so, and the default position if no election was made.
   
• It was a requirement that the election as to which parts of the remuneration were to be covered by section 7 P must be made before the time of legal acquisition (Da. retserhvervelsestidspunktet) of the individual components of the remuneration under the two programmes. The Danish Tax Agency considered the time of legal acquisition of the conditional shares to be deferred to the vesting date, and the time of legal acquisition of the share options to be deferred to the actual exercise date. Regarding the share options, the Danish Tax Agency disregarded the applicant's argumentation that the legal acquisition should be at the first possible exercise date. The Danish Tax Agency further elaborated that to ensure that the employee's election takes place before the legal acquisition under both programmes, the election must take place before the expiry of the vesting period for the conditional shares. If no election was made, the conditional shares would automatically be covered by section 7 P in accordance with the framework agreement.
   
• That the framework agreement was amended so that the employee had to give written notice of the election before the earliest time of legal acquisition of the conditional shares. Not merely at the latest on the earliest time of legal acquisition. Without this amendment, the employee would not retain the ability to elect that the conditional shares should not be covered by section 7 P.
   
• The requirement that the value of the remuneration cannot exceed 10% of the employee's annual salary in the year of agreement was considered to be satisfied, as the framework agreement provided that the value of the remuneration the employee could elect to have taxed under section 7 P had to remain within the 10% cap in the year of allocation.
   

Finally, the Danish Tax Agency also concluded that two separate programmes could be consolidated into one agreement document, provided the conditions applicable to each instrument were independently satisfied.

The ruling is of practical significance for companies that wish to build flexibility into the administration of incentive programmes:

• Flexible election: A company may enter into section 7 P agreements on two incentive programmes simultaneously, even where both agreements in principle utilise the 10% cap in full, provided the employee makes the final election at a later point in time before the earliest time of legal acquisition. It should be noted that the close interconnection between the two programmes was decisive in this case, and it cannot be ruled out that the Danish Tax Agency could take another standpoint in cases with programmes less interconnected.
  
  
• Unambiguous identification is essential: Each of the two programmes must independently satisfy the requirement for unambiguous identification, including information on the type of instrument, number of shares/purchase rights/warrants, nominal value of the shares, and the exercise price for the purchase/subscription. The framework agreement must also clearly set out who makes the election, how it is to be made, the applicable deadline, and the default consequence if no election is made.
  
  
• Election deadline and time of legal acquisition: The election must be made before the time of legal acquisition of the programme which is considered legally acquired first. The framework agreement must require the employee to give written notice before the legal acquisition.
  
  
• A single agreement is sufficient: The Danish Tax Agency interpreted the preparatory work as presupposing that a single agreement may provide for more than one type of share remuneration. Companies may accordingly consolidate several programmes into one agreement document, provided the conditions applicable to each instrument are independently satisfied.
  
  

Please be aware that the rules on section 7 P will be eased from 1 July 2026. We have written a separate newsletter on the new rules on section 7 P, which can be read here.