New exciting possibilities for business succession to employees

The initiative involves introducing a model that gives a business owner the opportunity to transfer his/her company, which operates active business activities, to a larger group of employees in a business succession. Currently, favorable business succession methods can only be used when transferring to family members or close employees defined by law.

Under the new rules, the business succession occurs when the business transferor transfers some or all of his/her shares to an employee-owned company without taxation of the business transferor, as the employee company takes over the tax burden. This is called succession.

The transfer process is highly regulated. As a starting point, all employees in the company must be offered the opportunity to become co-owners, and the conditions in connection with entry should only be based on objective criteria, which must not be designed in such a way that it effectively only becomes an offer to a narrow group of employees. However, it is proposed that an employee should only have the right to be co-owner when the employee has been employed for at least three consecutive months. Furthermore, it is suggested that it is possible to decide instead that only employees with at least 12 months' seniority can be co-owners. 12 months is the limit for such a criterion. 

The business transferor makes an offer to all employees to become co-owners of the company (the participant company) via an employee-owned company. There are requirements for the level of detail of the offer, which must at minimum contain a transfer sum and other relevant conditions such as the financing of the transfer sum. The offer must have an acceptance deadline of at least 10 weeks, excluding July from the calculation.

The offer must be accompanied by a valuation report that declares that the participant company has a value that at least corresponds to the transfer sum, and which must be prepared by an independent, expert appraiser.

The employees' decision to initiate negotiations must be made by simple majority through anonymous voting among all employees in the participant company and its subsidiaries. The decision is merely an indication of whether there is immediate support to form the basis for further negotiation between the parties.

If a majority of employees have voted to continue the transfer process, there will be a need to establish an employee-owned company, which must own the shares in the participant company.

The following conditions must be met for the employee-owned company:

• Corporate form: The employee-owned company, which must own shares in the company in which the participants are employed, should be a company with limited liability, i.e., either a cooperative society with limited liability (A.M.B.A) or an association with limited liability (F.M.B.A).
   
• Minimum requirements: The participant group must at the time of establishment and registration as well as at the time of transfer of shares consist of at least 5 employees and constitute more than half of all employees in the participant company and any subsidiaries to ensure that the business succession transfer model benefits a larger group of employees. There are certain limitations on the possibility of participation for individuals who own/have owned 5% or more of the company.
   
• Ownership share: At the first transfer of shares from the business transferor to the employee-owned company, at least 25% of the shares and voting rights in the participant company must be transferred.
   
• Requirements for board composition: The majority of the board must not consist of individuals who, outside the employee-owned company, own or have owned more than 5% of the participant company or its subsidiaries.
   
• Profit sharing: Profit sharing must be equal or distributed according to objective criteria such as employment period, working hours, or salary.

It is proposed that a special tax liability provision will be introduced for the employee-owned company to which the business owner must transfer the shares in the company (the participant company).

The proposal will mean that the employee-owned company will be subject to the Danish general corporate taxation of 22% and, among other things, be covered by the rules on mandatory joint taxation. This applies even though it is from a corporate law perspective required that the employee-owned company must be organized as A.M.B.A or F.M.B.A.

According to the proposal, an individual business transferor is able to transfer shares in companies that operate active business activities to an employee-owned company without this triggering tax for the transferor, as the employee company takes over the tax burden. It is proposed that when using the model, a capital gain should be calculated for the transferor in accordance with the general rules of the Danish Capital Gains Tax Act. From the calculated gain, a deferred tax must be calculated, which constitutes of the transferor's capital gains tax (transferor tax).

The transferor tax is calculated based on the transferor's gain at the time of transfer is taxed with 22% being the tax rate of the employee-owned company. The employee-owned company's payment of the transferor tax is, however, deferred until certain situations occur. This can be that the employee-owned company receives dividends, sells the shares, if the conditions are no longer met, the employee-owned company is dissolved, the reporting obligations are not met, etc. Voluntary payments of the tax can be made.

The settlement of the transfer sum can be set quite freely, but we hope that there will be greater clarity about what is accepted during the legislative process.

If the shares are transferred as a gift to the employee-owned company, the employee-owned company will be taxable on the gift and pay 22% tax. If the employee-owned company simultaneously takes over a tax burden as a capital gain is calculated, a liability offset (Da: "passivpost") is calculated, corresponding to 50% of the transferor tax, which reduces the gift amount and thereby the tax payment.

Finally, it is a condition for using the model that the transferor, as part of the transfer to the employee-owned company, must pay the tax value of the negative acquisition sum, if the transferor's tax acquisition sum on the shares is negative. However, the tax is borne by the employee-owned company after transfer of the shares and the tax can be paid in installments.

The bill on business succession to employees is an exciting new alternative, which hopefully will make it easier to transfer some of the many companies that operate active business activities, and which are about to undergo transfer of ownership in the coming years. We will follow the development until the bill is hopefully passed.

According to the bill, the possibility for business succession of public and private limited companies to employee-owned companies shall take effect for transfers that occur on 1 January 2026, or later.