Stock options are financial instruments that give the holder the right, but not the obligation, to buy or sell a specific quantity of shares at a predetermined price within a certain time period. Stock options are often used as part of employee incentive programs. These are complicated rules that often require advice and assistance with reporting to the Danish Tax Agency.
Frequently Asked Questions About Stock Options
What are stock options?
Stock options are a form of equity compensation where an employee receives a right – but not an obligation – to purchase or subscribe to shares in the company at a later date at a predetermined price. Options are often used as part of incentive programs because the employee can benefit from the appreciation in value of the company's shares.
What does it mean when stock options are taxed under Section 7P?
If an agreement meets the conditions in Section 7P of the Tax Assessment Act, the employee is not taxed upon grant or exercise of the options, but only when the shares are later sold. The gain is taxed as stock income (27/42%), instead of as ordinary salary. This provides both a tax advantage and a deferral of taxation until the employee actually realizes the value.
What happens if the conditions in Section 7P are not met?
If the conditions in Section 7P are not met, options are instead taxed as salary. This can occur either under Section 28 of the Tax Assessment Act, where taxation occurs upon exercise of the option, or under the general rules, where taxation occurs at the time the right is acquired or exercised. In both cases, it is taxed as personal income – typically at a higher tax rate than stock income.
What are the advantages of Section 7P taxation?
The advantage of Section 7P is that taxation occurs as stock income with a lower tax rate of maximum 27/42%. Furthermore, no taxation occurs when the options are granted, but only when the shares are later sold. This gives the employee the opportunity to defer the tax, so it is only paid at the time when any gain is realized.
Are there limits to how much can be granted as stock options under Section 7P?
Under Section 7P, limits are set for how large a portion of salary can be given as equity compensation. If the scheme only applies to a smaller group of employees, for example management, the value can amount to a maximum of 10% of annual salary. If the scheme is offered broadly to at least 80% of the company's employees, the value can increase to 20% of annual salary. In new and smaller companies, the ceiling can even be 50% of annual salary if special conditions are met. If the grant exceeds these limits, the excess portion is taxed under the general rules as salary income.
What formal requirements apply to Section 7P schemes?
For the Section 7P scheme to be used, there must be a written agreement concluded before the grant, and the employer must ensure correct reporting to the Danish Tax Agency.
Can Section 7P be used for stock options in foreign companies?
If it is solely a foreign company with no connection to Denmark, Section 7P cannot be used. The provision presupposes an employment relationship with a Danish taxable employer or a group company that can report the scheme to the Danish Tax Agency. Without such a connection, the scheme falls outside Section 7P, and the benefit will be taxed as ordinary salary income in Denmark.
Disclaimer
As the above is for guidance purposes only, we accept no liability for decisions that may be made based on the above without prior individual advice. We accept no liability for errors and omissions.