Employee options are financial instruments that give employees the right, but not the obligation, to buy company stock at a set price within a specified period of time. The options are often used as part of the employee compensation package and can motivate employees to work for the success of the company, as they can benefit from increases in the share price. The timing of taxation depends on the design of the agreement.
Frequently Asked Questions About employee options
What are employee options?
Employee options are an agreement under which the employee receives the right, but not the obligation, to buy or subscribe for shares in the employer’s company at a fixed price at a later date.
Employee options are often used as incentive schemes to retain and motivate employees.
How are employee options taxed as a starting point?
As a starting point, employee options are taxed as salary income.
When the employee exercises the option to buy shares at a fixed price, a benefit arises corresponding to the difference between the market value of the shares and the price the employee pays.
This benefit is considered A‑income and is taxed as personal income with labour market contribution. Any subsequent gain or loss on the sale of the acquired shares is taxed under the ordinary rules for share income.
Only if the options are covered by special rules such as section 7 P of the Danish Tax Assessment Act can this salary taxation be avoided and the taxation instead take place as share income at the later sale.
What is section 7 P of the Danish Tax Assessment Act?
Section 7 P of the Danish Tax Assessment Act is a special tax scheme under which employee shares and options are only taxed when the shares are sold.
The employee is not taxed at the time of grant or when the option is exercised to buy shares. The gain on the sale is taxed as share income instead of personal income, which typically results in a lower tax rate.
Which conditions must be met for employee options to be covered by section 7 P?
For employee options to be covered by section 7 P of the Danish Tax Assessment Act, a number of conditions must be met, including requirements for:
- The type of employer and employee covered by the scheme
- The size of the benefit in relation to salary
- That the agreement is concluded in writing and meets the statutory content requirements
- That the options relate to shares in the employer company or group
What are the reporting obligations for the employer?
The employer must report granted options to the Danish Tax Agency via E‑Income.
The reporting must state the type of scheme, value and conditions.
What are the advantages of employee options?
The advantages of employee options are that the employee has the opportunity to become a co‑owner of the company and thereby share in any increase in value.
This can create a financial incentive and a closer connection to the company.
Depending on the chosen scheme, there may be tax advantages where taxation is either deferred to a later point in time or takes place as share income instead of salary income, which normally results in a lower overall tax burden.
Employee options thus combine an element of ownership with a potentially tax‑advantaged form of remuneration.
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.