Amendment of the rules for tax free grant of employee purchase and subscription rights

Date 21 dec. 2009
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Pursuant to the current rule in Section 7(H) of the Tax Assessment Act (”TAA”), employees may be granted tax free share purchase and subscription rights, provided that the exercise price is not greater than 15% lower than the market price of the shares in question. See TAA Section 7(H)(1) and (2)(2)(b).

 

When looking at TAA Section 7(H), one should also consider TAA Section 28, pursuant to which employees are generally taxed upon being granted purchase or subscription rights at the time of exercise or refusal. See TAA Section 28(1).

 

Section 7(H)(2)(2)(b) has been repealed. The repeal affects only purchase and subscription rights that are legally acquired 1 January 2010 or later. Pursuant to the amended rules, an employee may only be granted tax free purchase and subscription rights, provided that the value of the shares does not exceed 10% of the employee’s yearly salary.

 

4 December 2009, the Danish Tax and Customs Administration published guidelines to be used in determining the new rules.  

 

The scope of the new rules – time of legal acquisition

The time of legal acquisition is determinative as to whether an agreement is subject to the current or the amended rules.

 

The published guidelines explain that, generally, the time of legal acquisition is the time where the purchase or subscription rights are granted to the employee. The latter is the time where the annual shareholders’ meeting has decided to grant the employees purchase or subscription rights, or if the Board of Directors has been given the authority to do so, at the time where the Board makes such a decision. This does not apply, however, if the agreement granting the rights is subject to conditions that postpones the time of legal acquisition.

 

Conditions in agreements subject to TAA Section 7(H)

If the agreement granting the purchase or subscription rights is subject to either conditions precedent or conditions subsequent, in which the happening or non-occurrence of an event either suspends or terminates the agreement, respectively, the time of legal acquisition is postponed until the conditions are met. Both conditions regarding the grant and conditions regarding the exercise of the rights may have such an effect.

 

Even though the legal time of acquisition must be determined from the wording of the agreement, practitioners agree that conditions that are within the employee’s control do not postpone the time of legal acquisition. Generally, the determinative factor as to whether the time of legal acquisition is postponed is the existence of real uncertainty as to whether the conditions will be met.

 

Conditions that will postpone the time of legal acquisition include reaching financial targets, and a condition stating that the employee must be alive at the time of exercise.

 

A condition that the employee continues to be employed in the company at the time of exercise will, provided that the employee is not subject to the Stock Option Act (“STA”), result in the postponement of the time of legal acquisition. If the employee is not subject to the STA, however, the effect of the condition is less clear. Pursuant to the STA, an employee’s right to exercise purchase or subscription rights are forfeited if the employee resigns. If, however, the employer terminates the employment, the employee continues to own the right to exercise the purchase or subscription rights, provided that the termination was not due to the employee’s neglect or rightful discharge.

 

Voluntary resignation is not always, however, within the employee’s control. The guidelines therefore note that the uncertainty regarding the continued employment increases proportionally to the time limitation on the purchase or subscription rights. A long time limitation therefore postpones the legal time of acquisition. Based on the legislative history, it should be further noted that a time limitation of 3 years or more constitutes a long-term limitation.

 

Because of previous uncertainty regarding the application of the rules, the guidelines state that agreements entered into prior to their publication, where the exercise was conditioned on continued employment alone, the legal time of acquisition will be the time the rights in question are granted to the employee, unless the employee requests a redetermination based on the terms of the agreement.

 

Changing existing agreements

For agreements entered into prior to 1 January 2010, but where the legal right of acquisition occurs on or after 1 January 2010, revision may be desirable. In making revisions, however, it is important to keep in mind that such revisions may result in taxation pursuant to TAA Section 28.

 

A revision will be subject to taxation if the revision is material and results in the formation of a new agreement. In connection herewith, the removal of a continued employment condition and a condition requiring the employee to be alive at the time of exercise, from the agreement, is not considered material.

 

If a condition that would otherwise result in the postponement of the legal time of acquisition, e.g. a condition that the employee be alive at the time of exercise, is revised or removed in its entirety, the legal time of acquisition is considered the time the rights in question are granted to the employee, provided, however, that the agreement does not contain any other conditions that would postpone the legal time of acquisition.

 

The new rules

As described, employees can, as a result of the amendment, only be granted tax free purchase or subscription rights from 1 January 2010, if the value of the shares does not exceed 10% of the employee’s yearly salary. It should be noted that if the exercise price is set in e.g. 2008, it is the salary for 2008 that is determinative, regardless of whether the legal time of acquisition occurs in a later year. Moreover, it is important to note that TAA Section 7(H) continues to apply to rights that exceed the 10% limit. In these instances, however, only the value that is within the limit is governed by TAA Section 7(H), whereas the exceeding amount is governed by TAA section 28.

 

As such, there can be a need to revisit existing agreements regarding the receipt of employee purchase and subscription rights, such that the employees are not, as was the original intent, taxed on the grant of these rights.

 

 

If you have questions regarding the above or require additional information about the amended rules, please contact attorney Dan Moalem (dmo@mwblaw.dk), or junior associate Pinar Gökcen (pgo@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.