Cash Bonuses are taxable on a current basis

Date 26 jul. 2010

 

The National Tax Board has in a binding answer determined that cash bonuses are taxable on a current basis and not at the time of actual payment.

 

Facts

A company intended to give certain employees cash bonuses. The bonus program was to commence in January 2010, and the actual payment of the bonus would take place three years after the commencement of the programme provided that certain requirements were met. One such requirement was the employees’ continued employment at the company, except in instances of retirement or death. The company therefore wanted the Tax Board to confirm that the bonus would not be taxable to the employees until the time of actual payment.

 

The Legal Basis

Generally, income is taxable at the time of legal acquisition. According to the withholding tax order, any income which is received after the earnings period must be taxed within the year in which the actual payment is received. If, however, actual payment has not been received six months after the time of legal acquisition, at the latest, the income is taxable at this time. 

 

As noted by the company, the bonus terms were most likely not in accordance with the Salaried Employee’s Act. This is so, because according to this Act, a salaried employee successively becomes legally entitled to a proportional share of the cash bonus. Thus, a salaried employee who voluntarily or involuntarily terminates the employment after two years is entitled to receive 2/3 of the bonus, regardless of the bonus terms.

 

The National Tax Board’s Determination

In as much as the company had referred to the rules regarding employee share bonus programs, according to which the shares received are taxed only at the time of actual payment, the Tax Board noted that there was an inherent difference between share bonus programmes and cash bonus programmes. One determinative difference was the law which applied to each type of employee incentive programme.  Share bonus programmes are subject to the Stock Option Act, which was enacted for the very reason of changing to change the state of law which otherwise followed from the Salaried Employee’s Act. The purpose of the Stock Option Act is to regulate the employees’ legal entitlement to stock options received during the course of employment at the time of termination. Thus, it follows from the Stock Option Act, that an employee who terminates the employment may forfeit the right to receive any stock options granted during the course of employment.

 

Consequently, the Tax Board concluded that since the employees successively periodically acquired the legal right to a proportional share of the cash bonus, this proportional share must be taxed periodically on a current basis concurrently with the relevant employees’ acquired right to the agreed bonus.

 

 

The Determination’s Consequences

The National Tax Board has indicated that, following the enactment of the Stock Option Act, there is an inherent taxable difference between receiving cash bonuses and stock options. Both companies and the employees should therefore be acutely aware of the tax consequences associated with choosing one employee incentive scheme over another.   

 

 

If you have questions or require additional information on this determination, please contact attorney Dan Moalem (dmo@mwblaw.dk) or senior associate Henning Hedegaard Thomsen (hht@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 for decisions or considerations.