Denmark: Employees Failed To Report Millions In Capital Gains From Share Sales

Reprinted from Tax Notes Int'l, August 15, 2011, p. 509

A recent audit by the Danish tax authorities found that 82 percent of the employees of an unlisted Danish company that had granted employees shares under the Danish employee share taxation regime failed to include capital gains on employee shares sold during the last three years in their taxable income on their annual tax returns.

The combined gains of the 3,000 employees amounted to DKK 76 million (about $14.6 million), resulting in tax obligations of approximately DKK 23 million (about $4.41 million).

Danish tax legislation provides for three different employee share taxation schemes, which either defer taxation or defer taxation and reclassify the taxable personal income (taxed at a marginal rate of 56 percent) as share income. Share income amounting to less than DKK 48,300 (about $9,260) is taxed at a rate of 28 percent. Share income amounting to more than DKK 48,300 is taxed at a rate of 42 percent. The employee tax schemes are subject to various requirements and conditions.

The audit, the results of which were published July 14, is part of the Danish tax authorities' action plan for 2011. The tax authorities are focusing on individuals' compliance with the rules for including in taxable income capital gains on unlisted shares because taxation of these capital gains relies solely on the information submitted by the shareholders. The sale of listed shares, on the other hand, is automatically reported to the Danish tax authorities.

It is estimated that more than 100,000 employee share schemes have been established by Danish companies. Thus, the Danish tax authorities expect to uncover several other similar cases.

Filing Tax Returns

In Denmark, tax returns are generated automatically by the tax authorities based on information from an extensive network of automatic reporting from various financial institutions, employers, and other income sources. Thus, in most instances, the filing of individual tax returns does not require much more effort from the individual than confirming that the information in the return is correct. However, not all income — for example, capital gains on unlisted shares — is automatically reported to the Danish tax authorities from the source of the income.

The Danish tax authorities attribute the high number of compliance failures to the fact that individuals must report information on their capital gains on unlisted shares and a general lack of knowledge concerning the taxation of capital gains. According to the tax authorities, many of the audited employees explained that they thought their capital gains on employee shares constituted tax-exempt income. The tax authorities expect to issue a number of fines to some of those who have failed to include the gains in their annual tax returns.

The tax authorities expect to launch new projects to promote awareness of the current rules for taxing capital gains on shares. Furthermore, the tax authorities will begin examining possibilities for changing the reporting system for the sale of unlisted shares.

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