On 26 August 2025, a draft bill was sent out, which, among other things, proposes to expand the scope of employee shares, etc. in start-ups and certain small and medium-sized companies. The bill is part of the implementation of the Entrepreneurship Package ("Iværksætterpakken") adopted on 21 June 2024.
Since 2021, it has been possible to grant employee shares, warrants and options in start-up companies for a value of up to 50% of the individual employee's gross annual salary within the special rules of section 7P of the Danish Tax Assessment Act. This makes it possible to defer taxation and obtain taxation as share income for the recipient. The introduction of a "50% limit" was a significant extension of the rules, as the general limit for allocations is 10% of gross annual salary, with the possibility of allocation of up to 20% under certain conditions. However, the challenge for new, smaller companies has often been that the need to make a valuation of the remuneration has been a major administrative and cost-intensive burden. In addition, the whole purpose of granting share-based remuneration is usually a need for wage restraint, whereby the 50% is often measured on a low gross annual salary.
The new rules only propose to change the rules for start-up companies, i.e. companies that, under the current rules, can apply the aforementioned "50% limit".The changes can be summarised as follows:
- The "50% limit" is removed, after which there is no ceiling on the value of awards if the recipient has an annual salary of at least DKK 253,100 at the time of the award (2025 level).
- The current requirement of a maximum of 50 employees is increased to 150.
- The current requirement for a maximum balance sheet total and net turnover of DKK 15 million is increased to DKK 200 million.
- The current limit for when a company is considered "new" of 5 years will be increased to 10 years.
In concrete terms, this means that the scope of application of the rules will be significantly expanded, while at the same time there will no longer be a ceiling on grants if the company falls within the scope of the rules.
The rules are currently set to come into force on a date determined by the Minister of Taxation, regardless of the fact that the overall bill is set to come into force on 31 December 2025. However, as the bill is currently drafted, the new rules will only apply to agreements entered into afterthe rules come into force and will therefore not cover agreements entered into prior to that date.
Perspectives for the new rules
The new rules primarily mitigate the need to prepare a valuation of the share-based consideration, as there is no cap on allocations.
In addition, the new rules also open up some opportunities that do not exist to the same extent under the current rules:
- In particular, there will be better opportunities to allocate free shares, discounted shares and in-the-money warrants and options under the new rules, as these will typically have a high value. Even with the "50% limit", there have been significant restrictions on the size of allocations.
- The opportunities for using conditional shares may prove attractive because they are less burdensome in terms of documentation than, for example, warrants, and at the same time are covered by the Danish Share Option Act in the same way as warrants and options and can therefore be subject to leaver conditions.
- In start-up companies, the new rules also make it possible to onboard, for example, a co-founder who joined later, and effectively designate them as an original founder without triggering taxation. This can be done by allowing them to subscribe for new shares at the same price as the original founder, regardless of how much the value of the start-up company may have increased at that point.
- To a certain extent, a tax-free "reshuffle" of shares can be carried out if the ownership structure of a start-up company proves not to be commercially accurate, provided that the receiving owners are employed by the company and own less than 25% of the company. This can even be done shortly before or in connection with an investment round or a sale of the company.
- There is also – albeit to a lesser extent – an opportunity to apply the new rules in certain Private Equity fund structures, where tax and valuation challenges often arise when awarding attractive incentive programmes. The basic prerequisite must be that the acquired company is still covered by the new rules at the time of purchase and that it is not a bolt-on investment, where the acquired company will become part of a group of companies that are not covered by the new rules. Under the right conditions, uncertainty about valuation at the time of establishment can be completely avoided, just as an upside on an instrument covered by section 7P of the Danish Tax Assessment Act should not be affected by the rules on carried interest (regardless of the Danish Tax Council's decisions in January 2025 on possible carried interest taxation in portfolio companies of Private Equity funds).
Going forward, it will be crucial to assess when a company is covered by the new criteria. In this connection, it is important to note that in practice there is a "window" after the criteria are immediately exceeded, during which the company continues to be covered by the new rules.This is due to several factors:
- The limit for when a company is "new" is measured from the date of the first commercial sale, which does not start from the date of incorporation. A company is within the limit if the allocation takes place within 10 years after the end of the year in which the first commercial sale took place. If, for example, the first commercial sale took place in January 2016, the new rules can be applied until the end of 2026 (provided that the other conditions are met). If the bill is passed, a number of companies will thus obtain "new" status, even though they do not qualify as such under the current rules.
- The limits for the number of employees (calculated as full-time equivalents), balance sheet total and net turnover must simply be met in one of the last two financial statements at the time of allocation. This means that it is only when the second financial statement is approved, in which one of the limits is exceeded, that a company falls outside the rules.
We are following the process
We are now awaiting the final bill and political approval when the legislative programme is published at the opening of the Danish Parliament.
We are ready to advise on all forms of share-based pay and incentive pay or to discuss the new opportunities and what they may mean for your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
