Background information

The employee stock plan covers shares, options to purchase shares, or warrants to subscribe for shares that individuals may receive as compensation in an employment relationship. However, until July 1, 2026, the plan was subject to a number of restrictions that particularly affected small and start-up companies. This applied in particular to the cap on the proportion of salary that could be paid as stock-based compensation, as well as the requirement to value the granted shares. The legislative amendment has made the plan more flexible and has reduced the tax uncertainty that has previously been a limiting factor in the implementation of employee stock plans.

If the rules in Section 7 P of the Tax Assessment Act are applied, the employee is not taxed at the time of the grant, but only when the equity interests are sold—and then as dividend income rather than as wage income. In return, the company is not entitled to a deduction for the value of the grant.

What has changed?

• Elimination of the cap on the number of warrants that can be offered as income-tax-free employee shares: Under the previous rules, the general rule in Section 7 P of the Tax Assessment Act was that companies could compensate their employees with income-tax-free employee shares with a value corresponding to up to 50% of the employee’s annual salary. This cap has now been removed, so that an employee may be granted an unlimited number of employee shares tax-free, provided, among other things, that the employee, at the time the grant agreement is entered into, has an annual salary of at least DKK 265,300 (2026 level, adjusted annually), which roughly corresponds to 12 months at the highest daily unemployment benefit rate. The key aspect of removing the cap is that companies are no longer required to value warrants, a process that, in practice, has led to uncertainty and complexity.
• Expanded size and age requirements: The program is available to companies that have been in operation for no more than 10 years, have fewer than 150 employees, and have net revenue or total assets of less than 200 million DKK. Previously, the limits were 5 years, 50 employees, and 15 million DKK.

This means that the scheme can be used for longer and by more growth companies than before.

When can the new rules be applied?

All three conditions must be met before the new rules can be applied:

• Effective Date: The new rules apply to grant agreements entered into on or after July 1, 2026. For agreements entered into before this date, the previous value thresholds of 10%, 20%, or 50% of annual salary—which we have discussed here—apply. If a company granted warrants above the 50% threshold prior to the legislative change, subsequent grants made under the new rules will not be taken into account when assessing whether the 50% threshold was complied with in the earlier grants.
• Age Requirement: The company must have been active in a market for less than 10 years prior to the calendar year in which the agreement is entered into. A company is considered active in a market when it makes its first commercial sale—in other words, the date of incorporation is not the starting point. A company that was incorporated in 2015 but did not make its first commercial sale until 2018 can therefore still apply the new rules in 2026. Companies that had fallen outside the scope of the program under the previous 5-year limit can thus re-enter the program.
• Size requirements: The company must have had no more than 150 employees, and its net revenue or total assets must not have exceeded 200 million DKK. Both requirements must be met, but they are less stringent than they sound. For the revenue requirement, it is sufficient for one of the two figures to be below the threshold—a company with DKK 300 million in net revenue but DKK 150 million in total assets meets the condition. Furthermore, each requirement need only be met in one of the two most recent approved annual financial statements. This means that a company that exceeds one of the thresholds will not fall outside the scope of the rules until the threshold has been exceeded in two consecutive annual reports. The figures are calculated in accordance with the rules for the preparation of annual financial statements, and for fiscal years in which the company has been part of a group, they are calculated for the group as a whole.

If even one of the conditions is not met, the grant cannot be awarded under the new scheme—but the company may continue to use Section 7 P within the limits of 10% or 20% of the annual salary. Read more about this here.

Our comments

The legislative change is a much-needed breakthrough that allows companies to use employee stock ownership plans as a real and effective tool for attracting and retaining employees. Over the years, the use of these plans has faced justified criticism, driven by the significant uncertainty surrounding the taxation of warrants. The new rules largely resolve this uncertainty.

Under the previous rules, the application of Section 7 P of the Tax Assessment Act required a valuation of warrants. This was difficult for several reasons, the primary one being the choice of method used to calculate the value of warrants. Under the new rules, in most cases both the cost of the valuation and the risk that the Danish Tax Agency will subsequently reject it and reclassify part of the allocation for tax purposes are eliminated.

The removal of the 50% limit makes the program far more practical to use, as it eliminates the need for complex valuations in many cases. At the same time, the higher age and size limits mean that the program is relevant not only for brand-new startups but also for growth companies that are in the process of establishing themselves.