Why are the ‘section 7P’ tax rules attractive?
- Under ordinary tax rules, employees who receive shares, options, or warrants as part of their compensation package are taxed at the salary level on such income.
- The point of taxation for warrants and options is when employees exercise the options or warrants, and the difference between the fair market value of the shares and the exercise price is taxed as salary.
- For shares granted for free with vesting conditions, the tax point is generally at the time the fulfilment of vesting conditions can be confirmed, but this requires a case-by-case assessment.
- Accordingly, under ordinary tax rules, participation in a share-based compensation plan means that employees in unlisted companies can face a significant tax liability before they have the opportunity to sell their shares and realise a cash benefit.
Section 7P offers a much more attractive alternative for employees. Under this scheme, employees are not taxed until they sell their shares. Furthermore, the benefit is taxed as share income, typically at a lower rate than salary income for the employee. This means the 7P tax rules offer two benefits:
- Employees can defer taxation until they have liquidity from a sale of shares to pay tax.
- The overall tax rate is usually lower.
Taxation: Ordinary rules vs. Section 7P rules
| Ordinary rules | Section 7P scheme |
Point of taxation | Generally, at vesting for shares and at exercise for warrants and options | At sale of shares |
Tax type and rate | Salary income, up to approx. 56% (approx. 60.5% with top-top tax from 2026) | Share income, up to 42% |
Corporate income tax deduction in the employing company | Yes | No |
Valuation of benefit required | No | Yes, however, see below |
Under the section 7P rules, the value of employee shares is generally capped at a threshold of 10% of the employee’s annual salary to qualify under section 7P. A higher threshold of 20% may apply if the scheme is broadly offered to employees, and an even higher threshold of 50% may apply for start-up companies with less than five years of market activity, fewer than 50 employees, and annual turnover or balance sheet below DKK 15 million.
What are the changes?
There are no changes to the general section 7P rules under the 10% and 20% thresholds. However, the new proposal brings several important improvements for start-ups by abolishing the 50% cap, allowing a broader range of companies to grant share-based incentives of unlimited value under section 7P, as outlined in the table below:
Current Rules for start-ups
| Proposed new rules for small and medium-sized companies | |
Who can use the scheme? |
• Up to 5 years of activity in the market • Up to 50 employees • Annual turnover or balance sheet below DKK 15 million | • Up to 10 years of activity in the market • Up to 150 employees, and • Annual turnover or balance sheet below DKK 200 million |
| Threshold for value under section 7P | Shares/options with a value corresponding to up to 50% of the employee’s gross annual salary (subject to certain conditions) | No threshold, as long as the employee’s base salary is at least at the unemployment benefit level, approx. DKK 253,000 in 2025 |
| Valuation requirement | Complex and costly valuation required for each grant to demonstrate the amount subject to section 7P under the 50% threshold | No valuation is required due to the threshold being abolished |
Key considerations and practical implications
It is worth noting that, although the 50% threshold for start-ups under current rules is significantly higher than the general 10% (or 20%) cap for other companies, the scheme has not been widely used in practice, which in our view is due to the fact that employees in start-ups often have relatively low cash salaries, implying that the share-based value that can be granted is limited even under the 50% threshold. Furthermore, application of section 7P can be burdensome for start-ups and newly established companies due to complex and costly valuation requirements, and the rules imply some level of uncertainty since valuations are at risk of being challenged.
- By abolishing the 50% threshold, the proposal removes the need for valuation for this group of small and medium-sized companies, thereby reducing costs and opening up the possibility for a much broader range of companies to benefit from this rule.
- The risk of valuation being challenged and potentially triggering “dry income tax” (taxation without liquidity) under ordinary tax rules for part of the grant being deemed above the threshold and thus outside the scope of section 7P is abolished.
- In venture-owned portfolio companies, benefits under the new rules could also be used to offer the management team share-based incentives as an attractive compensation package without a dry income tax risk as a result of inherent valuation risks on shares. The risk of the benefit being subject to carry-taxation rules should be assessed on a case-by-case basis.
- It is important to note that, while the new rules simplify tax issues, granting shares for free or at a discount to employees still has accounting implications, as these must typically be recognised as an expense in the company’s financial statements.
When will the new rules apply?
The bill is expected to be introduced and considered in the Danish Parliament in November and may become effective from 1 January 2026. The amendments are, however, also subject to approval under the EU state aid rules. Thus, the final wording of the bill and the effective date are still subject to uncertainty.
