Proposal for Tax Reform of Personnel Offerings – More Alternatives for Unlisted Companies

The Ministry of Finance circulated a draft proposal for legislation concerning personnel share offerings at the start of March. If the proposal is enacted as drafted, it would be a warmly welcome and long-anticipated reform.


Under current legislation, share issues based on an employment relationship are exempt from income tax. This rule applies equally to listed and unlisted companies. However, using a subscription price that is less than the fair value leads to the difference between the fair value at the time of subscription and the subscription price being subject to income tax. A discount of up to ten per cent is tax exempt if the benefit is available to a majority of the personnel.

The problem is that, in practice, it can sometimes be difficult to determine the fair value of a share in an unlisted company, and the tax consequences of an incorrect valuation can be severe for employees who have subscribed for shares. Hence, often one of the main goals when planning personnel share offerings is to avoid at all costs a situation where a large part of the personnel would subscribe for non-liquid shares and end up having to pay a significant amount of income tax as a result.


The proposed reform would be a major improvement to the current situation. A personnel share offering by an unlisted company would no longer give rise to income tax consequences as long the subscription price is not less than the mathematical share value of the company being the employer, calculated based on the employer company’s latest adopted financial statements and adjusted based on, e.g. dividends and returns of invested non-restricted equity. In other words, the requirement of use of interpretative fair market value would be abandoned.

The new model includes numerous restrictions for tax exemption. In our understanding, the key restrictions in practice are that the benefit would still have to be available to the majority of the personnel, and that shares could not be issued to persons who alone or together with their family members own over ten per cent of the employer company. Furthermore, shares could only be issued to by the employee’s actual employer company which conducts business activities, and not by the group parent company holding shares in the employer company, for example.

The amount of a tax-efficient subscription benefit could be tied, for example, to the salary level of employees. According to the draft proposal, a subscription benefit based on position would be deemed to be available for the majority of personnel only to a limited extent.


If enacted, the legislative proposal would be an excellent addition to the remuneration and retention toolbox available to unlisted companies.

From the perspective of employer companies, the proposal would make it possible to create stronger retention and ownership interest amongst personnel in a tax-efficient way. The new model could be beneficial, for example, to a late-stage start-up whose business is based on the expertise of key persons, which has a light balance sheet structure and which is looking to take a decisive leap into the next growth stage. The new model could also be attractive to a company that provides expert services, has a light cost structure compared to its turnover and is dependent on retaining key persons at its service.

If enacted, the proposal would not be without pitfalls, however. These would include restrictions relating to the way of calculation of the majority of personnel as well as the fact that, as proposed, the new rules would only apply to shares issued by the actual employer company. It would be desirable that the final act would be expanded to also cover issuance of shares to personnel by companies in the same group as the employer company — strictly limiting the new rules to the employer company could prove challenging in practice when designing overall remuneration arrangements.