The Danish Parliament adopted an amendment to section 7 P of the Tax Assessment Act on 29 December 2025, significantly expanding the type of companies eligible to grant tax-advantaged employee share compensation. The changes broaden access from start-ups to a wider category of “new and smaller” companies and relax some of the regime’s prior limitations. Under the pre-amendment rules, newer and smaller enterprises may only grant share-based remuneration to an employee up to a value equal to 50% of the employee's annual salary.
Section 7 P provides an alternative and more favourable tax regime. Taxation is deferred until the shares are sold and the income is taxed solely at that time as share income at the 27%/42% rates, which is lower than the taxation of salary income. To use the regime, the employer and the employee must conclude a formal agreement.
There are three variations of the section 7 P regime, allowing the share-based compensation valued at up to 10%, 20% or 50% of the employee’s annual salary. The 50% threshold applies only to startups and is subject to requirements relating to the size and age of the company. Under the pre-amendment rules in section 7 P, the following limits are imposed on the value of share-based compensation:
Removing the 50% cap also reduces uncertainty related to share valuation, which previously risked pushing a grant above the threshold and jeopardising the tax treatment.
The amendments to the section 7 P rules will only apply to agreements entered into after a date still to be set by the Minister for Taxation. Implementation is contingent on approval from the European Commission that the measures constitute permissible state aid under EU rules. Companies with existing share-based compensation agreements cannot retroactively apply the new, more lenient rules.
Lars Bodín Jacobsen
BDO in Denmark
Background
To understand the significance of the amendment, it is necessary to understand the rules governing the taxation of employee share compensation in Denmark. As a general rule, employee equity compensation—such as warrants, options and employee stock purchase plans—is taxed at exercise on the difference between the exercise price and the market value of the shares. Shares and restricted stock units are taxed at vesting or when the employee acquires legal rights to the shares. This income is treated as salary and taxed at marginal rates of approximately 56%, increasing to roughly 60.5% due to the new additional top-top tax applicable from 2026 for very high income. If the employee later sells the shares, a second taxation occurs upon sale: this part is taxed as share income at a flat rate of 27% or 42%.Section 7 P provides an alternative and more favourable tax regime. Taxation is deferred until the shares are sold and the income is taxed solely at that time as share income at the 27%/42% rates, which is lower than the taxation of salary income. To use the regime, the employer and the employee must conclude a formal agreement.
There are three variations of the section 7 P regime, allowing the share-based compensation valued at up to 10%, 20% or 50% of the employee’s annual salary. The 50% threshold applies only to startups and is subject to requirements relating to the size and age of the company. Under the pre-amendment rules in section 7 P, the following limits are imposed on the value of share-based compensation:
- 10% of annual salary as the general rule;
- 20% if the share plan covers at least 80% of the employees; and
- 50% for new and smaller companies.
Abolition of the 50% Threshold
Under the amended rules, new and smaller companies will no longer be restricted in how much of an employee’s salary may be granted as share-based compensation under section 7 P. Instead, companies may freely determine the proportion of equity compensation, provided the employee receives at least DKK 253,100 in taxable annual salary (indexed each year).Removing the 50% cap also reduces uncertainty related to share valuation, which previously risked pushing a grant above the threshold and jeopardising the tax treatment.
Relaxed Criteria for “New and Smaller” Companies
The pre-amendment rules for determining whether a company qualifies as a new and smaller company are strict. The amendment significantly broadens the category of companies eligible for the most flexible variation of section 7 P based on the number of employees, the company’s balance sheet total and net turnover, and the definition of whether the company is considered “new.”- Employee threshold: The threshold is increased from no more than 50 employees in either of the two most recently approved annual financial statements to 150 employees.
- Financial threshold: The net turnover or balance sheet total is increased from not exceeding DKK 15 million to DKK 200 million.
- Company age: The maximum age of the company is extended from less than five years at the time it entered into the share-based compensation agreement to 10 years.
Effective Date
The amendments to the section 7 P rules will only apply to agreements entered into after a date still to be set by the Minister for Taxation. Implementation is contingent on approval from the European Commission that the measures constitute permissible state aid under EU rules. Companies with existing share-based compensation agreements cannot retroactively apply the new, more lenient rules. Lars Bodín Jacobsen
BDO in Denmark