The Government has introduced a Bill to abolish the exemption for employer-paid health insurance, the tax privilege concerning employee share and the multimedia taxation against re-introducing the tax on free phones.
Employer-paid health insurance
The Bill will abolish the present tax exemption for employer-paid health insurance and health treatment as at 1 January 2012.
This means that if an employer elects to pay an employee's health insurance in the future, such insurance will be considered a taxable benefit for the employee.
Tax exemption for employer-paid treatments in relation to medicine, alcohol and other substance abuse and smoking cessation will continue unchanged.
The employer may face challenges if an employee wants to opt out of a health insurance cover. Whether the employee is entitled to opt out depends, however, on whether employees are free to opt in or out of the insurance, or whether the health insurance is part of the aggregate remuneration package which cannot be opted out of.
Generally, the employer is not required to compensate the employee for the tax liability, but this may depend on the specific scheme.
There will also be a need to adjust the existing arrangements concerning contributions to pension and insurance schemes.
If it is possible for an employee to opt out of an employer-paid health insurance cover, this will result in administrative challenges for the employer - both in relation to the administration of the employees opting in or out of the scheme, but also in relation to the insurance and pension companies offering these schemes.
If the employer has not ensured that the current scheme may remain unchanged irrespective of the number of employees participating in the scheme, the employer must also negotiate new schemes with the insurance and pension companies.
It may be wise even now to review the existing pension and insurance agreements and to contact the pension advisor for the purpose of clarifying the various options.
It is suggested to abolish the multimedia tax against re-introducing the tax on free phones.
In the future, free phones will be taxed at DKK 2,500 a year (2010 level). Where both spouses have free phones, the taxable value of each free phone will be reduced by 25 %. A condition for this reduction is that the total taxable value of the benefits amounts to minimum DKK 3,300. 3.300. It is no longer possible - as under the former rules - to make a set-off against the employee's private phone bill.
Taxation of free phones requires that the employee has private access to a wholly or partly company-paid telephone. Isolated private calls will not result in taxation. It is decisive that the employee does not use the phone in such a way that it actually replaces his or her private phone, but that it is only used in close connection with the employee's work. In this respect, it is the employer's responsibility to ensure that the arrangement is complied with.
The new rules also imply that an employee is not to be taxed on the computer and the internet connection made available by the employer in connection with a home workplace. However, it is a condition for tax exemption that the employee uses the computer for work purposes.
It is also a condition that the employee has access to the employer's network through the internet connection. The employee must have access to almost the same functions or documents as when working from the company's premises. If the employee does not have access to the employer's network, the employee is liable to pay tax equivalent to the tax on free phones.
If the employee receives IT equipment as part of a gross pay arrangement, the employee will be taxed on an amount equivalent to 50 % of the initial price of the equipment each year the equipment is made available. The reason for the introduction of this tax is the presumption that e.g. a computer made available to an employee in connection with a gross pay arrangement is made available mainly for private purposes.
The new rules entail a number of challenges for the employer, including the administration of the many gross pay arrangements, but also as regards information to the employees on the consequences of the new rules.
The Bill provides that, as a maximum, an employee may be taxed on DKK 3,000 in case of a gross pay arrangement entered into before 1 January 2012. This transitional rule applies up to and including the income year 2014. It is, however, not clear whether the taxation of DKK 3,000 as a maximum is inclusive or exclusive of the tax on free phones. We will therefore issue a follow-up newsletter as soon as we have clarified this question.
It has been suggested to repeal sections 7A and 7H of the Tax Assessment Act with the result that the tax privilege concerning general and individual employee share schemes disappear. The purpose of this change is to make the tax rules more neutral in relation to the different kinds of remuneration.
The abolition of the tax privilege concerning employee shares means that an employee receiving shares is to include the value of those shares when calculating the personal income with the result that the taxation is based on the personal income.
In the future, option and warrant schemes will be taxed at the time of exercise, whereas conditional share schemes will be taxed at the time of taking title. The employee's previous advantage under section 7H - taxation when selling the shares - will cease to apply.
The employee will now have to pay tax on the value of the shares at a time when the employee has not yet obtained the financial gain because the shares have not yet been sold. As regards conditional shares, the employee will be taxed at the time when the shares are acquired. To a much wider extent than before, the taxable perspective should therefore be considered when establishing such payment schemes.
Transitional rules - general employee share schemes¨
As regards the abolition of the general employee share schemes, this will become effective for grants made on or after 1 January 2012. It is, however, still possible to grant employee shares in 2012 without these being covered by the new rules if such a scheme was entered into no later than 21 November 2011.
Transitional rules - individual employee share schemes
As regards the abolition of the individual employee share schemes where taxation is postponed until the time of sale, this will become effective in relation to schemes entered into after 21 November 2011.
The repeal of sections 7A and 7H of the Tax Assessment Act implies that the employee's immediate tax gain is removed as the taxation on both general and individual employee share schemes will be based on personal income. This makes it less attractive for an employee to enter into a share scheme, which is not appropriate to the employer as share schemes also function as an incentive and retention tool for the employer.
The content of this Newsletter is not, and should not replace, legal advice.