Denmark: Proposed ceiling for deduction of salary expenses

A draft bill proposes to impose a ceiling for the deduction of salary expenses

A draft bill proposes to impose a ceiling for the deduction of salary expenses

The Danish government, in a February 2022 draft bill, proposed imposing a ceiling for the deduction of salary expenses. The draft bill proposes an annual ceiling of DKK 7.5m (€1 million) per employee and is currently expected to be effective as of 1 January 2023.

Read the draft bill (Danish)

Scope of entities

The scope of the draft bill is broad and is expected to apply to all entities subject to corporate income tax, including companies subject to hydrocarbon taxation. Also, permanent establishments would be expected to be within the scope of the rules.

If a Danish partnership (P/S) pays salary to an employee exceeding the ceiling amount, the denial of deduction is expected to be allocated to the investors based on their pro rata shares in the limited partnership. At this stage, the legislative wording is still preliminary, and it is expected a more detailed description of the scope would be available when the final version of the bill is proposed.

Calculation of gross salary

According to the draft bill, the gross salary is to be calculated in accordance with income that is subject to Danish social security (AM-bidrag). If the employee is not subject to Danish social security, an anti-avoidance rule is expected to capture such salary expenses.

The calculation of the gross salary is expected to cover all types of salary income within an employer-employee relation—including bonus schemes, in-kind payments, and share-based payments subject to salary taxation.

The calculation of gross salary is to be conducted at the group level. This means that if an employee is employed by more than one Danish employer within the same group, the salary expense would be allocated among the relevant entities. If the salary expense exceeds the ceiling calculated on the Danish group level, then expenses exceeding the ceiling could not be deducted for Danish tax purposes. At this stage, no carry-back or carry-forward rules have been presented. 

Specifics about share-based payment schemes

Share-based payments subject to salary taxation (that is, schemes within section 16 and 28 of the Tax Assessment Act) are to be included in the calculation of the gross salary. Specifically, this means that when calculating the gross salary, the salary benefits from, for instance, a warrant scheme would be included in the calculation of the gross salary at exercise with a value equal to the employee’s proceeds (fair market value minus exercise price).

The draft bill does not take into consideration any transitional rules. Consequently, share-based payments that are already granted, but will vest/exercise in 2023 and onwards would be subject to the proposed rules.

KPMG observation

Tax professionals have observed that a transitional rule could be considered to mitigate this treatment, or else the consequence would be that the rules could have retroactive effect. In addition, an accrual rule could be considered to accommodate that long-term incentive schemes earned over a number of years are not put in a worse position compared to incentive schemes earned and vested/exercised on a yearly basis. Expenses incurred to set up the scheme are not expected to be affected if the draft bill is adopted.

Under section 7 P of the Tax Assessment Act, an employee can receive up to 10% of the annual salary as share-based payments subject to capital gains taxation instead of salary taxation. Such a scheme is expected to be out of scope of the draft bill—i.e., it is not expected to be included in the basis for calculation of the ceiling. Also, share-based payments acquired from an employer at fair market value are expected to be out of scope. 

KPMG observation

Application of section 7 P schemes for employees that exceed the salary deduction ceiling could, therefore, be attractive to create a better tax position for the employee without any downside on the employer side (companies subject to the special payroll taxation (lønsumsafgift) could obtain an additional benefit). Opportunities may, therefore, be considered to mitigate denial of deductions in 2023 and going forward.


For more information, contact a KPMG tax professional in Denmark:

Birgitte Tandrup | +45 5074 7053 | birgitte.tandrup@kpmg.com

Lars Terkilsen | +45 5374 7040 | lars.terkilsen@kpmg.com

Steffen Bonde Jensen | +45 5077 0730 | steffen.jensen@kpmg.com

 

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