Share-based Incentive Schemes

Peter Leth Keller

Student thesis: Master thesis


This dissertation deals with the tax treatment of share-based incentive schemes in unlisted companies for the employee, the company and its shareholders, as well as how valuation of these schemes is made, for the purpose of assessing this type of remuneration for and retention of an employee. With the use of share-based incentive schemes, there are three types of remuneration instruments; Stock options, Warrants and Shares. In relation to the use of one of the three above types, there are several parameters that form the basis for these, especially in relation to stock options and warrants. In relation to how it is chosen to design the sharebased incentive scheme, there may be different taxation rules and options. By allocation of a share-based incentive scheme, if a preference element occurs in the award, the employee will, as a rule, be taxed according to LL § 16, but upon fulfillment of certain requirements, there may be taxation under LL § 28 or LL § 7P, which implies postponement of the employee´s taxation. If the employee pays the full market price of the acquired share-based incentive scheme, there will be no taxation on the employee, as there is no remuneration. In principle, the company deducts the costs incurred in the allocation of a share-based incentive scheme, except if taxation takes place under LL § 7P. At the company's allocation, the company's shareholders will not, as a rule, be affected by taxation. In the case of a share-based incentive scheme, valuation of the scheme at market price must be made. Because of the company not being listed, there is no public market price on the company's shares. Therefore, it is possible to use different methods for the valuation of the company as well as any stock option and warrant granted. In the final part, some comparisons have been made showing the profit, that the employee can achieve through different share-based incentive schemes, using the present tax rules, as well as the employee's ability to finance the utilization. It has also been considered that the company's costs are the same in the comparisons. Based on the assumptions stated, it is advantageous to apply tax rule LL§ 7P, and it may be advantageous to transfer the scheme to a privately-owned company. As noted in the dissertation, it is not possible to allocate a share-based incentive scheme to several types of employees or reuse the scheme on other companies if the scheme must be optimal for the company and the employee. It must therefore be concluded, that by awarding a share-based incentive scheme, a specific assessment must be made, based on the employee's, the company's and the shareholders' perspectives, thus optimizing the arrangement for all parties, and thereby offering optimal financial gain.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2017
Number of pages96