Denmark Passes Law to Encourage Employee Ownership

Denmark has become the third European country to pass legislation to encourage employee ownership through a trust or similar collective arrangement, joining the UK (2014) and Slovenia (2025).

The law passed with broad support in December. The impact of the law is uncertain, in part because it was crafted to have a minimal impact on tax revenue.

Under the law, at least 50% of a firm’s employees would have to vote to form an employee-owned company (EOC) that would acquire all or part of the ownership of their employer. The tax benefits to the seller become effective only when the EOC owns at least 33% of the company.

Sellers to the EOC would not have to pay the current 42% capital gains tax due on the sale of a company, but the EOC would have to pay tax on the value of that amount at the current tax rate of 22%. That amount can be deferred, however, until certain defined events occur, such as when the company has paid off the acquisition loan or the company is sold.

The employees could buy the shares outright, but more likely would finance the purchase, most likely by having the seller take a note. The company could make regular contributions to pay off the debt, but, unlike the US ESOP, these contributions are not tax-deductible.

At least all full-time employees must become owners in the EOC after three months of employment. Allocations of profit must be based on salary, tenure, or some other formula that does not concentrate ownership in more highly paid people. Employees have individual accounts in the plan, but the value of these accounts is based on the asset value, not an appraised value. The company would have to set its own rules about who gets any surplus if the company is sold for more than its asset value.

The company can provide equity grants, such as stock options, to selected employees, but no employee can hold more than 5% of the total ownership. That would provide employees a path to realizing the appraised value of the shares. The EOC must be governed like a worker cooperative, with one vote per employee-owner.

Employee ownership advocates in Europe have a mixed view of the law. The EOC's obligation to pay the tax on the seller's gain as well as on its own profits adds a financial burden that may be hard to manage if the company is bought at full market value, especially since contributions to repay an acquisition loan are not deductible. This could be offset if the valuation includes a discount for this, as it arguably should because a hypothetical willing buyer would pay less for a company with that liability. The one-person one-vote requirement may also discourage some sellers from selling if they fear the new democratic EOC will make decisions that could imperil a seller note.

The law is an important step forward, however, and lessons from its implementation could help shape future European laws. The European Parliament is now considering a proposal to create a framework for employee ownership that would apply to all member countries. That would set out the basic structure of an employee-owned company but leave it up to individual countries to determine tax rules.