Many companies offer employees the opportunity to purchase shares in the employer company or the wider group. Such share programmes can be an effective tool for strengthening employees’ connection to the business and allowing them to participate in future value creation.
At the same time, an employee’s share investment may have unexpected tax consequences if the shares are acquired at a price below their fair market value. A discount on shares may be treated as a taxable benefit derived from employment.
For both employers and employees, it is therefore important to understand the rules before share programmes are established or implemented.
The main rule: a share discount may be treated as employment income
If an employee is allowed to purchase shares at a price lower than their actual value, the employee generally receives an economic benefit.
This benefit will normally be treated as employment income where there is a sufficient connection between the discount and the employment relationship. The benefit is taxed as a benefit derived from employment and is included in the employee’s personal income.
Example:
An employee is allowed to purchase shares in the employer company for NOK 50 per share. The actual market value of the shares is NOK 100.
The difference of NOK 50 per share will, as a starting point, represent a taxable benefit.
It is therefore not decisive that the employee has actually paid something for the shares. A discount may still be taxable if the shares have been acquired below market value.
Why is the discount taxed as salary?
The reason is that the benefit is generally regarded as having been granted because of the employment relationship.
Norwegian tax law is based on the principle that economic benefits received from an employer in connection with employment should be treated as employment income—even where the benefit is provided in a form other than ordinary salary.
This means that an employee cannot necessarily avoid employment taxation simply by receiving a benefit in the form of shares rather than a cash payment.
Do the rules only apply to shares in the employer company?
No - the rules may also apply where the employee purchases shares in a company other than the entity employing them, for example another company within the same group.
The decisive factor is not which company’s shares are involved, but whether there is a sufficient connection between the benefit and the employment relationship.
How is the value of the shares determined?
The key question is often what the shares were actually worth at the time of acquisition.
The taxable benefit is generally calculated as:
Fair market value of the shares – amount actually paid by the employee = taxable benefit
For listed shares, valuation is often relatively straightforward because an observable market price is available.
For unlisted shares, the assessment is more complex. A specific valuation must be made based on factors such as:
- the company’s financial position;
- future earnings potential;
- transactions involving the shares;
- capital structure;
- rights attached to the relevant share class; and
- any restrictions on the transferability of the shares.
When is the benefit taxed?
An important question is the timing of taxation.
As a general rule, the benefit is taxed when the employee actually acquires the shares and obtains the discount.
This means that the tax liability normally arises at the time of purchase or subscription of the shares—not when the shares are later sold.
This may have significant practical implications. An employee may therefore have to pay tax on a share benefit before the shares have been realised and before the employee has received any cash from the investment.
What happens when the shares are later sold?
When the shares are subsequently sold, the transaction is subject to the ordinary rules governing capital gains and losses on shares.
The employee will generally have a tax basis that includes both:
- the amount actually paid for the shares; and
- the benefit that has already been taxed as employment income.
This prevents the same increase in value from being taxed twice.
It is therefore important to maintain records of both the original share acquisition and the tax treatment of the discount.
Shares acquired through a holding company – an area with particular considerations
Some employees acquire shares through a holding company. This may raise complex questions regarding who actually receives the benefit and whether the discount should be regarded as a benefit derived from employment.
The fact that the shares are formally owned by a company does not necessarily mean that employment-related benefits fall outside the scope of taxation. The specific assessment will depend, among other things, on how the structure has been established and what economic benefit the employee actually obtains.
Employer obligations
When an employee receives a taxable benefit from acquiring shares below market value, the employer will normally be responsible for ensuring correct reporting.
This includes, among other things:
- determining the taxable benefit;
- reporting the benefit through the a-melding system; and
- assessing employer’s social security contributions.
Incorrect handling may result in additional assessments of both tax and employer’s social security contributions.
Previous special tax rules have been changed
Previously, special rules existed that could provide employees with a tax advantage when purchasing shares at a discount.
These rules have been abolished for new income years, and the current assessment is primarily based on the general rules regarding benefits derived from employment.
Common mistakes in share programmes
In practice, problems often arise because:
- shares are priced too low without sufficient valuation support;
- employers underestimate the tax implications;
- employees are unaware that the discount is taxed before any sale takes place;
- share programmes are established without assessing payroll tax and social security consequences; or
- restrictions attached to the shares are not properly taken into account in the valuation.
A thorough assessment before establishing a share programme can therefore reduce the risk of later disputes and unexpected tax consequences.
Conclusion
Employees’ purchase of shares at a discount can be an attractive arrangement for both employers and employees, but the arrangement has important tax implications.
Where shares are acquired below market value as a result of the employment relationship, the discount will generally be treated as taxable employment income. The valuation of the shares, the timing of taxation, and proper documentation of the share value are therefore critical factors.
For companies considering share programmes, and employees who are offered the opportunity to acquire shares, tax considerations should form a natural part of the decision-making process.
