Flexible salary packages with a focus on smartwatches

The Tax Council has determined according to which rules a smartwatch provided by an employer should be taxed.

In brief:

• If an employee is provided with a smartwatch, the employee shall not be taxed for it if they are already taxed for a free phone.
• An employer-provided smartwatch shall not be taxed as a second work phone, even though the Tax Agency previously held this view. However, this is subject to a specific assessment.

Flexible salary packages are not a new phenomenon, but there are regularly binding responses and developments in practice regarding benefits that can potentially be offered in a flexible salary benefit scheme. With a flexible salary package, employees can themselves compose the salary package, typically without extra costs for the employer. This means that one or more benefits are made available in exchange for a reduction in cash salary. A flexible salary package is also called a gross salary scheme. The Tax Council has recently in a binding response taken a position on the treatment of a Smartwatch.

Smartwatch combined with salary reduction – binding response SKM 2024.203.SR

The Tax Council has in a binding response taken a position on which rules a smartwatch made available by an employer should be assessed in relation to the taxation rules. Is it a watch, a phone, or an accessory to a phone? In addition to this, it was decided whether an employer-paid smartwatch can be combined with a salary reduction. The Tax Council concluded that a smartwatch with or without eSIM could be compared to a smartphone and therefore considered a phone covered by the rules on taxation of free phone according to the Tax Assessment Act § 16, subsection 12. Furthermore, the Tax Council's opinion was that in the present case there was a real work-related reason for making a smartwatch with or without eSIM available to the employees as phone number 2, even though it would be offered through a salary conversion/gross salary scheme.

The Tax Council emphasized that a smartwatch to some extent contains usage possibilities and functionalities that a smartphone does not contain. Due to the fact that the watch is worn around the wrist, the Tax Council concluded that it would also be easier for employees to carry the watch compared to a smartphone, and the employees would thereby have access to more quickly respond to a customer call and messages, as well as get an overview of calendars, etc. The Tax Council assumed that the employer-paid smartwatch would not actually be made available to others in the employee's household.

The Tax Administration's recommendation to the Tax Council was that a smartwatch should be handled and taxed as a watch. The market value of the watch should be used: "...On this basis, it is the Tax Administration's opinion that the main function of a Smartwatch such as an Apple Watch with or without eSIM or similar, including Samsung Galaxy Watch6, is to function as a watch with a number of different features, which the user can use in connection with, for example, exercise, sleep, and health measures, as well as act as an extension of a phone. The main function is thus not telephony. The watch can therefore not be considered covered by the Tax Assessment Act § 16, subsection 12. It is furthermore the Tax Administration's opinion that a Smartwatch cannot be considered to be a usual accessory to a phone covered by the taxation in the Tax Assessment Act § 16, subsection 12. This is because it cannot be compared with, for example, headphones, chargers, etc., which are minor additional services that are normally delivered with the phone and do not have an independent function. An Apple Watch or similar Smartwatch with or without eSIM can thus neither be considered to be an independent phone, nor an accessory to a phone, covered by the taxation of free phone in the Tax Assessment Act § 16, subsection 12. If a Smartwatch is made available by the questioner, the watch should therefore be taxed at the market value according to the general rules for employee benefits, cf. the Tax Assessment Act § 16, subsections 1 and 3..."

As mentioned, the Tax Council changed the Tax Administration's recommendation, as the Tax Council believed that a smartwatch with or without eSIM with access to telephony can be compared to a smartphone, which is why an Apple Watch or similar smartwatch with or without eSIM must be considered a phone covered by the taxation of free phone in the Tax Assessment Act § 16, subsection 12.

Phone number 2

Since the smartwatch in the specific salary conversion is made available as phone number 2 for the employees, the taxation of free phone according to the Tax Assessment Act § 16, subsection 12, presupposes that there is a real work-related reason for making a smartwatch available.

According to practice, it is noted that it is presumed against the fact that a phone is a work phone if the employee compensates the employer for making the phone available in the form of a salary reduction. In SKM2012.719.SR, where the employees as part of an agreement on salary conversion were to be offered an extra phone (phone number 2), it was however specifically assessed that there was a real work-related reason for phone number 2. The Tax Council emphasized in the decision that phone number 1 was a phone that the company's customers, etc., should always be able to get through on, and it was also referred to the decision in SKM2009.687.SR. In SKM2009.687.SR, it was assessed that there was a real reason for phone number 2, and emphasis was placed on the information provided that phone number 1 was either an on-call phone, or that customers, etc., should always be able to get through on phone number 1.

Based on the questioner's information, it was the Tax Council's opinion that in the present case there is a real work-related reason for making a smartwatch with or without eSIM available to the employees as phone number 2, even though it will be offered through a salary conversion.

The Tax Council emphasized in this connection that a smartwatch to some extent contains usage possibilities and functionalities that a smartphone does not contain. Due to the fact that the watch is worn around the wrist, it will also be easier for employees to carry the watch compared to a smartphone, and the employees will thereby have access to more quickly respond to a customer call and messages, as well as get an overview of calendars, etc.

The tax advantage of a smartwatch being considered phone number 2 is that employees can only be taxed for one phone, so employees who are already taxed for free phone/multimedia with DKK 3,200 annually will not be taxed further for having a smartwatch made available.

Comments on the binding response

For a smartwatch combined with a salary reduction to be offered to employees without further taxation, there must be a specific assessment of the employees in relation to the need for a phone number 2, if the employees already have a free phone made available. The binding response does not clearly state which type of employees are in question in relation to the work-related assessment of making a smartwatch available as a phone number 2 without further taxation.

The following reasons are stated, among others:

"...Next, it must be assessed whether the Questioner has a real reason for making the new type of multimedia available to its employees. A Smartwatch offers employees much greater flexibility and freedom than a smartphone and the opportunity for quicker responses to shorter messages, emails, as well as a quick overview of one's calendar, including meetings, and therefore fits well into the modern workplace, where work is often performed at different locations. A Smartwatch eSIM also makes it easier for employees to quickly respond to a customer call or internal calls without having to have their smartphone with them. Conversely, a Smartwatch eSIM also has limited functionality compared to a smartphone, which makes it necessary to have a smartphone made available, as it is not limited to the same extent (for example, for reading or responding to longer emails and messages as well as document handling, etc.) and thereby greater usage possibilities than a Smartwatch eSIM, which should be considered a phone number 2..."

Since a specific assessment of the work and the need for a smartwatch made available as phone number 2 without further taxation must be made, the individual employee groups should be assessed before a smartwatch is offered combined with a salary reduction. A binding response will also be advisable in some cases.