Restricted stock units, RSU

What are employee shares?

Employee shares, Restricted Stock Units (RSUs), warrants and similar arrangements exist in many forms and under many names. Common to most such schemes is that they are designed to provide (often key) employees with an additional incentive to achieve the company’s objectives and to remain in employment. This form of remuneration is widespread in the United States and the United Kingdom and is increasingly being adopted elsewhere, including Denmark.

If you are a tax resident in Denmark, you are fully liable to Danish taxation on income derived from employee share schemes, regardless of where the shares are held. Three main taxation models apply under Danish tax law:

1. Shares granted in lieu of salary, where taxation occurs as personal income at the time of grant. Any later gains or losses are taxed as share income at a lower rate.
2. Options or warrants are exercised, for example, after three years of employment. Taxation is based on personal income upon exercise. Subsequent gains/losses are taxed as share income.
3. Section 7P shares, where taxation occurs as share income – but only when the shares, options, or warrants are eventually sold.

Many stock units and stock option programmes combine elements of the above models. Danish employers often report some, but not necessarily all, relevant details. In our experience, errors or omissions in reporting are more common than not, particularly for Section 7P units.

Taxation at the time of sale

When shares are sold, they are generally taxed as share income. Most individuals are taxed on the basis of the realisation principle and the average cost method. This means that for each sale, you must calculate the average price of the shares being sold..

This would be straightforward if, for example, you received 1,000 shares at DKK 100 and sold them all a year later at DKK 140. However, it becomes much more complex if you have received 3,000 shares over six different grants – some as options, some as 7P shares. Then, after three years, you sell 500 to fund a new car. Calculating the tax in such cases often requires a full review and systematisation of all the data from the start of the share plan.

Things become even more complicated when the shares are held in a foreign depot and issued by a foreign company – in which case the source state may also claim taxing rights, depending on whether Denmark has a double tax treaty (DTA) with that country, and what that treaty stipulates. It also matters whether you have placed your RSUs in a company or performed some or all of the work (for which you are receiving, say, warrants) while abroad.

When we handle a case involving employee shares, we typically need to clarify:

• How long has the programme been running, and have all years been reviewed? There is a significant difference between reviewing a brand-new program and one that has been running for 10 years with varying degrees of oversight (for example, everything needs to be reviewed).
• Which components are included? Shares, options, warrants, Section 7P, holding companies?
• And, importantly, how much have you received? Number of shares, value, currency, and dates?
• Have any shares been sold?
• Have you been a tax resident in Denmark during the relevant periods?
• Are the shares held in a foreign depot, and are there shared taxing rights (for example, should Denmark grant relief for foreign taxes, such as U.S. income tax, to avoid double taxation)?

It isn’t always that complicated. Some matters are straightforward and resolved within a few hours; others, especially when prior years need rectification, can be far more extensive.

Get your stock renumeration program in order

It is strongly advisable to maintain proper records for your employee share program. While it may seem harmless, the consequences of non-compliance can be significant, including fines or penalties for incorrect or missing reporting. Additionally, financial losses may occur, for example, if a large portion of shares is taxed at 57%, increasing to 62% upon receipt, only to subsequently drop significantly in value, with any future loss deduction limited to a 42% tax value.

We are happy to review your employee share program. These programs vary in complexity, so it is difficult to predict in advance how much work your case will require. However, we have handled all types before, and you will only be charged for the time we spend.