Taxation of Restricted Stock Units

25 October 2019

If you are employed by a US-owned company, you have most likely heard of Restricted Stock Units, which are a form of share pay. Unfortunately, RSUs are not always subject to the favorable rules for taxing such schemes.

In the United States of America, remuneration with shares are rather common. Hence, even in smaller Danish companies, this kind of remuneration often occurs, if the company is American owned.

The schemes can be very different. In some companies, they are aimed at all employees, whereas in other companies, only the management is eligible. Generally, it is a common characteristic that the right to the shares is earned over a period, that certain financial goals for the period are met (performance requirements) and that one must be employed in the company at the time the right can be exercised.

Restricted Stock Units are usually in the nature of free shares. They are transferred to a depository in a (often foreign) financial institution when and if the stipulated conditions are met. The recipient must then decide when to sell the shares. In rare cases, a lock-up period may apply, according to which the shares received may only be sold after a while.

Although Denmark has quite favorable rules for taxing certain types of share pay, it is rare for American RSU schemes to be covered by these rules, because the applicable conditions are not met. This is not due to reluctance on the part of the owners, but an indication that the schemes are typically based on uniform conditions for employees in many countries and that it would be too cumbersome if local considerations were to be made.

The Danish tax treatment of RSU schemes - which are not covered by the special share pay rules - can be summarized as follows:

•    The RSU grant usually has no tax implications. Generally, taxation takes place when the shares are transferred to the employee’s custody account. Taxation takes place regardless of whether the shares are sold immediately or retained.

•    The taxable amount corresponds to the gain at the time the shares are transferred to the custodian, which would equal the market value of the shares at this date. The marginal tax rate is approx. 56 pct. The employer must report the amount to the Danish Tax Agency, but the employee must make sure that the amount is included on his annual tax statement.

•    A subsequent increase in value of the shares will be taxed upon realization with a marginal tax rate of 42 pct. If the shares decrease in value, the tax treatment of the loss depends on whether the shares are listed. If this is the case, the loss can only be offset against subsequent gains on other listed shares and only if the employee has provided the Danish Tax Agency with information on the shares. If the shares are unlisted, the loss can be deducted as negative share income. The tax value thereof can be offset against the tax on other income, including salary.

The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.