Taxation on stock remuneration, options, RSU, ESPP, etc.

Taxation of stock remuneration, RSU and ESPP

Does your company have employees who receive stocks, ESPP, or RSU as part of their salary? It can be an effective way to motivate and retain your employees, but how about the taxes? The taxation of stocks, ESPP, and RSU can be complex and lead to unexpected costs if not handled properly.

At SkatteInform, we offer expertise in navigating these tax rules and avoiding pitfalls, so that both the company and employees can get the most out of these opportunities.

How is employee stock compensation taxed?

The tax for both employees and employers depend on the set of rules, under which the stock compensation is granted. Therefore, it is beneficial to choose the compensation, that involves the least amount of tax-liability.

The taxation of employee stock compensation depends on the legal provisions under which it is granted:

• Section 16 of the Danish Tax Assessment Act – taxation at the time of acquisition of rights
• Section 28 of the Danish Tax Assessment Act – deferral of tax until the time of exercise
• Section 7P of the Danish Tax Assessment Act – deferral of tax until the time of sale

Pitfalls to be aware of

• Incorrect Tax Planning: If ESPP or RSU are not planned correctly, employees may face high tax bills because the beneficial element of the stocks is taxed as salary income upon award . Understanding timelines is essential.
• Lack of Reporting: Incorrect reporting can result in interest and penalties from the tax authorities. It is crucial to accurately report and avoid unforeseen tax consequences.
• Understanding Double Taxation: For employees working internationally, double taxation can be a risk. Proper coordination of tax rules across multiple countries is essential.

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Contact Us

At SkatteInform, we advise both companies and employees on how best to optimize taxes using stock compensation regimes. Our goal is to ensure that the reporting of stock compensation is correct, and that our clients avoid unnecessary interest charges.

Do you have questions or would you like to know more about how we can help you? Please do not hesitate to contact us

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Frequently Asked Questions

1. What are employee shares and stock options?

Employee shares are shares that a company grants to employees as part of its equity-based compensation. Such schemes are often used as an incentive to motivate employees, retain key staff, and align their interests with the company’s long-term goals. Employee shares may be granted free of charge or purchased at a favorable price. Stock options may have an exercise price that must be paid in order to exercise the option and receive shares.

SkatteInform can assist both individuals and companies with advice on the tax treatment of these schemes.

2. What is the difference between employee shares and stock options?

Employee shares provide immediate ownership from the time of grant, while stock options give the right, but not the obligation, to purchase shares at a pre-determined price at a future date.

The tax treatment varies:

• Employee shares are taxed either at the time of receiving or upon sale, depending on whether the scheme is covered by Section 16 or Section 7P of the Danish Tax Assessment Act.

• Options are typically taxed at the time of exercise under Section 28, unless special rules such as Section 7P allow deferral of taxation.

SkatteInform can advise on the different schemes, their tax implications, and determine which rules apply in your case. ‍

3. What is the difference between RSUs and ESPPs, and which schemes do they fall under?

RSUs (Restricted Stock Units) are conditional grants of shares that are only transferred to the employee once certain requirements are met – typically a vesting period or performance targets. RSUs are generally taxed as salary income upon transfer, with subsequent sales taxed as capital gains on shares.

ESPPs (Employee Stock Purchase Plans) allow employees to purchase company shares, often at a discount. In Denmark, the discount, the difference between the market price and the purchase price, is taxed as salary income at the time of purchase, while later sales are taxed as stock gains on shares.

SkatteInform can assist with review of RSU and ESPP schemes, tax calculation, and planning the optimal time to sell. ‍

4. How are employee shares and stock options taxed under Danish law?

Taxation depends on the applicable scheme:

• Section 16: If an employee receives shares, purchase rights, or subscription rights without the application of Section 28 or Section 7P, equity compensation is taxed as salary income at the time of vesting.

• Section 28: The employee is taxed at the time of exercise. Tax is calculated on the difference between the exercise price and the market value, and the difference is taxed as salary income (up to approx. 56%).

• Section 7P: Taxation only occurs at the time of sale. A tax-free portion of the value, 10% or 20% (if the agreement covers at least 80% of employees) or 50% of annual salary (for startups), is shifted from personal income tax to stock gains tax on shares (27%/42%).

Choosing the right scheme can have a significant impact on both tax rates and liquidity. If the share price drops after grant or exercise, the employee may end up paying tax on a higher value than the shares’ current market value.

SkatteInform can assist with tax calculations for different employee share schemes and taxation upon sale. ‍

5. What can I do if my employer has reported my employee shares incorrectly?

For equity compensation received in a foreign account, it is the employee’s responsibility to report the value to the Danish Tax Authorities (Skattestyrelsen), as well as any sales made during the year.

For Danish employees receiving employee shares or stock options, the employer is generally responsible for correct reporting. However, we often see reporting errors, which can lead to significant discrepancies and, in some cases, additional tax charges. Such errors occur especially with Section 7P schemes where the employer has not used the correct values.

SkatteInform can verify whether your employer’s reporting is correct and, if necessary, request corrections on your behalf. ‍

6. What should I be aware of with international equity compensation, and can you be taxed in both countries?

Yes, double taxation can occur if there is no prior determination of which country has taxing rights. If equity compensation is earned in two countries, for example, the US and Denmark, taxation will depend on both domestic laws and applicable double taxation agreements (DTAs).

In practice, we see cases where the paying country taxes the full compensation, even if only part of it relates to that country. Denmark will only grant relief for the portion the paying country is entitled to tax. If excess tax is paid abroad, a refund must be sought directly from the foreign tax authorities.

SkatteInform can determine taxing rights, ensure correct allocation, and assist with applications for foreign tax refunds. ‍

7. What are the consequences of incorrect tax planning or reporting?

Errors in reporting equity compensation can lead to reassessments, interest charges, fines, and in some cases double taxation. This is particularly risky for individuals with international equity compensation who have income from multiple countries, where correct allocation is crucial.

SkatteInform offers review of tax reporting, prevention of errors, and professional handling of cases with the Danish Tax Authorities.

Disclaimer

The above information is for guidance purposes only, and we accept no responsibility for decisions made based on this information without prior individual advice. We accept no responsibility for errors or omissions.