Equity Compensation Plans: Understanding Reporting and Compliance with e-Indkomst and e-Kapital
Businesses operating in several jurisdictions often benefit from offering equity compensation plans as an attractive way to retain talent and align employees’ interests with the company’s long-term success.
Companies can offer their employees a stake in the business with equity compensation plans such as:
- Restricted Stock Units (RSUs)
- Employee Stock Purchase Plans (ESPPs)
- Stock Options.
However, these benefits come with complex reporting obligations that companies must navigate to stay compliant with Danish tax measures.
In this article, we will explore the various types of equity compensation plans, the key provisions of Danish tax law—Ligningsloven § 16, § 28, and § 7P—and how companies should use the Danish tax reporting systems eIndkomst and eKapital to ensure compliance.
Types of Equity Compensation Plans
Equity compensation plans come in various forms, each with its own set of rules and benefits.
Here, we outline the most common types:
1. Restricted Stock Units (RSUs)
RSUs are shares granted to employees that vest over time.
The employee does not receive the shares immediately but instead earns them based on the completion of a vesting period or performance milestones.
The taxable event for RSUs typically occurs either at the time of vesting or at the time of grant, depending on the structure of the RSU plan.
The employer shall report the taxable event in eIndkomst, and the shares should be reported in eKapital at year-end.
2. Employee Stock Purchase Plans (ESPPs)
ESPPs allow employees to purchase company shares, often at a discount.
These plans operate similarly to a savings plan, with payroll deductions accumulating over time, enabling employees to buy shares at a discounted rate.
The difference between the discounted purchase price and the fair market value at the time of purchase is considered a taxable benefit.
The employer shall report the taxable event in eIndkomst, and the shares should be reported in eKapital at year-end.
3. Stock Options
Stock options give employees the right to buy shares at a predetermined price within a specific time frame.
As a rule of thumb, taxation occurs when the employee exercises the options, and the difference between the exercise price and the market value at the time of exercise is considered taxable income under Ligningsloven § 28.
This income is reported through eIndkomst, and the stock option must be reported via eKapital at year-end.
4. Phantom Stock and Stock Appreciation Rights (SARs)
Phantom stock and SARs are often offered as alternatives to traditional equity compensation.
These schemes provide cash or stock bonuses based on the appreciation of the company’s stock.
Although the employee does not actually own shares, the value increase is taxed as income and must be reported through eIndkomst at the time of the payout.
Often, this type of incentive is a cash payment and thus also subject to tax withholding.
Ligningsloven and the Taxation of Equity Compensation Plans
Understanding the tax implications of equity compensation plans is crucial for compliance.
Here, we delve into the relevant sections of Danish tax law:
Ligningsloven § 16: Taxation of Benefits (including Shares)
Under Ligningsloven § 16, any benefit provided to an employee, including stock compensation like RSUs, ESPPs, or Stock Options, is subject to taxation as personal income.
For RSUs, this taxable event is usually either at the time of vesting or at the time of grant, depending on the structure of the plan.
However, for Stock Options, Ligningsloven § 28 may apply instead. The critical point here is when the “taxable event” occurs.
This must be carefully reported to tax authorities through eIndkomst as a benefit
If a company grants RSUs, the employee is taxed when the taxable event occurs, which is normally at the time of vesting or the time of grant, depending on the specifics of the RSU plan.
Similarly, if the company offers shares through an ESPP at a discount, the taxable benefit arises and must be reported through eIndkomst.
Ligningsloven § 28: Stock Options
Ligningsloven § 28 specifically addresses the taxation of stock options.
Employees are taxed only when they exercise the options. The taxable amount is the difference between the option’s strike price and the market value of the shares at the time of exercise.
This difference is considered a “perquisite” or salary benefit and must be reported in eIndkomst.
An employee is granted stock options at a strike price of DKK 100 per share, but at the time of exercise, the market price is DKK 150.
The DKK 50 difference per share is considered taxable income.
The income shall be reported using eIndkomst as part of payroll reporting.
Ligningsloven § 7P: Special Tax Rules for Employee Shares
Ligningsloven § 7P is an attractive provision for employees receiving stock-based compensation.
It allows for deferred taxation on shares or options granted as part of a salary package, provided that certain conditions are met.
Under this rule, employees are not taxed at the point of grant or vesting but rather when they sell the shares, and the profit is taxed as capital gains.
eKapital plays a crucial role here, as the sale of the shares must be reported at year-end to ensure the correct amount of tax is paid on capital gains.
An employee under a 7P scheme receives RSUs that vest after three years. No tax is due at vesting or exercise if the conditions of § 7P are fulfilled.
When the employee sells the shares, capital gains tax applies to the difference between the sale price and the vesting price.
The company reports these transactions annually via eKapital and at the time of grant via eIndkomst.
Reporting Equity Compensation Plans: eIndkomst and eKapital
To comply with Danish tax regulations, companies must use both eIndkomst and eKapital reporting systems.
eIndkomst
eIndkomst is used for ongoing monthly payroll reporting.
When stock compensation is granted as part of an employee’s salary, whether it be through RSUs, ESPPs, or stock options, these must be reported in eIndkomst as a benefit.
For example, if RSUs vest during a particular month, the value of the income must be reported in the eIndkomst system.
eKapital
eKapital handles annual reporting, especially for ownership information.
At the end of the fiscal year, companies must submit detailed reports about any stock-related transactions made by their employees.
This ensures that employees who sell shares are taxed on any capital gains made during the year.
Compliance Challenges and Cross-border Considerations
One of the most significant challenges for businesses is ensuring compliance across multiple jurisdictions, especially when employees are working across borders.
Tax residency can impact when and how stock-based compensation should be reported.
For example, an employee working in Denmark but residing in another country may be subject to different tax rules, and the employer must navigate both local and international regulations.
With Crossbord’s specialised knowledge in handling both Danish and international tax rules, companies can remain compliant with complex reporting obligations, particularly when managing employees on cross-border assignments.
The effective management of equity compensation plans requires an understanding of both the tax rules governing these benefits and the correct use of reporting systems such as eIndkomst and eKapital.
Avoid Costly Penalties
By ensuring timely and accurate reporting, companies can avoid costly penalties and ensure that both they and their employees meet their tax obligations.
With the Crossbord Solution, companies get tailored support so they can focus on their core business while we handle the complexities of payroll, tax compliance, and cross-border employee management.
AVOID PENALTIES
Contact Crossbord today to streamline your equity compensation plan reporting and avoid costly penalties.
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