What are RSUs?

Restricted Stock Units (RSUs) have become the preferred equity compensation method for public companies over the past two decades. With most public companies granting service-based and performance-based RSUs, effective plan administration is critical for employee pay, retention, and compliance. A clear understanding of the RSU lifecycle is essential for managing these programs and supporting company equity strategies.

This article explains what RSUs are, how they function, and the key administrative challenges involved, particularly within the complex European regulatory landscape.

What Are Restricted Stock Units?

Restricted Stock Units (RSUs) are promises from an employer to give shares of company stock to an employee in the future. These promises are not shares right away — actual shares are given only after certain conditions are met.

RSUs require the employee to meet specific requirements, called vesting conditions, before they receive any shares. Until those conditions are met and the shares are delivered, employees do not have ownership or shareholder rights.

• No upfront cost: Employees do not pay to receive RSUs, unlike stock options
• Future delivery: RSUs are promises of shares, not immediate ownership
• Vesting required: Conditions must be met before receiving actual stock
  
  

How Restricted Stock Units Work From Grant to Vesting

The RSU process follows three distinct stages, each with specific implications for the employee.

Grant Date

The company awards a specific number of restricted stock units to an employee. No stock is transferred at this stage. The grant agreement outlines key terms including the vesting schedule and any performance requirements.

Vesting Date

Vesting occurs when the employee meets the conditions set in the RSU agreement. When RSUs vest, they convert to actual shares and become taxable income based on the stock's fair market value. The company may withhold shares or cash to cover tax obligations.

Share Delivery or Cash Settlement

After vesting, employees receive shares in a brokerage account or cash equivalent. Once delivered, the shares can be sold or held like regular stock, subject to any company trading restrictions.

RSU Vesting Schedules and Triggers

Companies structure RSU vesting in different ways depending on their retention and performance goals.

Time-Based Vesting

Shares vest according to a predetermined schedule over multiple years. A common structure is annual vesting over four years, with 25% of shares becoming available each year.

Performance Vesting

Vesting depends on achieving specific company or individual goals such as revenue targets, profit margins, or stock price milestones. These performance stock units (PSUs) are typically reserved for senior executives.

Double-Trigger Vesting for Private Companies

This structure requires two conditions: completing a service period and experiencing a liquidity event like an IPO or acquisition. Double-trigger vesting helps private companies avoid immediate share delivery obligations before going public.

RSUs vs Stock Options

Understanding the differences between equity compensation types helps clarify what employees can expect.

Taxation of RSUs at Vesting and Sale

RSU taxation occurs at two distinct points, each with different tax treatment.

Ordinary Income at Vesting

Upon vesting, the full market value of your shares generally becomes taxable income. The specific tax treatment depends on your country of residence, but typically includes:

• Income Tax: Levied at the national (and sometimes regional or municipal) level.
• Social Security Contributions: Both employee and employer contributions may be due.
• Employer Withholding: Your employer is usually required to withhold the estimated taxes and contributions directly from your payroll.
  
  

Capital Gains After Sale

Once you sell your vested shares, any profit you realize is typically taxed as a capital gain. Key considerations for this in Europe include:

• Taxable Amount: The taxable gain is the difference between the share value when you sell and the market value on the date they vested.
• Holding Periods: Some countries offer lower tax rates if you hold the shares for a minimum period (e.g., two, three, or five years), but this rule is not universal.
• Tax Rates: Capital gains tax rates are determined by national law and can vary widely. For instance, Denmark has one of the highest rates, taxing gains above a certain threshold at 42%, while in Switzerland, capital gains from selling shares are generally tax-free for private individuals.
• Allowances & Reliefs: You may be entitled to an annual tax-free allowance or other reliefs that can reduce your overall tax liability. The UK, for example, offers a Capital Gains Tax allowance where the first £3,000 of gains (in the 2024/25 tax year) are tax-free. Similarly, Germany provides an annual saver's allowance of €1,000 that covers all investment income, including capital gains.
  
  

Sell-to-Cover and Net Settlement

Companies often handle tax withholding through automated methods:

• Sell-to-cover: Automatically sells a portion of shares to cover taxes
• Net settlement: Withholds shares equivalent to the tax obligation and delivers the remainder

Both methods ensure your tax withholding requirement is met, but the process and timing of ownership and sales are different.

Below is a detailed example comparing RSUs using the two different tax withholding methods:

• 1,000 RSUs vest at €20 → €20,000 ordinary income this year.
• Tax needed: Withholding estimate 40% → €8,000 taxes. (The final tax owed may differ depending on your total income and the tax regime that applies in your country.)
• Net Settlement:
  • Company withholds 400 shares (8,000 ÷ 20).
  • Delivered to employee: 600 shares.
• Sell-to-cover:
  • If broker sells at €20, no fees → sell 400, keep 600 (matches net settlement method).
  • If broker sells at €19.80 with a €10 fee → sell 405, keep 595.
  • If broker sells at €20.20, no fees → sell 397, keep 603.
• Only gains after vesting are capital gains. If sold later at €26, the gain is (€26 − €20) × net shares kept.

Navigating European Payroll and Compliance for RSUs

Companies with a European footprint face significant complexity when administering RSUs, as each country has distinct tax, social security, and reporting requirements.

Pan-European Tax and Social Security Withholding

A primary challenge is the sheer diversity of withholding obligations across Europe. The timing of the taxable event, the applicable income tax rates, and especially the calculation of social security contributions differ significantly.

For example, in Germany, the value of vested shares is subject to both wage tax and solidarity surcharge, withheld through payroll. In the Nordics, countries like Denmark have some of the highest marginal tax rates on equity income.

In a starkly different approach, the UK treats the RSU value at vest as employment income subject not only to income tax but also to both employee and employer National Insurance Contributions (NICs). The employer's NIC liability, which can be substantial, often requires a separate agreement with the employee on how it will be funded, adding a unique layer of complexity not seen in many other countries.

Financial Reporting under IFRS 2

For European companies, RSUs must be accounted for under IFRS 2 (Share-based Payment). This standard mandates the recognition of a compensation expense over the vesting period, based on the fair value of the equity instruments at the grant date. This requires meticulous tracking of vesting schedules and employee service periods to ensure financial statements are accurate and compliant, a standard practice for companies listed on European exchanges.

The Mobility Challenge: Cross-Border Complexity

A unique European complexity arises when employees move between countries. For a mobile workforce across markets like Germany, Italy, and Switzerland, determining which country's tax and social security laws apply to vested RSUs can be incredibly complex. Tax treaties and specific social security agreements dictate where the liability falls, creating a significant administrative burden. For instance, an employee moving from Milan to Zurich will have their RSUs subject to different tax treatments and reporting obligations in both Italy and Switzerland, which must be carefully managed.

Modern equity management platforms, like Optio Incentives, are essential for navigating this fragmented landscape. They automate these complex calculations, from German wage tax to UK NICs, and help ensure compliance with IFRS 2 and cross-border mobility rules, significantly reducing the administrative burden.

Advantages and Disadvantages of RSUs

RSUs offer distinct benefits and drawbacks for both employees and employers.

Key Advantages:

• No financial risk: Employees receive value without upfront investment
• Retention incentive: Vesting schedules encourage long-term employment
• Upside participation: Employees benefit from company stock appreciation
  
  

Key Disadvantages:

• Immediate tax liability: Income tax is due at vesting, regardless of whether shares are sold
• Concentration risk: Heavy exposure to single company stock performance
• No shareholder rights: Until vested, employees have no voting privileges or dividend payments
  
  

Common RSU Misconceptions That Cost Money

Several widespread myths about RSUs can lead to expensive mistakes.

Myth 1: Vesting Creates Immediate Cash

The vesting event is when you receive ownership of company shares, not cash. However, this event is considered a taxable form of income. Tax authorities in your country will treat the market value of the shares on the vesting date as part of your salary, and income tax becomes due on that amount.

Myth 2: Holding Vested RSUs Reduces the Income Taxes

The income tax liability is determined at the moment of vesting based on the shares' market value. Holding the shares does not alter this initial tax event. Any change in the shares' value after vesting is treated separately as a capital gain or loss when the shares are eventually sold.

Myth 3: Employer Withholding Covers Your Full Tax Bill

Employer withholding, often done via a "sell-to-cover" transaction, is an estimated payment. Due to varying marginal tax rates and social security rules across the EU, this estimate may not cover your total liability. The employee is ultimately responsible for ensuring the correct total amount of tax is paid, which may require an additional payment when filing their annual tax return.

Why Modern Platforms Simplify RSU Administration

Administering RSUs across multiple countries, currencies, and regulatory environments creates substantial operational complexity. Modern equity management platforms automate vesting calculations, tax withholding, and compliance reporting.

These systems integrate with existing HR systems to ensure data accuracy and streamline processes. Automated employee communications keep participants informed about vesting events and tax obligations.

Optio Incentives specializes in global equity compensation management, helping companies navigate multicountry compliance while providing employees with clear, accurate information about their awards.

Request a demo to see how Optio streamlines RSU management across your global workforce.

FAQs About Restricted Stock Units

What happens to unvested RSUs when an employee leaves the company?

Unvested RSUs are typically forfeited immediately upon termination. Some companies offer partial acceleration for specific circumstances like retirement or involuntary termination.

Can employees transfer RSUs to family members before vesting?

RSUs cannot be transferred, sold, or assigned before vesting because they represent promises of future shares rather than current ownership interests.

Do RSU holders receive dividends on unvested units?

Most RSU plans do not pay dividends on unvested units. Some companies credit dividend equivalents that accrue and pay out upon vesting, along with the underlying shares.

What is the difference between the grant price and the vesting price?

The grant price is the stock's market value on the day the RSUs are granted. The vesting price is the market value on the day the shares actually vest and become your property. Your taxable income is calculated based on the vesting price, not the grant price.

What happens to my RSUs if my company is acquired?

This depends on the terms of the acquisition and your RSU agreement. In many cases, an acquisition can trigger "accelerated vesting," meaning your unvested RSUs vest immediately. In other cases, they may be converted into shares of the acquiring company.

Can I choose how my RSU taxes are withheld?

This depends on your employer's plan. Some companies allow employees to choose between methods like "sell-to-cover" or paying taxes with cash from other sources, but many default to a single method like sell-to-cover for administrative simplicity