ADR stands for “American Depositary Receipt.” With an ADR, an American can gain exposure to a foreign stock without having to worry about converting currencies or opening foreign stock brokerage accounts. Trading costs may be lower, as well. The “American Depositary Share” (ADS) is a similar structure.
For tax purposes, however, the foreign government may take the position that the owner of the ADS is actually an owner of the underlying shares. This means the investor becomes subject to all the tax laws and filing requirements of the foreign country.
For example, the prospectus for Nabriva Therapeutics AG (an Austrian company) states,
For Austrian tax purposes, a holder of ADSs who is entitled to claim the full number of shares represented by the ADSs held at any time and who may freely dispose of and exercise the shareholder rights, in particular voting rights, inherent to our common shares (or instruct the depositary acting as an agent for the holder in light of the ADSs to do so) is in general considered to be the economic owner of common shares represented by such ADSs. As a result, dividend income resulting from our common shares should be attributable to the holder of the ADSs for Austrian tax purposes. As a consequence, any distribution received by an Austrian resident or nonresident ADS holder with respect to our common shares will therefore be taxable in Austria as a dividend under the principles set out for common shares below. Capital gains realized upon the disposal of the ADSs will equally be subject to tax in Austria as outlined below with respect to capital gains realized through the sale of common shares.
Then the prospectus lays out in great detail what one might expect from the Austrian tax authorities.
Many ADRs trade in the United States, but do not have to make such disclosures. If you were to invest in such securities, how would you find out if you have to:
(a) pay taxes to a foreign government, and
(b) file income tax returns with that foreign government?
My book, Investing in Foreign Stocks is one way to find out!
None of this legal advice. See the Terms of Service.