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Are ADR Fees Tax-Deductible?

Discover if ADR fees are tax deductible and consider whether you may deduct these expenses from your taxes. Find out the qualifying requirements and how they will affect your financial situation.
Are ADR Fees Tax-Deductible?
Are ADR Fees Tax-Deductible?
Ensure you manage your resources wisely by knowing the possible financial advantages and qualifying requirements for deducting ADR costs. Let's understand more about ADRs.
In this article

Investing in overseas companies is easier with ADRs, or American depositary receipts, than it would be with regular stocks. ADRs allow foreign firms to attract American investors and capital without having to list on an American stock exchange. Are ADR fees tax-deductible? This article will explain how ADR fee tax affects economic scenarios. Also, check out Beem Tax Calculator to get a quick and accurate estimate of your federal and state tax refund for free.

Are ADR Fees Tax-Deductible?

No, ADR fees are generally not tax-deductible for most individuals in the United States. This is due to the Tax Cuts and Jobs Act of 2017, which suspended the deductibility of most investment expenses, including ADR fees.

Tax YearDeductible ADR FeesNon-Deductible ADR Fees
Before 2018Some fees eligible as miscellaneous itemized deductions, subject to 2% AGI thresholdAll other ADR fees
2018 and afterRare exceptions in specific situations, such as: 

– Fees incurred as part of a qualified business expense
– Additional expenses beyond typical ADR fees directly related to managing ADR holdings
All other ADR fees, including: 

– Standard ADR fees for individual holdings <br> – Any fees exceeding qualified business or additional expense deductions

How is an ADR Taxed?

In the same way that dividends on U.S. stocks are taxable, dividends paid on ADRs are also taxable. ADR companies may also have to pay taxes to their local governments. As a result of foreign taxes being withheld, foreign taxes withheld may be credited against U.S. taxes, and recapture opportunities may also exist.

Understanding American Depositary Receipts (ADRs)

Foreign stock transaction taxes do not apply to ADR investors. U.S. investors can benefit from American Depositary Receipts (ADRs) by investing in non-US stocks without dealing with foreign stock exchanges. Among their clients are household names like Nokia, among others.

The Securities and Exchange Commission requires foreign companies that sponsor listed ADR programs in the United States to file disclosure statements by U.S. accounting conventions in English.

Different Types of ADR Programs

There are two basic types of American depositary receipts:

Sponsored ADRs

The bank is responsible for issuing a sponsored ADR on behalf of a foreign company. There is a legal arrangement between the bank and the company. The foreign company usually pays for the issue of the ADR and retains control over it, while the bank manages investors’ transactions. Their compliance classifies sponsored ADRs with Securities and Exchange Commission (SEC) regulations and American accounting practices.

Unsponsored ADRs

Banks also issue unsponsored ADRs, but the foreign company has no direct involvement, participation, or permission to publish them. In theory, a foreign company could have multiple unsponsored ADRs issued by different banks in the United States. There may also be variations in dividends between these other offerings. In sponsored programs, the bank that works with the foreign company is responsible for issuing only one ADR.

ADR Risk Factors and Expenses

Since non-US companies issue ADRs, they are subject to the risks associated with foreign investments, including:

  • The exchange rate risk is the risk that the currency of the issuing company will drop compared to the dollar of the U.S.
  • Political risk refers to the risk that foreign exchange rates will be undermined or earnings will be destabilized by political or regime changes in the issuing company’s country.
  • A currency’s value is at risk because of inflation in its issuing country.

How Often Are ADR Fees Charged?

There may be added fees associated with investing in ADRs. Depositary banks may charge a custody fee for setting up and distributing an ADR.

In most cases, investors must pay one to three cents per share as an ADR prospectus fee; either that fee will be deducted from dividends or passed on to their brokerage firm.

Is NIO an ADR?

Yes, NIO.Inc is an ADR. Issuers receive compensation when they grant exclusive rights to offer ADRs as consideration for the transfer of interests in real estate in the U.S. This is FDAP income from domestic sources within the United States. According to the consensus rating, Nio is a Moderate Buy, with 7 buy ratings, 3 hold ratings, and 0 sell ratings. Nio is currently priced at $11.02 on average. 

Why Do Companies Issue Depositary Receipts?

A depositary receipt allows investors to purchase equity shares of companies in foreign markets without trading directly on those markets. Depositary receipts enable investors to diversify their portfolios by investing in shares of companies in different markets and economies.

Fees Charged to Investors

All dividends are paid in U.S. dollars to holders of ADRs, though currency conversion expenses and foreign taxes are deducted from dividend payments. Usually, the bank automatically withholds these amounts. To avoid double taxation, American investors must seek a refund from the foreign government’s taxing authority or a credit from the IRS.

Tax Implications

Just like dividends on U.S. shares, dividends paid on foreign shares will always be subject to taxation. However, the local government may withhold taxes, so reviewing each case is crucial.

In addition to not being subject to non-US stock transaction taxes, ADR investors don’t have to pay foreign withholding taxes on dividends. However, the proceeds from ADR holdings may be related to income or capital gains taxes and backup withholding, as with investment gains or income from domestic securities.

Conclusion

Americans can purchase American Depositary Receipts or ADRs to invest in foreign companies. Even though these companies don’t trade on the U.S. stock market, investors can buy them with an ADR as quickly as any domestic stock. Aside from benefiting foreign firms, the arrangement allows them to raise capital from the United States.

It is more expensive to invest in ADRs than in local stocks, but most investors prefer to take the risk to gain the benefits of global diversification and higher dividend yields. It usually far outweighs the costs associated with ADR debt, including fees and taxes.

FAQs

Are ADRs subject to US taxes?

However, prompts from an ADR holding can be subject to backup withholding and US income or capital gains taxes, much as investment gains or income from domestic stocks.

How much are the fees for American Depositary Receipts?

Some banks may require ADR holders to pay recurring services costs, often known as “custody fees,” which are generally charged at $0.01 to $0.03 per share.

Do ADR fees have an annual cost?

‘ADR Pass-Through costs,’ which include custody costs and fees for processing dividends and corporate actions, may be assessed regularly or annually by the institutions issuing ADRs. These charges may raise the price of your investments. Some ADRs may not have much liquidity, impacting bid/ask spreads.

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Picture of Prem Kishan

Prem Kishan

A seasoned Product Manager who thrives on making a meaningful impact within the organization, Prem is deeply passionate about tackling intricate problems using cutting-edge technology and is a specialist in tax content.

Editor

This page is purely informational. Beem does not provide financial, legal or accounting advice. This article has been prepared for informational purposes only. It is not intended to provide financial, legal or accounting advice and should not be relied on for the same. Please consult your own financial, legal and accounting advisors before engaging in any transactions.

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