What is an ADR?
An ADR is a certificate issued by a US depositary bank. The bank buys shares in the foreign company listed on a foreign share market and repackages them to list on the US share markets as ADRs.
ADRs can be sponsored or unsponsored – essentially by agreement with the foreign company (sponsored) or not (unsponsored). Through Hatch, you can get access to sponsored ADRs.
You will pay custodial fees on ADRs
The depositary banks that provide custodial services for ADRs charge fees to do so. The fees cover the costs of managing all registration, compliance and record-keeping services associated with listing foreign shares as ADRs. The fees are charged to DriveWealth, our US broker, and ‘passed-through’ to you by deducting the money dividend payments, or if a non-dividend-paying share, from your Hatch account balance post-trade. Custodial fees for ADRs will vary – they’re usually charged annually and are usually only a few cents per ADR.
What you should do: Find the custodian fee for an ADR
The fees generally range from $0.01 - $0.05 per ADR, per year, but it can vary. You can find the exact fees on the SEC’s website by searching for a company and viewing its F-6 registration statement.
What are the tax implications of ADRs?
You may pay more tax
There is no ‘one-size-fits-all’ answer to how you will be taxed on ADRs in NZ, and remember, we don’t offer any tax advice. If you have a professional tax advisor or accountant, they will give you all the information you need. If you don’t have one, we recommend you think about it. At a high level, if you invest in ADRs, you still:
Tax on ADR dividends
Dividends on ADRs are taxed in the much the same way as they are on your US shares: withholding tax is still deducted from the dividends before they hit your Hatch account (so you don’t need to do anything to fulfil your overseas tax obligations for your investments through Hatch). However, because the company is not based in the US, the withholding tax deducted could vary from ADR to ADR.
A high-level picture of how ADR dividends are taxed is:
The company deducts withholding tax from the gross dividend at the rate of the country they are in. Note: It may be substantially higher or lower than the 15% US withholding tax rate on US-based dividends so it makes sense to look at withholding tax rates that may apply for the countries of the companies you are investing in.
They pay the net dividend out in pounds, euros, yen or whatever the currency is. They pay this to the depositary bank that custodies the ADR.
The bank exchanges the money into USD and pays it to your Hatch account via our US broker. The exchange rate can impact the amount you receive in USD.
When tax time comes in NZ, you may need to include your ADR dividends in your tax return.
The NZ tax rules for investments in ADRs are similar to those for US shares - meaning if you have:
Under $50k NZD invested overseas, the tax credit you can claim in NZ on ADR dividends is likely to be limited to 15%. For example, if the withholding tax you’ve already paid is over 30% (as it is in a few countries), you may still only be able to claim a tax credit for 15%.
Over $50k NZD invested overseas, taxable income on ADRs is generally calculated on the same basis as US-listed shares, but that each ADR should be assessed on its own merits.
Tax when selling ADR shares
In some circumstances, you may need to pay tax when you sell your shares. You can find out more here.
ADRs are impacted by exchange rates
Because of the way that ADRs are structured, the price and dividends are impacted by the foreign currency-to-US dollar exchange rate. For example, if the local price of the foreign share does not change, but the exchange rate versus the US dollar declined by half, the US-listed ADR price would also reduce by half. The inverse is true as well: any gain in the exchange rate would mean an increase in the US-listed ADR price.
A good tax advisor will help you understand exactly how the tax scenario will play out for a particular ADR, or your overall investment strategy.