If you invest in foreign stocks through your broker (like Interactive Brokers or Degiro), you may have already come across securities whose name ends with "ADR". Although they look like regular stocks, how they work and how they’re taxed have important specificities you need to know.
An ADR (American Depositary Receipt) is a negotiable certificate issued by an American bank. This certificate represents one or several shares of a non-American company (European, Asian, etc.).
Why does this exist?
ADRs allow foreign companies to be listed on American exchanges (NYSE or NASDAQ) without having to go through all the heavy administrative burdens of a traditional IPO in the United States. For you as an investor, this lets you buy companies like ASML, Alibaba or TotalEnergies directly in dollars on the US market.
It’s important to note that an ADR doesn’t always correspond to a whole share. There is a conversion ratio.
Example: One ADR can represent 10 actual shares of the company, or conversely, it might take 5 ADRs to own the equivalent of a single share.
Consequence: The price of the ADR you see on your trading screen is therefore not necessarily the price of the share on its home market.
This is the point that often surprises investors. Since a U.S. bank acts as an intermediary to "hold" the real shares and issue the certificates, it gets paid for this service.
Custody fees: Fees (usually between 0.01 $and 0.05$ per share) are charged periodically.
How are they paid? Either they’re deducted directly from your dividends, or they’re taken from the available cash in your brokerage account by your broker.
This is where it gets tricky for your tax return.
Even if you buy the ADR in the United States in dollars, the tax applied to the dividend is usually that of the country of origin of the company, not that of the United States.
Example: If you buy the ADR of the Japanese company Toyota, it’s the tax treaty between France and Japan that applies, even if the stock is listed in New York.
The trap: Your broker might sometimes mistakenly apply the U.S. withholding tax (15%) on top of the withholding tax of the country of origin.
When filing your tax return (form 2047), you have to identify the real source of the income.
Check the country of origin of the company behind the ADR.
Declare the gross amount received before withholding tax in the country of origin.
Calculate the tax credit corresponding to the tax treaty between France and that country of origin (and not the USA).
Good to know: ADRs are often the only simple way to invest in hard-to-access markets (like some Chinese or Brazilian stocks).
