What is ADR?
ADRs are American Depository Receipts, which are certificates of ownership of ADSs – American Depository Receipts. The term ADRs and ADSs are often used interchangeably. AdSs are shares of a foreign company that are held on deposit by a custodial bank in the US.
ADRs are US dollar denominated shares of equity ownership in non-US companies. On the part of foreign companies, ADRs provide an opportunity for them to raise capital directly in the U.S. securities markets. And for U.S. investors, ADRs provide a convenient way to invest in foreign stocks through their U.S. brokerage, without having to go through foreign stock trading in their country country. There may be fewer obstacles and a lower price than if the investor were to buy the company’s shares directly on .
In order for foreign companies to place their ADRs in the US securities markets, they are also required to comply with Securities and Exchange regulations and reporting, so there is more confidence for US Investors that they are preparing to meet the standards for US companies and there will be the same level of transparency in reporting.
ADRs are marketed in the same way as US stocks, and are listed on the New York Stock Exchange, the American Stock Exchange, or the NASDAQ, or on an over-the-counter market. ADRs are traded in accordance with US market practices, are quoted in US dollars, and dividends are paid in US dollars.
Dividends are taxed at Capital Gains Rates
The Business and Growth Tax Reconciliation Act of 2003 included provisions that reduced the tax rate on certain dividends to a lower rate applied to capital gains. This rate is usually 15%, and 5% for taxpayers in lower brackets. The provision applies to dividends from US domestic corporations and quid foreign corporations (QFCs). Distributions from a foreign corporation will only qualify for these preferential taxes if they are distributed in accordance with US tax rules and the corporation qualifies as a QFC.
What is a foreign corporation?
One of the qualifying tests for QFC is to arrange a dividend on the stock, which is “secured assets easily traded on the market United States”. When ADRs meet these criteria, they would call the securities of a qualified foreign corporation.
The quality of dividends
In order for distributions from foreign corporations to be considered subject to our tax, the underlying payment must be an equity security and not debt. , and a distribution must be made out of the profits and gains. A security is considered equity if it is a common or ordinary share of stock, or if there is a State Securities and Exchange Commission (SEC) filing stating that the security is treated as equity for the US income tax cause Would ADR be worth this experiment?
ADR dividends are simply reported in box 1b of Form 1099-DIV that the manager or broker sends you to the investment account. These are qualified ordinary dividends that are subject to the highest taxes that apply on net capital gains. If the regular tax rate that would otherwise apply to your ordinary income is 25% or higher, the maximum tax rate on qualified dividends is 15%. And if the regular tax rate is less than 25%, the qualified shareholders would be subject to the 5% tax.
Holding period
As in dividends to qualify for special capital gains taxation, there is a test period. For common stock, you must have held it for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first day after the declaration of the dividend on which the buyer will not receive the next dividend payment. In other words, the ex-dividend date is the day on which trading begins without the dividend.
For preferred stock dividends that correspond to a period or total period of more than 366 days, you must own the stock for more than 90 days in the 181-day period that begins 90 days before the ex-terminus date. If the dividend corresponds to a period of 366 days or less, the holding period for common stock must be applied.
In determining whether you meet the test period, you include the time you sold or disposed of the class, or ADR in your holding period, but not the time you acquired. But keeping time is based on the days of the holidays, so you need to consider the number of days in each month that are involved in your time.
Your holding period can be affected if you enter your business, which reduces the risk of loss. You cannot include any days when you have reduced the risk of loss on the investment, for example through short sales. You could not count the days in which;
· You had a put option, were contractually obligated to sell, or had made a short sale of substantially identical stock or securities.
· You have given an option to buy the same substance or securities.
You hedge your loss by holding one or more positions that are substantially similar or related.
If you meet the test holding period, the dividends are qualifying dividends and are taxed at the capital market rate (15% or 5%, depending on the tax bracket). If you do not meet the probationary period, the interest would not call these preferential rates and would be ordinary Income in your regular tax rate
Your Form 1099-DIV may show ordinary dividends in box 1a and dividends in box 1b. If you don’t meet the requirement period, even though the 1099-DIV shows eligible dividends, you won’t be able to purchase lower interest rates, and all dividends will have to report as ordinary taxes. This is a factor to consider when deciding to sell an ADR. Depending on how the market’s ADR is moving, and how you expect it to move, you may want to extend your sale date to meet the tenant’s demand and qualify for a lower tax rate. One simple way to get space is to look at the fact that if you have received a dividend and own an ADR for more than 60 days, you will have a claim period.
Report:
- About – Day Trading – “American Depository Receipts (ADRs)”: daytrading.about.com Bank of New York – Depository Receipts: www.adrbny.com Ernst & Young – Tax preparation – United States Taxation – “IRS Announcements Simplified Information Reporting for Dividends by Foreign Corporations for 2004”: www.ey. com Internal Revenue Service Publication 550 – Investment Income and Expenses: www.irs .gov JPMorgan – < a href="http://http://adr.com/" rel="nofollow">adr.com: www.adr.com
