An ADR is a structure for U.S. investors to invest in a foreign company’s stock - an ADR trades on U.S. exchanges the same as any other stock.
Functionally, ADRs are created by a depositary bank acquiring a large number of shares in the foreign company, and then offering them for sale in the U.S. through an ADR certificate, which may represent a single share or multiple shares of the foreign company’s stock. Examples of these instruments include Nokia (NYSE: NOK) and InBev (NYSE: BUD). ADRs trade just like any other equity on the DriveWealth platform: the market hours are the same, they are fractional, and market makers help ensure liquidity for shareholders.
The depositary bank performs a number of functions to facilitate ownership of these assets, including translating investor materials to English, and converting dividends to USD. The depositary bank normally charges shareholders fees to cover the cost of these services, which are typically in the range of $0.02–$0.05 per share per year. These fees can be unexpected if investors are not experienced with investing in ADRs, as they can be charged directly against a customer account if a customer owns the ADR on the fee record date, disconnected from any purchase or sale. This means that customers looking to invest in ADRs should maintain a positive cash balance that can be debited when these fees occur. Often, depositary banks will simply deduct their annual fee from a dividend payout so there is no client impact, but this is not always the case.
Some ADR investors may be entitled to preferential tax treatment, but this can require additional work. For example, the Belgium/US tax treaty rate for US residents is 15%, as of 2020. However, the depositary bank does not know the residency of their Receipt shareholders, and so will withhold from all dividends at the maximum withholding rate of 30%, and remit those funds to the Belgian tax authority. This means a U.S. person has doubly overpaid any foreign taxes due for owning shares in Belgian companies. The tax reclamation process, often not taken advantage of by retail customers, differs for every country and can necessitate filing an overseas tax return.