February 27, 2023

A Wrench in the Works: The US IRS Asserts That ADR Expense Reimbursements Are Subject to US Tax Withholding


American Depositary Receipts (“ADRs”)1 create substantial liquidity advantages for non-US issuers of publicly traded stock. Under an ADR program, shares of stock of the issuer are wrapped in relatively transparent, trust-like holding cells.2 Each ADR trades on a US stock exchange in dollars, dividends are converted into dollars when paid with respect to the ADRs, and ADR holders can exercise voting rights over the underlying shares. ADR programs are administered by US financial institutions or US branches of non-US financial institutions.

The ADR administrators can earn substantial fees for ADR program administration. Accordingly, the administrators are incentivized to find non-US companies to undertake ADR programs. Many administrators induce non-US corporations to set up ADR programs by agreeing to reimburse third-party expenses incurred by the issuer in connection with the ADR program or to revenue-share ADR fees with the issuer of the underlying stock. As far as the author knows, ADR administrators have not been withholding US tax from these reimbursement or revenue sharing payments. The ADR program administrators likely had determined that no US tax withholding on such payments should be required because the source of the payments should be determined either with respect to (i) the place that the original expenses had been incurred or (ii) since the expense related to the issuance of stock, the jurisdiction in which the issuer was formed (which would always be outside of the United States).

In Internal Revenue Service (“IRS”) Advice Memorandum 2023-001, released on February 24, 2023, the IRS concluded that unless an applicable income tax treaty provides a basis for a withholding tax exemption, both fee reimbursement and revenue sharing payments are subject to 30% US tax withholding. The IRS reached this conclusion as follows. It first noted that “ADR program payments to the issuer are consideration for the [Depositary Institution’s] exclusive right for a limited period of time to manage the trading of the issuer’s ADRs in the U.S. capital markets.” From this it concluded that the payments were analogous to royalty and franchise payments, both categories of income potentially subject to US tax withholding. It then concluded that the payments are US-source payments because the ADR programs are platforms for trading stocks and securities within the United States. Accordingly, according to AM 2023-001, both the reimbursement and revenue sharing payments should be treated as US-source FDAP (“fixed determinable and periodic”) income.

At the end of AM 2023-001 (in footnote 32, more precisely), the IRS noted one avenue to avoid withholding. If the issuer of the stock or security underlying the ADR is eligible to claim the benefits of an income tax treaty with a beneficial “Other Income” provision, no withholding is required on either ADR expense reimbursement or revenue sharing payments. A beneficial Other Income provision is one that states that income not specifically addressed in another provision of the treaty may only be taxed in the payee’s country of residence. It’s worth noting that some treaties have unfavorable Other Income provisions. An unfavorable Other Income provision states that income earned in the US by a person resident in the other treaty jurisdiction that is not specifically addressed in the treaty may be taxed by the United States.

Suffice it to say that financial institutions participating in ADR programs should review their US withholding tax obligations in light of the conclusion in AM 2023-001. But the theory underlying the holding of AM 2023-001 could create withholding tax obligations in many other cross-border expense reimbursement arrangements. US companies (and US branches of non-US companies) should review their reimbursement policies in light of AM 2023-001 to determine their potential US withholding tax exposure.


Mark Leeds (mleeds@mayerbrown.com; (212) 506-2499) is a tax partner with the New York office of Mayer Brown. Mark’s professional practice focuses on domestic and cross-border taxation of financial products and strategies.



1 ADRs are interchangeably referred to as American Depositary Shares (“ADSs”).

2 See G.C.M. 33024 (June 8, 1965) (Holders of ADRs over shares of a Mexican corporation “should be regarded as owners of the underlying stock for foreign tax credit purposes.”).

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