The IRS recently issued a general legal advice memorandum (GLAM 2023-001) addressing how to source specific payments made by U.S. depository institutions to foreign corporations for the rights to issue sponsored American depository receipts (ADR).
The ADR program is designed to allow foreign corporations access to the U.S. capital markets. Under the program, a U.S. depository institution receives shares in a foreign corporation and issues ADRs that participants can trade or redeem for the underlying shares.
The IRS provided that when payments are made to foreign corporations under the program for expense reimbursement or revenue sharing, the payments represent consideration for the U.S. depository institution’s exclusive right to trade the foreign corporation’s ADR in the U.S. This right constitutes a property right made available by the foreign corporation for use for a limited period of time solely in the U.S., regardless of whether the holders are located inside or outside the U.S.
The GLAM concludes that the sponsored ADR payments, either for reimbursement or revenue sharing, would be U.S.-source fixed or determinable, annual or periodical income, subject to 30% withholding under Section 1442 unless treaty benefits apply and are examples of “other like property” under Section 861(a)(4) that could generate royalties.
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.