For the first time, the Federal Ministry of Finance has expressed its views on the tax treatment of ADRs on domestic shares in its circular letter dated 24 May 2013 (IV C 1 – S 2204/12/10003). The principles set out in this letter shall be applicable to capital income received after 31 December 2013, whereas the principles for the application and the issue of collective tax certificates (Sammel-Steuerbescheinigungen) shall already be applicable to capital income received as from 1 January 2012.
ADRs are certificates issued by American financial institutions depositing the underlying stocks. ADRs represent a fraction of stock or multiple stocks. They may also represent foreign, i.e. non-US, stocks. Parties involved in an ADR program are the foreign depository bank as owner of the stocks and manager of the ADR program, a domestic custodian bank and the holder of the ADRs.
As a result, the depositary bank receives the dividends and other distributions from the stocks and transfers them, on the basis of its contractual obligation, to the ADR holders.
In accordance with previous practice, the BMF circular letter states first that not the dividend payment to the depositary bank but the transfer to the ADR holder shall be relevant for tax purposes. Therefore, the dividend payment is to be attributed to the ADR holders according to their portion for tax purposes and shall be taxed at their level as capital income pursuant to sec. 20 para. 1 no. 1 sentence 1 German Income Tax Act (Einkommensteuergesetz). The dividend payment made by the domestic custodian bank shall be relevant for the taxation of the ADR holders. If the deposited stocks qualify as such in the meaning of sec. 43 para. 1 no. 1a of the German Income Tax Act, the domestic custodian bank shall withhold taxes from the dividend payment prior to making the payment abroad.
Even if the BMF circular letter explicitly addresses domestic stocks, i.e. stocks issued by German stock corporations, it provides for general rules regarding the qualification of the income of the ADR holder which should also apply for foreign stocks for which ADRs have been issued. It provides, however, specific rules regarding the deduction of withholding taxes.
The BMF circular letter dated 23 June 2011 dealing with exemption applications (Freistellungsaufträge) and offsetting of losses shall apply accordingly to income stemming from ADRs. It provides for income and the withholding taxes thereon in the meaning of Sec. 43 (1) s. 1 No. 1 a EStG being entered separately in the designated row of the withholding tax return regardless of a possible offsetting of losses or unused exemption applications. Offsetting of losses and exemption applications according to Sec. 44 a (10) s. 2 EStG are to be deducted at the Capital Gains Tax Registration from capital gains in the sense of Sec. 43 (1) s. 1 No. 6,7 and 8 to 12.
In addition, the BMF circular letter deals with details of tax certificates for ADRs. The submission of a tax certificate, for example, shall be necessary for the refund of withholding taxes according to Sec. 50d EStG if the deposited underlaying stocks are qualified as such in the meaning of Sec. 43 (1) s. 1 No. 1 a EStG, i.e. stocks in collective or safe custody. The tax certificates are issued by the domestic custodian bank upon request of the domestic or foreign financial institution storing the ADRs for the customers.
The domestic custodian banks may apply for a collective tax certificate (the BMF letter dated 1 March 2012 concerning the application of collective tax certificates according to Sec. 44a (10) s. 4 EStG applies accordingly to ADRs).
The BMF letter shall apply accordingly to EDRs, IDRs and GDRs provided they are structured similar to ADRs.