What is it?

1. What is it? • American Depositary Receipts (ADRs) are receipts issued by a U.S. bank on foreign securities purchased by the bank through a foreign correspondent bank and held in trust for the benefit of the ADR holder. • Introduced as a result of the complexities involved in buying shares in foreign countries • Primarily the difficulties associated with trading at different prices and currency values • The depository bank sets the ratio of U.S. ADRs per home country share. • The price range for the majority of ADRs is between $10 and $100 per share • ADRs can be listed on any of the U.S. exchanges • NYSE, AMEX, NASDAQ, etc.

2. What is it? • The concept of the ADR has been extended to other geographical markets. • Global Depositary Receipts (GDRs) • International Depositary Receipts (IDRs) • European Depositary Receipts (EDRs) • Dividends on the stocks underlying an ADR are received by the depositary bank • The depositary bank turns over the proceeds to the ADR holder. • Net of foreign withholding taxes • In U.S. dollars

3. When is the use of this tool indicated? • ADRs allow investors to buy foreign stocks and diversify internationally without the difficulties and restrictions of direct foreign investments • ADRs internalize the costs of foreign currency exchange for U.S. dollars with every dividend or interest payment • Also eliminate the costs of buying and selling securities in a foreign currency • Many studies indicate that investors can increase overall returns and reduce overall risk by including foreign investments in their portfolios.

4. Advantages & Disadvantages • International diversification can increase average returns for a portfolio while reducing the overall volatility of the portfolio. • It is possible that political or economic turmoil could cause the country of an investor’s foreign security to restrict capital flows. • Receipt of interest, dividends, and, perhaps, principal could be delayed or forfeited altogether.

5. Advantages & Disadvantages • Currency differences can have a major effect on ADR performance. • One could actually lose money on the stock and end up making money because of currency fluctuations, or vice versa. • Financial information on foreign securities is generally less available and less reliable than what Americans have come to expect for domestic securities.

6. Tax Implications • Foreign taxes are generally withheld before interest and dividends are passed through to the ADR holder. • Foreign taxes paid can be offset, to some extent, against federal income taxes. • There is often no capital gain tax imposed by foreign governments • The U.S. government taxes such gains. • Special rules apply to 10% or more ownership of a foreign corporation.

7. Tax Implications • The 15% maximum tax rate for qualified dividends is generally applicable to U.S. individual investors in ADRs issued by entities that satisfy the IRC’s definition of “qualified foreign corporations.” • For those ADRs issued by entities that do not meet the definition, dividends will be taxed at the taxpayer’s tax rate for ordinary income.

8. Tax Implications • Generally, the term “qualified foreign corporation” includes any foreign corporation that • Is eligible for the benefits of a comprehensive income tax treaty with the U.S. • Has issued stock that is readily tradable on an established securities market in the U.S. • The term does not include passive foreign investment companies, foreign investment companies, and foreign personal holding companies.

9. Alternatives • Alternatives to investing in ADRs include: • International or global mutual funds • Passive foreign investment companies • International exchange-traded index funds • Single-country index funds • Investing in multinational corporations listed on the U.S. stock exchanges is another alternative to investing in ADRs.

10. Where can I find out more about it? • Morgan Stanley Capital International Perspective • Wall Street Journal • ADR prices listed • Dessauer’s Investor’s World • Worldwide Investment Notes • www.adr.com