Tax consequences of exchanging ADR certificates for the underlying shares

Introduction

Recently, we published a newsletter concerning the Danish tax treatment of ADRs based on two binding rulings from the Danish Tax Council: New rulings on the Danish tax treatment of American Depositary Receipts (ADR).

In a new binding ruling, the Danish Tax Council has been asked to consider whether the exchange of ADR certificates for the underlying shares is to be considered a disposal for tax purposes for the ADR holder or whether the exchange has no tax consequences. 

The case

A Danish taxpayer had in October 2021 exchanged his ADR certificates for the underlying shares representing the ADR certificates. The company in which the taxpayer had ADR certificates (referred to as "X-company") was listed on a stock exchange in a non-EU member state.

Further, X-company's shares were listed on an US stock exchange through an ADR programme. As part of the pro-gramme, X-company had entered into an agreement with a custodian bank for the establishment of an ADR programme under which the ordinary listed shares in X-company could be deposited with the custodian bank subject to the issuance of ADRs that could be traded on the US stock exchange. One ADR corresponded to eight ordinary listed shares.

The Danish taxpayer had requested the binding ruling to obtain certainty of the Danish tax implications of his exchange of ADRs for the underlying shares represented by the ADRs. 

Under Danish tax law, an exchange of shares is generally seen as a taxable disposal. The question to be addressed by the Danish Tax Council was whether this was also the case when exchanging ADR certificates for the underlying shares. 

The decision of the Danish Tax Council

The Danish Tax Council stated that to determine the tax implications of exchanging ADR certificates for the underlying shares, a qualification of the ADR certificates had to be made.

It was the opinion of the Danish Tax Council that, generally, it is for Danish tax purposes the custodian bank that should be considered the shareholder of the underlying shares in ADR programmes if the bank holds the administrative rights. However, if the custodian bank has completely waived actual influence and control over the underlying shares via the ADR programme, the holder of the ADR certificates should be considered the shareholder for tax purposes. 

With reference to the principles laid down in the two earlier rulings (as referred to above), the Danish Tax Council con-cluded that the holder of the ADR certificates was the shareholder in X-company for tax purposes; hence the Danish taxpayer had exchanged ADR certificates that were considered proof of ownership of the ordinary shares in X-company for the actual ordinary shares in X-company.

As a consequence hereof, the Danish Tax Council concluded that the exchange of ADR certificates for the underlying shares in X-company was not a disposal for tax purposes. The conclusion was based on:

• The deposit agreement entitled the ADR holder to receive the underlying share(s) represented by the ADR certificate,
• The exchange did not change the rights of the taxpayer,
• The exchange did not shift the rights among the shareholders,
• Finally, the exchange caused no change in the ownership of the underlying shares.

Since there was no disposal for tax purposes, the exchanged ordinary shares were to be considered acquired at the time of the acquisition of the ADR certificates and for the purchase price paid for the ADR certificates.

Kromann Reumert's tax team is available if you have any questions in relation to the binding ruling or need any other assistance or advice.