Missed Reporting Investment Account: ADRs for US-UK Filers

American and global depositary receipts are taxed in both countries as if you owned the underlying foreign shares. A missed reporting investment account problem arises when dividends, third-country withholding tax, depositary fees or the account itself were left off the US return, the UK return, or both. Each omission is correctable.

Depositary receipts look domestic. They are quoted in dollars, they settle like any US-listed share, and the year-end tax statement presents them in the same columns as a domestic holding. That familiarity is exactly why they generate filing errors for wealthy Americans living in the United Kingdom. Behind the receipt sits a share in a company incorporated in a third country, a withholding tax levied by that country, a fee taken by the depositary before the cash arrives, and two tax authorities that each expect the income to be reported gross. At Jungle Tax we prepare the US and UK returns side by side, and depositary receipts are among the most frequently mis-reported lines we see when a new client's prior-year filings are reviewed.

What is a depositary receipt, and who is treated as owning the shares?

A depositary receipt is a negotiable certificate issued by a depositary institution that holds shares of a foreign company in custody. An American depositary receipt (ADR) is issued in the United States and denominated in dollars. A global depositary receipt (GDR) follows the same model but is typically issued and traded outside the issuer's home market, often in London or continental Europe. Each receipt represents a fixed ratio of underlying shares, which may be a fraction of one share or several shares.

Both tax systems look through the wrapper:

• United States. For federal income tax purposes the holder of a depositary receipt is treated as the owner of the underlying shares. Dividends are dividends from a foreign corporation, the income is foreign-source, and exchanging receipts for the underlying shares is generally not a taxable event.
• United Kingdom. HMRC's published practice is to regard the holder of a depositary receipt as the beneficial owner of the underlying shares. Its Capital Gains Manual at CG50240 confirms that for UK-issued receipts, and that where the law of the overseas territory of issue does not give a conclusive answer the question is decided on UK principles, with the same result. Only where overseas law positively denies the holder beneficial ownership does the analysis change.

The practical consequence is that a UK-resident American has no route to treating a depositary receipt as a US asset producing US income. It is a foreign shareholding on both returns, and it brings a third country's withholding tax with it.

How does the US tax depositary receipt dividends?

Report the gross dividend, not the cash received

The amount that reaches the account has usually been reduced twice: once by the issuer country's withholding tax and once by the depositary's fee. The US return must show the gross dividend before both deductions. A year-end statement from a US custodian will normally do this correctly. A statement from a UK or other non-US custodian frequently will not, and may show only the net sterling credit. Rebuilding the gross figure from the issuer's declared dividend, the receipt ratio and the exchange rate on the payment date is often the first task in any correction.

Do depositary receipt dividends qualify for the lower US rates?

They can, but qualification is not automatic. A dividend from a foreign corporation is a qualified dividend, taxed at the 0%, 15% or 20% long-term capital gain rates, only if several conditions are met:

• the issuer is either eligible for the benefits of a comprehensive US income tax treaty that includes an exchange of information programme, or the receipt is readily tradable on an established US securities market;
• the issuer was not a passive foreign investment company (PFIC) in the year of the dividend or the preceding year; and
• the holder owned the receipt for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date.

Receipts listed on a registered national securities exchange satisfy the readily tradable test. Unsponsored or over-the-counter programmes do not, so qualification then depends entirely on the treaty test and therefore on where the issuer is resident. An issuer in a jurisdiction with no qualifying US treaty, traded only over the counter, pays ordinary dividends taxed at rates up to 37%. Custodian statements make this determination with imperfect data, and we regularly find dividends classified as qualified that should not have been, and the reverse.

Whatever the rate, the dividend is also net investment income. The 3.8% net investment income tax applies above the modified adjusted gross income thresholds of $200,000 for single filers, $250,000 for joint filers and $125,000 for married individuals filing separately, and under the Internal Revenue Code it is not reduced by the foreign tax credit.

Foreign withholding tax and the foreign tax credit

The issuer's home country withholds tax at source. Statutory rates vary widely, from nil in some jurisdictions to 25% or more in others. The US allows a credit for that tax on Form 1116, in the passive category basket, subject to three constraints that are frequently overlooked:

• Only compulsory tax is creditable. If the statutory rate was withheld but a treaty entitled you to a lower rate, the excess is a refundable overpayment to be reclaimed from the source country. It is not a creditable foreign tax.
• A holding period applies. The receipt must have been held for at least 16 days within the 31-day period beginning 15 days before the ex-dividend date. Active trading around dividend dates forfeits the credit.
• The limitation is computed by basket. Where dividends are taxed at the preferential rates, the foreign-source income entering the limitation fraction is scaled down by the rate differential adjustment unless the taxpayer qualifies for and makes the election to skip it. A 15% withholding on a dividend taxed at 15% does not always produce a full credit once expenses are allocated.

The simplified election to claim the credit without Form 1116 is confined to taxpayers whose creditable foreign taxes do not exceed $300 ($600 on a joint return), all of it on passive income reported on a qualified payee statement. Few of our clients fall within it. Unused credits carry back one year and forward ten.

Depositary custody fees

Depositaries charge periodic service fees, commonly a few cents per receipt each year, and usually collect them by deduction from a dividend. On a US custodian's statement the fee appears as a separate adjustment; on a UK statement it is often invisible, netted into the amount credited. For US purposes the fee is an investment expense. Miscellaneous itemised deductions of that kind were suspended from 2018 and the suspension has since been made permanent, so the fee is not deductible and the full gross dividend remains taxable. Netting the fee against the dividend understates income.

PFIC status of the underlying issuer

Because the holder is treated as owning the underlying shares, the PFIC rules apply by reference to the issuer. A foreign corporation is a PFIC if 75% or more of its gross income is passive, or 50% or more of its assets produce passive income. Most operating companies with depositary receipt programmes are not PFICs, but investment holding companies, cash-rich early-stage companies, certain shipping, royalty and natural resource vehicles, and some financial groups can be. Issuers with US-registered programmes usually state their PFIC conclusion in their annual report filed with the US securities regulator; that statement should be read every year because status can change.

Where the issuer is a PFIC:

• dividends are never qualified dividends;
• without an election, excess distributions and all gains on disposal are allocated across the holding period, taxed at the highest ordinary rate for each prior year, and subjected to an interest charge;
• a mark-to-market election is generally available where the receipt is regularly traded on a qualified exchange, and a qualified electing fund election is available only if the issuer supplies an annual information statement; and
• Form 8621 is required for each PFIC in any year with a distribution, a disposal or an election in force. A purely informational annual filing is excused only where the aggregate value of all PFIC stock is $25,000 or less at year end ($50,000 on a joint return) and no excess distribution or gain arose.

Are depositary receipts reportable on FBAR and Form 8938?

The answer turns on where the receipt is held, not on what it is. This is the point most generalist guidance gets wrong, usually by stating flatly that ADRs are never reportable. That statement is true only for the holder who keeps them with a US custodian. A UK-resident American very often does not.

How the receipt is held	FBAR (FinCEN Form 114)	Form 8938
In an account with a US financial institution	Not reportable. The account is not a foreign financial account.	Not reportable. Assets held in an account at a US institution are outside the definition.
In an account with a UK or other non-US financial institution	The account is reportable, at its maximum value for the year, once all foreign accounts together exceed $10,000.	The account is reportable as a whole once the filing threshold is met. The receipts inside it are not listed separately.
At a US branch of a foreign financial institution	Not reportable.	Not reportable.
Registered directly in the holder's name, outside any account	Not reportable. There is no account.	Foreign stock held outside an account is a specified foreign financial asset. Whether a directly registered receipt is caught is not settled by published guidance; disclosure is the prudent course.

The IRS sets out the underlying rules in its comparison of Form 8938 and FBAR requirements. For a taxpayer living outside the United States, Form 8938 is required when specified foreign financial assets exceed $200,000 on the last day of the tax year or $300,000 at any time during it; for joint filers the figures are $400,000 and $600,000. An interest in a PFIC already reported on Form 8621 is not described again on Form 8938, but it is counted towards the threshold and the number of Forms 8621 filed is disclosed.

The typical failure is therefore not the receipt but the account. A general investment account opened with a UK wealth manager, holding a handful of GDRs and London-traded ADRs among other positions, is a foreign financial account in every respect. If it was left off the FBAR because its holdings looked American, six years of reports may need to be filed.

How does the UK tax depositary receipts?

Foreign dividend income

For a UK-resident individual, dividends on receipts over a non-UK company are foreign dividends, reported on the foreign pages of the Self Assessment return at their gross sterling value on the date they arose. After the £500 dividend allowance, the dividend rates for 2025-26 are 8.75%, 33.75% and 39.35%. From 6 April 2026 the ordinary and upper rates rise by two percentage points to 10.75% and 35.75%, with the additional rate unchanged. Depositary fees are not deductible against dividend income for an individual investor.

Two UK-specific points deserve attention:

• Receipts over UK companies. A UK-resident American who holds an ADR over a UK-incorporated company is receiving a UK dividend. There is no UK withholding tax, the income belongs on the main return rather than the foreign pages, and no foreign tax credit relief is in point. The US, by contrast, still treats it as foreign-source income.
• The four-year foreign income and gains regime. Since 6 April 2025, individuals in their first four years of UK residence after at least ten consecutive years of non-residence can claim relief on foreign income and gains. Dividends on receipts over non-UK companies can fall within it, but the relief must be claimed and the income quantified on the return. It is not a licence to omit the figures, and it does nothing to the US liability.

Third-country withholding tax: relief capped at the treaty rate

The UK gives foreign tax credit relief for the tax withheld by the issuer's country, but only up to the rate permitted by the UK's own double taxation agreement with that country, and never more than the UK tax on the same income. HMRC's guidance on foreign income taxed twice is explicit that relief is restricted where an agreement sets a smaller amount. If the source country withheld 25% and the UK treaty rate is 15%, the UK credits 15%. The remaining 10% must be reclaimed from the source country's tax authority.

The US reaches the same conclusion by a different route, because tax withheld above the treaty entitlement is not a compulsory payment. The cross-border difficulty is that the two countries may be looking at different treaties. The UK tests the agreement between the UK and the issuer's country. The US tests the agreement between the US and the issuer's country, and a US citizen who is resident in the UK is not always treated as a US resident under that agreement. The correct reclaim route, and therefore the creditable amount in each country, has to be worked out issuer by issuer.

Capital gains tax and share pooling

Disposals of depositary receipts are chargeable to capital gains tax at 18% or 24% for disposals on or after 30 October 2024, after the £3,000 annual exempt amount. Three features cause mismatches against the US return:

• Pooling. The UK matches disposals first with acquisitions on the same day, then with acquisitions in the following 30 days, and then with the section 104 pool at average cost. HMRC treats shares held directly and the same shares held through receipts as a single holding for identification. The US uses first-in-first-out or specific identification of lots. The gain on an identical sale is routinely different in the two computations.
• Currency. The UK computes the gain in sterling, converting cost and proceeds at the rates on their respective dates. The US computes in dollars. A dollar gain can be a sterling loss.
• Conversions. Surrendering a receipt for the underlying shares, or depositing shares for a receipt, is not a disposal where the holder is beneficial owner throughout. Custodian reports sometimes show it as a sale and repurchase.

Timing compounds this. The US year is the calendar year and the UK year runs to 5 April, so a gain realised in February falls in one US year and a UK year that has not yet closed. Where UK tax on the gain is to be credited in the US, the accrual or paid basis election on Form 1116 determines which US year receives it.

Stamp duty reserve tax on issue

Historically the UK imposed a 1.5% stamp duty reserve tax charge when UK shares were issued or transferred into a depositary receipt system, a cost usually passed to the investor. HMRC's Stamp Taxes on Shares Manual records that the charge on issues, and on certain transfers connected with capital raising, was removed from UK legislation with effect from 1 January 2024. Transfers of existing UK shares into a depositary system outside those exemptions can still bear the 1.5% charge. Where it has been borne, it forms part of acquisition cost for UK capital gains purposes and of basis for US purposes. Purchases of receipts over non-UK companies carry no UK stamp duty reserve tax.

US versus UK treatment at a glance

Issue	United States (IRS)	United Kingdom (HMRC)
Who owns the shares	Receipt holder treated as owner of underlying shares	Receipt holder generally treated as beneficial owner
Character of dividend	Foreign-source dividend; qualified only if issuer and holding period tests are met	Foreign dividend (UK dividend if issuer is a UK company)
Top rate on dividends	20% qualified or 37% ordinary, plus 3.8% net investment income tax	39.35%
Amount reported	Gross, before withholding and depositary fee	Gross, before withholding and depositary fee
Third-country withholding	Credit on Form 1116, limited to tax legally owed under the applicable treaty	Foreign tax credit relief, limited to the UK treaty rate
Depositary fee	Not deductible	Not deductible against dividend income
Passive foreign company rules	PFIC regime and Form 8621 by reference to the issuer	No equivalent for an ordinary trading company
Gain on sale	Dollar computation; FIFO or specific lots; 0%, 15% or 20% if held over one year	Sterling computation; same-day, 30-day and pooled cost; 18% or 24%
Tax year	Calendar year	6 April to 5 April
Asset disclosure	FBAR and Form 8938 where held with a non-US institution	No separate asset report; income and gains on the return

How do the three layers of tax fit together?

For a UK-resident American, a depositary receipt dividend is taxed in sequence. The issuer's country takes withholding tax first. The UK, as country of residence, taxes the gross dividend and credits the source country's tax up to its treaty rate. The US, taxing on citizenship, then taxes the same gross dividend and credits both the source country's tax and the UK tax, within the passive basket limitation.

Consider a worked illustration with rounded figures. An additional-rate UK taxpayer receives a gross dividend equivalent to $10,000 on a listed receipt. The issuer's country withholds 15%, which matches both the UK and US treaty rates.

1. Source country: $1,500 withheld. The depositary deducts a $20 fee. Cash received is $8,480.
2. UK: tax at 39.35% on $10,000 is $3,935, less foreign tax credit relief of $1,500. UK tax payable is $2,435.
3. US: a qualified dividend at 20% produces $2,000 of regular tax. Foreign taxes of $3,935 are available in the passive basket, so regular tax is fully covered and excess credits arise. Net investment income tax of $380 remains payable because the Code does not allow the credit against it.

Now vary one fact. If the source country had withheld its statutory 25% because no treaty documentation was on file, the extra $1,000 is creditable in neither country. It sits with the source country's tax authority until reclaimed, and reclaim windows are finite. Among wealthy clients with concentrated positions in a single foreign issuer, this is often the largest sum recovered in a review of prior years.

What typically goes wrong?

• Net dividends reported. Income is taken from cash credited, understating the dividend and omitting the foreign tax altogether, on one or both returns.
• Foreign tax credit never claimed. The withholding line on the custodian statement is ignored, so the same income bears source country tax, UK tax and US tax without relief.
• Over-claimed credit. The full statutory withholding is credited where a treaty rate was available.
• Dividend treated as US-source. A dollar-denominated receipt on a US statement is assumed to be domestic, distorting the Form 1116 limitation and, on the UK return, the treaty relief claimed.
• Wrong dividend character. Over-the-counter or PFIC issuers treated as paying qualified dividends.
• Form 8621 not filed. The issuer's PFIC statement was never checked.
• Account omitted from FBAR and Form 8938. A UK-custodied account was assumed to hold only US securities.
• UK gains computed on US figures. Dollar lot-based gains carried onto the UK return without pooling or sterling conversion.
• Fees deducted. Depositary charges netted against income.

How are omitted income or credits corrected on the US return?

The route depends on what was missed and whether tax was underpaid.

Returns were filed but depositary receipt items were wrong

Where the only errors are income, character or credits and no information return was missed, amended returns on Form 1040-X with corrected Forms 1116 are usually sufficient. Refund claims are generally limited to three years from the original filing date or two years from payment, but a claim attributable to foreign taxes paid or accrued may be made within ten years of the due date of the return for the year concerned. Unclaimed credits for third-country withholding going back a decade can therefore still have value.

Tax was underpaid and FBAR, Form 8938 or Form 8621 were also missed

This is the profile the IRS Streamlined Filing Compliance Procedures were designed for. Under the Streamlined Foreign Offshore Procedures, a taxpayer who meets the non-residency test and whose failures were non-willful files or amends the most recent three years of returns with all required information returns, files six years of FBARs, pays the tax and interest, and submits a signed certification on Form 14653 explaining the conduct. No failure-to-file, accuracy-related, information return or FBAR penalty is imposed. Our IRS streamlined filing team prepares these submissions in full, including the narrative statement.

No tax was underpaid but information returns were missed

Where income was fully reported and only the FBAR was omitted, the delinquent FBAR submission procedures allow late reports to be filed with an explanatory statement, and the IRS has indicated it will not impose a penalty where income was properly reported and the taxpayer has not already been contacted. A parallel procedure exists for other delinquent international information returns, with reasonable cause statements. Outside these routes the exposure is real: $10,000 for each failure to file Form 8938, and an inflation-adjusted non-willful FBAR penalty in excess of $16,000 per late report. Our FBAR penalty calculator illustrates the range.

One further point is easily missed. Where a required Form 8621 or Form 8938 was not filed, the assessment period for the return can remain open until three years after the form is eventually furnished. Filing the missing form starts the clock; leaving it unfiled does not make the year safe.

How are omitted income or credits corrected on the UK return?

• Within the amendment window. A Self Assessment return can be amended up to 12 months after the 31 January filing deadline. Omitted foreign dividends, gains and foreign tax credit relief are simply added.
• Overpaid UK tax in earlier years. A claim for foreign tax credit relief must generally be made within four years of the end of the tax year, and overpayment relief runs to the same limit.
• Underpaid UK tax in earlier years. Disclosure is made through HMRC's Worldwide Disclosure Facility, which covers offshore income and gains. HMRC can assess four years back where reasonable care was taken, six years for carelessness, twelve years for offshore matters and twenty years for deliberate conduct. Penalties for offshore non-compliance are scaled by behaviour and by the transparency category of the territory involved, and unprompted disclosure reduces them materially.

The UK and US corrections must be prepared together. A change to UK tax changes the foreign tax credit available in the US, and where foreign taxes claimed as a credit are later refunded or increased, the US return for the affected year has to be redetermined and the IRS notified. Sequencing matters: we normally settle the source-country reclaim position first, then the UK computation, then the US amendment, so that each return is filed once. Our UK tax and US tax preparers work from a single reconciled ledger of each dividend and disposal for that reason.

What records should you assemble before a review?

1. Annual and transaction statements for every account that held depositary receipts, in both countries, for at least six years.
2. Dividend vouchers or statements showing gross dividend, withholding tax, depositary fee and payment date for each distribution.
3. Acquisition records, including receipts acquired by conversion, corporate action or award, with dates and consideration.
4. Any treaty relief forms or residence certificates previously lodged with a custodian, and any reclaims submitted to a source country.
5. The issuer's annual report disclosure on PFIC status for each year held.
6. Filed US returns with Forms 1116, 8938 and 8621, FBAR confirmations, and filed UK returns with foreign and capital gains pages.

With these, each dividend and disposal can be traced through three tax systems and both returns rebuilt on a consistent footing.

Speak to a cross-border preparer in confidence

Depositary receipts are rarely the reason a client first contacts us, but they are frequently where the errors are found. If dividends, withholding tax credits, PFIC forms or a UK-custodied account have been omitted from past filings, the position can almost always be regularised without penalty when it is addressed before either authority raises it. Jungle Tax prepares US and UK returns for high-net-worth individuals with holdings on both sides of the Atlantic, and we handle prior-year corrections and streamlined submissions from start to finish. To arrange a confidential consultation, contact our cross-border team.