The reason is that Domain Name System(DNS) used in the Internet recognizes basic ASCII characters only. For the IDN domain to function, every IDN is automatically converted into a format, that is understood by the Domain Name System. This format is called an ACE string and it stands for ASCII Compatible Encoding.
To indicate that the domain name is an IDN, ACE-strings begins with four characters: XN–. Other characters in domain name, indicate which characters in the IDN you entered were non-ASCII characters and what their positions were.
For example, the ACE-string of the domain name JÕULUD.EU is XN–JULUD-DUA.EU.