Breaking News: The CTA has been ruled as unconstitutional by Federal District Court [March 1, 2024].

The courts decision will most likely be appealed, so we will all need to watch this space!

Contents

Overview of the U.S. Corporate Transparency Act

When to Report?

Who MUST* Report?

The 24 Exemption Categories

Non-Registered Foreign Companies are Exempt by Definition

What MUST be Reported?

What are the Penalties for Not Reporting?

Overview of the U.S. Corporate Transparency Act

The U.S. Federal Corporate Transparency Act (CTA) introduces major changes to transparency requirements of all U.S. local & foreign registered corporations, LLCs, or similar entities (with 23 enumerated exceptions + 1 exception by definition).

The objective of the new legislation is to stop the plethora of anonymous shell companies, limited liability companies, etc. from hiding the identities of their owners from the U.S. government and law enforcement.

The U.S. Government are making it mandatory to answer to the question ➲ Who is the BOSS?

Starting from 1 January 2024 (the Effective Date), reporting of identity and beneficial ownership details will be required to be made to the Beneficial Ownership Secure System "BOSS" (the confidential & secure online reporting system developed by the U.S. Treasury’s Financial Crimes Enforcement Network "FinCEN").

The "BOSS' central database will only be available to law enforcement agencies (but not the public) in the following limited circumstances:

1️⃣ A request from certain federal or state agencies engaged in national security, intelligence or law enforcement activity;

2️⃣ Certain types of requests from a federal agency on behalf of foreign authorities;

3️⃣ A request by a financial institution “subject to customer due diligence requirements”; or

4️⃣ A request by a federal regulator.

The new registry will collect the names, dates of birth, addresses, and identification documents of individuals who:

⚖️ Own at least a 25% equity stake in the entity; or

⚖️ Exercise "Substantial Control" over the entity.

Mandatory reporting of this information will more directly enable specific individuals to be made responsible for the entity’s conduct.

When to Report?

Reporting Companies already in existence as of 1 January 2024 MUST submit their initial beneficial ownership reports to FinCEN's Beneficial Ownership Secure System or "BOSS" by January 1, 2025 (that is, within 1 year of the Effective Date).

Reporting Companies that are formed or registered to do business ON or AFTER January 1, 2024 MUST submit their initial beneficial ownership reports within 30 days of such formation or registration.

Any changes to previously submitted reports (including with respect to beneficial ownership or exemption status) MUST also be reported on an amended filing within 30 days.

Who Must* Report

Definition of “Reporting Company”

The definition of what constitutes a “Reporting Company” is broad and includes any:

⚖️ Corporation;

⚖️ Limited liability company; or

⚖️ Other similar entity created by the filing of a document with the Secretary of State or similar office of any U.S. State or Territory; or

⚖️ Formed under the laws of a foreign country AND registered to do business in the United States.

Effectively, this means that all such entities will be subject to these requirements, UNLESS they fall into one of following 24 exemption categories.

The 24 Exemption Categories

The 23 Exemption Categories ➲ Enumerated by the Final Rule.

The Final Rule is a policy document published by FinCEN providing guidance for compliance with the CTA which lists the following categories of legal entities that are exempt from the reporting requirement.

1 Securities reporting issuer

2 Governmental authority

3 Bank

4 Credit union

5 Depository institution holding company

6 Money services business

7 Broker or dealer in securities

8 Securities exchange or clearing agency

9 Other Exchange Act registered entity

10 Investment company or investment adviser

11 Venture capital fund adviser

12 Insurance company

13 State-licensed insurance producer

14 Commodity Exchange Act registered entity

15 Accounting firm

16 Public utility

17 Financial market utility

18 Pooled investment vehicle

19 Tax-exempt entity

20 Entity assisting a tax-exempt entity

21 Large operating company* defined as any entity that:

1️⃣ Employs more than 20 employees on a full-time basis in the United States;

2️⃣ Had at least $5 million in gross receipts or aggregate sales in the previous year, as demonstrated on its tax returns; and

3️⃣ Has an operating presence at a physical office within the United States.

* Consequently, the primary burden of compliance with the Corporate Transparency Act will fall on small and medium-sized businesses that do not meet these thresholds.

22 Subsidiary of certain exempt entities

23 Inactive entity

The 24th Exemption ➲ Non-Registered Foreign Companies are Exempt by Definition

Foreign companies that do not need to formally register to do business in the United States— are exempt by definition from compliance with the CTA.

When is a Foreign company required to formally register to do business in the United States?

A Foreign Corporation may establish (or be deemed to have established) a branch within the US to conduct its business activities even though most foreign corporations choose to form subsidiary companies for tax and nontax reasons.

Most countries (Including the U.S) have the ability to subject Foreign Corporations to domestic taxation if they:

✅ Form a branch;

✅ Open an office;

✅ Employ staff;

✅ Maintain inventory or fixed assets; or

✅ Otherwise conduct business activities in the U.S.

The U.S. Federal & State taxing authorities have the power to assess the Foreign Corporation as if it has a deemed permanent establishment, which would require the Foreign Corporation to both register and comply with the CTA.

⚖️ If a Foreign Corporation has “effectively connected” income, then the Foreign Corporation will be subject to US tax on such income the same way as a US domestic corporation.

UNLESS an Applicable Tax Treaty Provides Otherwise

If 25% or more of a foreign corporation’s gross income is deemed effectively connected to a US source, then:

⚖️ Any dividends paid by the foreign corporation to a non-US resident will be subject to US Withholding Tax; and

⚖️ U.S. tax law also imposes a 30% branch profits tax, in addition to U.S. corporate-level income taxes, on a foreign corporation’s U.S. branch’s earnings and profits for the year.

Further Reading: FAQ ➲ When do Foreign Corporations need to file IRS Form SS-4 Application for Employer Identification Number (EIN)?

What MUST be Reported?

Each Reporting Company MUST file a report to BOSS disclosing each Beneficial Owner’s:

✅ Name;

✅ Date of birth;

✅ Residential or business street address; and

✅ Unique identifying number from an identification document.

Who Qualifies as a "Beneficial Owner"?

Any individual who:

⚖️ Directly or indirectly, owns or controls 25% or more of the ownership interest in the entity (that is, "Ownership Control"); or

⚖️ Exercises “Substantial Control” over the entity.

The Final Rule expands the definition of “Ownership Control” substantially beyond FinCEN’s 2016 customer due diligence rule.

The Final Rule adds a catch-all provision to capture any:

⚖️ Instrument;

⚖️ Contract;

⚖️ Arrangement;

⚖️ Understanding;

⚖️ Relationship; or

⚖️ Other mechanism used to establish ownership”.

In addition to equity, stock or similar instruments, this broad definition of ownership interest includes:

⚖️ Capital or profit interests;

⚖️ Convertible interests; and

⚖️ Puts, calls, straddles; or

⚖️ Other similar options.

An individual may be deemed to have direct or indirect ownership of a Reporting Company through any contract, arrangement, understanding, relationship, or otherwise, including through:

⚖️ Joint ownership with one or more other persons of an undivided interest in such ownership interest;

⚖️ Another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;

⚖️ With regard to a trust, its status:

(1) As a trustee with the authority to dispose of trust assets;

(2) As a beneficiary who is the sole permissible recipient of income and principal from the trust, or has a right to demand a distribution of or withdraw substantially all of the assets from the trust; or

(3) As a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or

⚖️ Ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the Reporting Company.

Substantial Control

The Final Rule adopts a broad definition of “Substantial Control”, thereby significantly expanding the scope of the beneficial ownership concept.

Under the Final Rule, an individual will be deemed to have Substantial Ccontrol

If the individual:

⚖️ Serves as a "Senior Officer" of the Reporting Company:

Senior Officer is defined as “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function”;

⚖️ Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

⚖️ Directs, determines, or has substantial influence over important decisions made by the Reporting Company, including decisions regarding:

1️⃣ The nature, scope, and attributes of the business;

2️⃣ The reorganization, dissolution, or merger of the Reporting Company;

3️⃣ Major expenditures or investments, issuances of any equity, or incurrence of significant debt;

4️⃣ The selection or termination of business lines or ventures;

5️⃣ Compensation schemes and incentive programs for senior officers;

6️⃣ The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; or

7️⃣ Amendments to any governance documents; or

⚖️ Has any other form of Substantial Control over the Reporting Company.

The Final Rule also reduces the reporting burden for a Reporting Company’s “Company Applicants” (the individuals who signed the formation document on the Reporting Company's behalf).

Reporting Companies in existence prior to 1 January 2024 (the Effective Date) will no longer be required to provide any information concerning Company Applicants, and Reporting Companies formed after the Effective Date will not need to make updates to company applicant information.

Penalties for Non-Compliance

The CTA establishes civil and criminal penalties for individuals who:

⚖️ “Willfully provide, or attempt to provide, false or fraudulent beneficial ownership information”; or who

⚖️ “Willfully fail to report complete or updated beneficial ownership information”.

Willful failures to report complete or updated beneficial ownership information are punishable by civil penalties of up to $500 per day that each violation continues, and in certain cases criminal penalties of up to $10,000, two years’ imprisonment, or both.

Accordingly, if your legal entity may be (or may be deemed to be) a Reporting Company within the scope of the CTA you should consider whether there is any doubt, and contact out legal team to obtain legal advice if you are unsure regarding your reporting obligations.

Further Reading: 

‍FinCEN: Beneficial Ownership Information Reporting Rule Fact Sheet

FinCEN: How to prepare to file with BOSS?

FinCEN: An Introduction to Beneficial Ownership Information Reporting Brochure

FinCEN: Small entity Compliance Guide

Cyber Alert: FinCEN has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act.

❌ The fraudulent correspondence may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code.

❌ Those e-mails or letters are fraudulent.

❌ FinCEN does not send unsolicited requests.

❌ Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.

‍Social Sharing Image: Courtesy of Paul Hanaoka on Unsplash

Credits: This blog article was written by James D. Ford Esq., GAICD CIPP/US CC | Attorney-at-Law, Blue Ocean Law Group℠.

Important Notice:

This blog article is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.