Beneficial Ownership Information Reporting
The Corporate Transparency Act (CTA), enacted by the U.S. Congress on January 1, 2021, is designed to strengthen the integrity of the U.S. financial system. It establishes new U.S. reporting obligations for certain types of corporations, which will take effect on January 1, 2024. Non-U.S. or foreign corporations may be subject to this reporting rule if they are registered to do business in any U.S. state.
The new law requires an entity that is formed or registered to do business in the United States to report information about their beneficial owners to Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau of the U.S. Department of the Treasury and Congress has given FinCEN certain duties and responsibilities including enforcement of regulations and sharing information with foreign financial counterparts around the world.
Who needs to report?
The reporting requirements apply to:
1. Reporting Companies include:
- U.S. reporting company
- A corporation
- A limited liability company (LLC), or
- Other entity created by the filing of a registration document with a state or similar office.
- For example, limited partnership and business trusts
- Non-U.S. reporting company
- An entity formed under non-U.S. laws, and
- Registered to do business in any state by filing document with secretary of state or any similar office under the law of a state
2. “Beneficial Owner”: any individual
(1) who directly or indirectly, has “substantial control” over the Reporting Company, or
- Substantial control: an individual has substantial control over a reporting company if they exercise the power to make important decisions.
- Any senior officer of corporations is deemed to have substantial control over a reporting company.
- A trustee of a trust may have substantial control over a reporting company.
(2) who directly or indirectly owns or controls 25% or more of the “ownership interests” of the Reporting Company
- Ownership interest: generally refer to arrangements that establish ownership rights in the reporting company, including equity, stock, capital or profit interest
- The rule provides standards and mechanisms for determining ownership interest held in trust such as a grantor, trustee, and beneficiary
3. “Company Applicant” is an individual who files the formation or first registration documents for the Reporting Company.
- This includes the person who directed the filing, or an employee of a law firm
- Only reporting companies formed or registered on or after January 1, 2024, will have to report their company applicants
Exemptions from reporting requirement:
CTA exempts 23 types of entities from the beneficial ownership information reporting requirements, that includes:
- Large operating companies
- More than 20 full time employees in the U.S.,
- Gross revenue over $5M USD in the prior year federal income tax return
- Has a physical office in the U.S.
- Subsidiaries of certain exempt entities
- Inactive entities
- Tax-exempt entities
- Certain types of investment companies
- Certain types of venture capital fund advisors
- Certain types of entities registered with the SEC
- Certain trusts
- Insurance companies
- Brokers or dealers in securities
- Certain types of banks and credit unions
- Public accounting firms
Many of the exempt entities noted above are already regulated by U.S. federal and/or state government, with requirements to disclose their beneficial ownership information to a government authority.
What information needs to be disclosed?
Reporting companies have to report the following information for each beneficial owner or a company applicant:
- Name, date of birth, and address
- Identification number from an acceptable identification document (e.g., driver’s license or passport)
- Photocopy of the identification document
When to file?
Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports.
After the initial filing, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.
The form has not been released yet and it cannot be filed before January 1, 2024. FinCEN will provide more guidance as to how and where reports are to be submitted.
Penalties for failure to report
Corporations who fail to timely file the beneficial ownership information report are subject to a civil penalty of up to $500 per day. In addition, a criminal penalty of not more than $10,000, imprisonment for not more than two years, or both, may apply.
Revision for Inaccurate Information – 90 days
Entities that submitted a report with inaccurate information, FinCEN provides a 90 day safe harbor to submit a revised corrected report within 90 days, after the date of the submission of the inaccurate report
FinCEN’s approach is designed to close loopholes that allows beneficial owners hide their identities or other assets and to catch the various ownership and control structures. The rules are complex, and it would be best to consult with your tax advisor to determine a beneficial owner.