It didn’t take very long for 2021 to bring about federal legislation that could significantly impact, or at least cause massive administrative headaches for, domestic and international private clients and their holding structures. The Corporate Transparency Act (the "Act") was enacted into federal law on January 1, 2021. With the close of the previous decade – a decade that brought the likes of FATCA, CRS, and other beneficial ownership and transparency laws around the world – it is not surprising that the United States is continuing to build on these global initiatives. This article first provides a brief overview of the Act and then raises some initial considerations and questions for private clients to start thinking about.
The purpose of the Act is to prevent the illicit use of so-called shell companies to conceal illegal activity or to facilitate money laundering and tax evasion, among other things. Accordingly, the Act requires information to be provided to the Financial Crimes Enforcement Network (FinCEN)1 regarding the beneficial owners of certain companies, as well as information regarding the applicants who form these companies. What companies are subject to the Act, and what information must be reported?
Companies Subject to the Act: The Act applies to a "reporting company," which is defined as a corporation, limited liability company, or other similar entity that is: (i) created by the filing of a document with a secretary of state or a similar office under the law of a U.S. State (e.g., creating a Florida LLC by filing Articles of Organization on Sunbiz); or (ii) formed under the law of a non-U.S. country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a U.S. State. At the outset, it is important to note that these rules generally apply to both U.S. and non-U.S. entities, but like any other law, there are exceptions.
Perhaps of most relevance to international private clients, the definition of a reporting company in the case of a non-U.S. entity excludes a non-U.S. company that is not registered to do business in the United States. Additionally, most traditional types of trusts that are used for estate planning purposes would not be considered reporting companies, as well as charitable entities that have qualified for special tax exempt status. Other exceptions of relevance to both domestic and international clients include, but are not limited to:
•companies that employ more than 20 full-time employees in the United States, that have filed a U.S. federal income tax return in the previous year showing more than $5,000,000 in gross receipts, and that have an operating presence at a U.S. physical office;
•companies that are already subject to certain oversight or regulations (e.g., banks, broker/dealers, certain SEC registered entities, and insurance companies, among others); and
•certain dormant companies.
Who and What Must Be Reported: A "beneficial owner" is any individual who, with respect to the reporting company, directly, indirectly, or otherwise: (i) exercises substantial control over the entity; or (ii) owns or controls 25% or more of the ownership interests of the entity. Of interest to private clients, however, a beneficial owner does not include an individual whose only interest in the relevant entity is through a right of inheritance. Other exceptions include minor children, as well as individuals acting purely as nominees or agents.
An "applicant" is any individual who files an application to form the relevant U.S. entity or who registers or files an application to register the relevant non-U.S. entity to do business in the U.S.
A reporting company must generally provide to FinCEN the following information for each beneficial owner and each applicant: such person's full legal name, birth date, a current home or work address, and a unique identification number, which is the number from an acceptable identification document, which includes a current U.S. passport, government-issued identification document, or U.S. driver's license (or in the case of a person not having one of the foregoing, a current passport issued by a non-U.S. government).
Reporting Due Dates and Penalties: Applicable due dates for filing the required information will depend on when final regulations implementing the Act are issued (but Treasury is required to issue such regulations within a year from the enactment of the Act, or January 1, 2022). For reporting companies that exist on the date those final regulations are issued, they will have two years to comply from the effective date of the final regulations. For reporting companies formed subsequent to the date of final regulations, they will be required to comply at the time of formation. Whether a reporting company is already in existence or newly formed, reporting will also be required to report certain changes in the beneficial ownership of the entity.
Failure to comply with the Act's reporting requirements can result in civil penalties of up to $10,000, as well as jail time in the case of criminal non-compliance.
CONSIDERATIONS AND QUESTIONS
The Act raises a number of questions and considerations that should be on the minds of individual private clients.
These are only initial observations and questions. There may not be any immediate answers to the foregoing questions, at least not until final regulations are issued (and even then, chances are there will be new questions and observations that arise and plenty of ambiguity left to deal with). Until then, domestic and international private clients should start reviewing their existing holding structures to determine the relevant reporting implications brought on by the Act.
1. FinCEN is a bureau of the U.S. Treasury Department that collects and analyzes information about financial transactions in order to combat illicit activity, such as money laundering. Clients and their advisors may recall the FinCEN geographic targeting orders that have been issue in years past, requiring the reporting of certain all cash purchases of real estate located in certain counties. In addition, clients and their advisors are likely familiar with FinCEN Form 114, better known as the FBAR, which stands for the Report of Foreign Bank and Financial Accounts and requires a U.S. individual to report certain foreign bank accounts having an aggregate value in excess of $10,000.