What is the issue?
The US recently enacted the Corporate Transparency Act (the Act), which is a new national beneficial ownership reporting regime for US companies and certain non-US companies.
What does it mean for me?
Succession planning structures commonly used in the US by domestic and international private clients will now require disclosure of such reporting companies’ beneficial owners and those persons involved in the set up of such companies.
What can I take away?
International private clients with US holding company structures and certain non-US holding company structures should begin collecting the requisite information in preparation for the Act’s reporting requirements going into effect.
Latin American clients are accustomed to making investments into the US. Typically, such investments are legally structured in a manner that is tax‑efficient for both the US and the home country. Many of these individuals seek privacy and confidentiality over their holdings for legitimate reasons, particularly when they are from jurisdictions with ongoing political turmoil or corruption. The concept of beneficial ownership registration is not new to parts of Latin America. This was not the case in the US until the passage of the Corporate Transparency Act (the Act) on 1 January 2021.
In broad terms, the Act creates a national company beneficial ownership registry accessible only by law enforcement, government agencies and other officials, and requires reporting companies to provide certain identifying information on its beneficial owners and company applicants. 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. The Act will go into effect when the regulations are finalised by the US Financial Crimes Enforcement Network (FinCEN).
This article provides an overview of the Act, its impact on common international private client structures and what private clients from Latin America should be advised to do in preparation for the implementation of the Act.
Overview of requirements under the Act
Who must file
The Act obligates a ‘reporting company’ to report the requisite information on its beneficial owners and company applicants. A reporting company is generally defined in the Act as a:
- US corporation, limited liability company (LLC) or other similar entity; or
- non‑US company formed under the law of a foreign country and registered to do business in the US.
Who must be reported
The Act generally defines ‘beneficial owner’ as an individual who, directly or indirectly: exercises substantial control over the entity; or owns or controls not less than 25 per cent of the ownership interests of the entity.
A reporting company is not only required to report its beneficial owners but also any ‘company applicants’. A company applicant is any individual who:
- files an application to form a US reporting company; or
- registers or files an application to register a non‑US reporting company to do business in the US.
FinCEN has taken a broad interpretation of such definition, clarifying that an applicant is not only the individual that makes the filing but also the individual that directs the making of such filing.
What must be reported and when
A reporting company must provide to FinCEN the following information for each beneficial owner and each company applicant: their full legal name, birth date, a current home or work address, and a unique identification number.
Applicable due dates will depend on FinCEN finalising its regulations. For reporting companies that exist on the date the 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 within 14 days of formation. Whether a reporting company is already in existence or newly formed, it will also be required to report certain changes in the beneficial ownership of the entity within a limited period.
Failing to comply with the Act could result in a civil penalty of USD500 for each day that the failure has not been remedied and a fine of up to USD10,000 or imprisonment for up to two years, or both, for a criminal violation. Although the Act requires reporting companies to comply with its reporting requirement, the proposed regulations clarify that any individual, in addition to the reporting company, will be liable and subject to the foregoing civil and criminal penalties.
Impact on common inbound US structures
It is common for international clients to legitimately structure their US investments through trust and holding company structures.
Although traditional estate‑planning trusts should not be considered reporting companies for the purposes of the Act, this does not mean that such trusts are not impacted by the Act. The proposed regulations could cause many different roles within a trust that owns a reporting company to be reported, when such individual either has direct or indirect substantial control or an ownership interest in the company. Trustees, protectors and investment advisors, for example, could be considered as having substantial control. The proposed regulations further provide that the following would be considered a beneficial owner:
- settlors with the power to revoke or withdraw assets from the trust;
- trustees or other individuals with the authority to dispose of trust assets; and
- a beneficiary, if such beneficiary is the sole permissible recipient of both income and principal, or any beneficiary that has the right to demand a distribution of, or withdraw substantially all of the assets from, the trust.
It is very common for trust agreements to provide for discretionary distributions. Under the approach taken in the proposed regulations, it is not clear if a purely discretionary beneficiary would be captured as a beneficial owner of the reporting company as such beneficiary could be a permissible recipient of income and principal, notwithstanding the fact that only the trustee would have the discretion to make a distribution. A conservative approach would be to disclose the beneficiary in the face of uncertainty until further guidance is issued.
Consider the example of a Florida manager‑managed LLC for which the membership interest is wholly owned by a Florida‑governed estate‑planning trust that is currently revocable by a Chilean settlor and with a professional trust company serving as the trustee. Based on the foregoing, the beneficial owners of the Florida LLC, as the reporting company, are the manager of the company, certain officers of the company, if any, the trustee and the settlor.
Under the 25 per cent ownership test, it remains unclear whether each beneficial owner reports as owning 100 per cent or 25 per cent of the interest.
US asset-ownership structures
Typically, holding company structures that take title to assets located in the US are designed to guard against US estate tax exposures on the death of the non‑US beneficial owner. Consider, for example, an individual from Colombia who forms a non‑US company to purchase a vacation apartment located in Florida. The property is not rented out and, therefore, the non‑US company does not register to do business in the state of Florida. Separate and apart from the potential US tax risks that may present themselves with this type of structure, this non‑US entity may not be a reporting company for the purposes of the Act. Outside of the real estate setting, the same question would apply to a non‑US entity formed to own a brokerage account or investment portfolio owning US stock, a US life insurance policy or otherwise formed for the purpose of owning US financial assets (even tangible personal property, like art, for example). Until the regulations are finalised, it is not yet clear if these holding company structures will require reporting under the Act.
With FinCEN underway finalising regulations to implement the Act, at the time of writing it remains uncertain when reporting under the Act will go into effect. When this happens, the abovementioned due dates for filing the beneficial reports will be triggered. As a result, international private clients and their closely held companies should become familiar with the compliance requirements imposed by the Act.
Latin American clients and their advisors should start identifying all of the reporting companies in their structures and gather information and necessary documents on all of the beneficial owners and company applicants. In the context of estate‑planning trusts owning underlying reporting companies, the trusts should be reviewed closely to determine which parties within the trust could be reported as beneficial owners. It is worth undertaking this task as soon as possible, particularly as a result of the short time periods that the proposed regulations have provided in terms of due dates and the applicable penalty exposures for non‑compliance mentioned above.