By Anthony Diosdi
Many states have marketed themselves as privacy havens to domestic and foreign business organizations over the years. Some of the states that have marketed themselves as privacy havens include Nevada, Wyoming, South Dakota, and Delaware.
For years, entity owners could establish an entity in a privacy haven and the owners of the entity could remain anonymous. However, the days are numbered for privacy havens. Congress is requiring disclosure of entity ownership regardless of what individual state laws might say.
Beginning in 2024, the Financial Crimes Enforcement Network (“FinCEN”) will require most businesses to file a statement detailing ownership information, which will be collected and stored by FinCEN. FinCEN (which is a bureau of the United States Department of the Treasury) will disclose entity ownership with law enforcement, the Internal Revenue Service or (“IRS”), and other federal and state agencies.
The Corporate Transparency Act is part of the Anti-Money Laundering Act, which was part of the National Defense Authorization Act. The Corporate Transparency Act delegated to FinCEN the task of creating regulations which will govern the new beneficial ownership information rules. On September 30, 2022, FinCEN promulgated the Final Rules regarding disclosing beneficial ownership of entities.
The Final Rules promulgated by FinCEN discuss how the lack of information collected by certain states in regards to entity formation has made it difficult to track down criminal and fraudulent activity. FinCEN also believes the data it will receive as the result of the Corporate Transparency Act will assist the IRS in tax investigations and to combat tax fraud because in many cases entities were used to commit tax fraud. The collection of beneficial ownership information in a database, accessible law enforcement and tax agencies could level the playing field for honest businesses who are forced to compete against illegal enterprises that utilize shell companies to evade taxes and defraud the general public.
Who is a “Reporting Corporation” for Purposes of the Corporate Transparency Act?
The Corporate Transparency Act requires “reporting companies” to file initial reports and must update those reports any time there is a change in beneficial ownership. A “reporting company” is defined as a domestic corporation, limited liability company, or an entity created by the filing of a document with a secretary of state or Indian tribe. A reporting is also a “corporation, limited liability company, or other entity; formed under the law of a foreign country; and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.
Exemption that are Exempt from the Corporate Transparency Act Reporting Requirements
There are a number of entities that are exempt from the Corporate Transparency Act reporting requirements. Below is a list of entities that are excluded from the Corporate Transparency reporting requirements:
1. Securities reporting issuers.
2. Government authorities.
4. Credit unions.
5. Depository institutions holding companies.
6. Securities brokers or dealers.
7. Security exchanges; other exchanges registered under the Securities Exchange Act of 1934.
8. Investment companies (Certain pooled investment vehicles do not qualify for this exception).
9. Venture capital fund advisers.
10. Insurance companies.
11. State-Licensed insurance producers.
12. Entities registered under the Commodity Exchange Act.
13. Public accounting firms.
14. Public utility companies.
15. Financial market utilities.
16. Pooled investment vehicles.
17. Tax-exempt entities or entities assisting a tax-exempt entity.
18. Subsidiaries of certain exempt entities.
19. Inactive entities.
20. Large operating entities.
As discussed above, large operating entities are not required to report their beneficial owners under the Corporate Transparency Act. A large operating entity is defined by the Corporate Transparency Act as a company that employs more than 20 full-time employees and have an operating presence at a physical office within the United States and has filed a federal income tax or information return in the United States for the previous year reporting more than $5,000,0000 in gross receipts.
What Information Must be Reported
According to the Final Rules, reporting companies will be required to provide FinCEN with beneficial ownership information on who owns or controls a company. Specifically, (with some minor exceptions) beneficial owners directly or indirectly exercise substantial control or own at least 25 percent of the reporting company. The Final Rules provides numerous examples of who qualifies as having substantial control or controls at least 25 percent of the ownership interest in a reporting company.
In determining who owns or controls 25 percent of an entity, the Final Rules state that all types of ownership interest should be compared to all outstanding ownership interests. For LLCs or LPs, the 25 percent owners are determined by comparing an individual’s capital or profits interest to the “total outstanding capital and profit interests of the entity.” For corporations or other entities that issue stock the 25 percent owner test is “the greater of: 1) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote, or (2) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interest” The Final Rules also have a catch-all provision that says a 25 percent owner is any individual who “owns or controls 25 percent or more of any class or type of ownership interest.”
Under the Final Rules, an individual that exercises substantial control over a reporting company is required to report. The Final Rules state an individual has substantial control if the individual is a “senior or officer” or if the person is “exercising the authority of a president, chief financial officer, regardless of official title.” This can also include individuals who have the power to appoint or remove a senior officer officer, appoint or remove the majority of the board, or exercise “substantial influence over important [company] decisions.” The Final Rules also create a broad catchall provision, which simply states that an individual is a “senior officer” if they have “any other form of substantial control over the reporting company.” Substantial control can also be exercised through a seat on the board, controlling the voting power, or through any other contract, arrangement, understanding, relationship, or otherwise.
Certain trust arrangements, or those individuals or entities acting as an intermediary, custodian or agent on behalf of another must also be reported.
To comply with the Corporate Transparency Act, reporting companies must submit a report containing the following information about their beneficial owners:
1. The full legal name;
2. Date of birth;
3. Current home or business address;
4. Unique identifying numbers such as a driver’s license number or passport number, and a copy of a driver’s license or passport.
For reporting companies that are formed after January 1, 2024, the report must include information about the “company applicant.” A company applicant must report the following information:
1) Legal name (and any trade names);
2) Address of principal place of business (a P.O. Box address cannot be used);
3) State or jurisdiction of formation;
4) IRS taxpayer identification number.
FinCEN will create a Beneficial Ownership Secure System or (“BOSS’) to enable electronic submission reports through a secure online interface.
What is the Deadline to File a Report?
The deadline to file an initial beneficial ownership report with FinCEN differs based on the date the entity was created or registration of the reporting company. For reporting companies created or registered prior to January 1, 2024, the filing deadline is January 1, 2025. For reporting entities created or registered on or after January 1, 2024, the deadline to file is within 30 days of formation or registration.
The Final Rules go into effect on January 1, 2024. Penalties for willful failing to comply with the Corporate Transparency Act include civil or criminal penalties up to $10,000 and/or imprisonment for not to exceed two years. Willful unauthorized disclosure can result in a civil or criminal penalty up to $250,000 and/or five years in prison.
Starting January 1, 2024, certain entities organized or registered to conduct business in the U.S. will be required to disclose identifying information about those who form and ultimately own or control the entity. Companies should begin collecting the necessary information for reporting purposes as soon as possible.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
He has assisted large law firms and accounting firms, and high-net worth individuals with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or firstname.lastname@example.org.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.