On December 11, 2020, Congress passed the National Defense Authorization Act for Fiscal Year 2020 (H.R. 6395) (“NDAA”). Thereafter, President Trump vetoed the legislation. On January 1, 2021, the United States Senate voted to override the President's veto of the NDAA. This followed the same action by the House of Representatives on December 28, 2020. As a result, the NDAA became law.
An important component of the NDAA is the Corporate Transparency Act (the “CTA”). One of the mandates of the CTA requires a “reporting company” (defined below) to file a report with the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, that identifies each beneficial owner of a reporting company. The purpose of this new requirement is to prevent individuals from utilizing shell companies to hide the identity of the true owners of a company. By requiring companies to disclose their beneficial owners, the government seeks to prevent corruption and improve enforcement against those owners who may attempt to use corporate shell companies for illicit purposes.
The definition of a "reporting company" includes corporations and limited liability companies, as well as “similar entities”, established in the U.S. under the laws of a State or Indian Tribe, as well as certain foreign established companies registered to do business in the U.S. It excludes certain classes of publicly traded, regulated, nonprofit, and government entities, as well as companies owned or controlled by those entities, which already have reporting obligations to disclose beneficial ownership information. In addition, the term “reporting company” specifically excludes companies that employ more than 20 full-time employees in the U.S.; those that report more than $5 million in annual gross receipts or sales to the Internal Revenue Service (the “IRS”), and those that have an operating presence with a physical office within the U.S.
A "beneficial owner" of an entity is defined as an individual owning 25 percent or more equity in the reporting company or one exercising "substantial control" over the reporting company. Certain individuals excluded from the definition of beneficial owner are individuals acting in the capacity as an agent, intermediary, or custodian on behalf of another person; an employee of a reporting company whose control or economic benefit with respect to the entity is derived solely from employment status; and creditors of the reporting company (unless the creditor meets either the "substantial control" threshold or owns or controls 25 percent or more of the reporting company). However, the term beneficial owner could be construed broadly, and thus future regulations may provide additional guidance as to the scope of the term.
This new FinCEN filing is expected to require a reporting company to report the full legal name, current residential or business address (as of the date that the report is delivered), date of birth, and a unique identifying number from an acceptable document, such as a driver’s license or passport, for each beneficial owner. A beneficial owner is also expected to have the option to request and use a unique FinCEN identifying number which would be obtained at the time of filing. Further guidance as to obtaining a unique number is not yet provided.
It is expected that the FinCEN filing will be required for newly formed entities at the time of formation. Existing entities will have to provide this information within two years of the effective date of the CTA. Regulations promulgated within one year of the enactment of the CTA will determine the effective date and the requisite information to report.
New and existing companies should review current ownership and determine whether they fall within the purview of the CTA. Further, the reporting company and beneficial owners must exercise care, as those determined to fall within the purview of the Act and determined to have willfully not filed the requisite information will face civil and criminal penalties, including $500 per day civil penalties and criminal fines up to $10,000, as well as up to two years imprisonment for willful violations.
FinCEN will issue future regulations and guidance to implement the new reporting requirement. If you have inquiries about this article, please contact any member of the international tax team at FGMK.
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Specialty Tax Practice
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