On December 7, 2021, beneficial owners of reporting companies received an early Christmas present. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a highly anticipated Proposed Rule implementing certain provisions of the Corporate Transparency Act (CTA), which was passed in January of 2021.
The CTA, coupled with the Anti-Money Laundering Act of 2020, brings much-needed revisions to the United States’ anti-money laundering and financing of terrorism compliance laws.
The United States has long been criticized for its lack of appropriate regulations to ensure and enforce corporate transparency. The Proposed Rule is a response to that problem, requiring “reporting companies” to disclose their beneficial owners to FinCEN either within 14 days of the formation of new entities or within one year of the final rule’s effective date for existing entities.
With the proposed rule, the CTA now defines a “beneficial owner” as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.”
The statute does not define “substantial control,” but the Proposed Rule provides various factors for consideration:
Service as a senior officer of a reporting company
Authority over the appointment or removal of any senior officer or dominant majority of the board of directors of a reporting company
The ability to direct or determine, or exercise a substantial influence over, important matters of a reporting company
Under this standard, more than one person can have “substantial control” over a reporting company. Thus, all such individuals would be required to disclose.
The Proposed Rule has also expanded the definition of “reporting companies” to include “domestic reporting company[ies]” and “foreign reporting company[ies].” Although this is not a significant departure from the existing statutory definition in the CTA, FinCEN is proposing the inclusion of limited liability partnerships, limited liability limited partnerships, business trusts and limited partnerships. This provides much needed clarity to the end of the existing definition: “…a corporation, limited liability company, or other similar entity.”
Finally, the Proposed Rule, while it does not provide more exemptions from the definition of “reporting company,” clarifies the scope of existing exemptions. One such exemption is the exemption for “dormant entities,” which generally captures investment funds, real estate enterprises, and other entities that typically involve a shelf company within an organization. Since the CTA now covers entities that have been “in existence for over 1 year,” the Proposed Rule further whittles the application, stating that the current 1-year rule is a Grandfathering Provision, meaning it covers only “entities in existence for over one year at the time the CTA was enacted.” Therefore, it does not apply to those in existence for more than one year when the statute is being applied. The grandfather clause, in other words, acts as an anti-abuse provision by preventing the exploitation of exemptions.
As a final note, many with a hat in the ring had advocated for a de minimis exemption allowing inactive entities with relatively small value assets to skip out on reporting. FinCEN did not create such an exemption this time around. So, any entity holding assets must report, regardless of the value of the assets that are held.
Whether or not these regulations will turn out to be a gift or a lump of coal for the reporting companies depends on who you ask. But if you have questions about whether you may qualify as a beneficial owner or whether you may fall under the list of reporting companies, our international tax professionals possess the most current knowledge of the applications of the CTA and how it might apply to you. The Schneider Downs team will continue to monitor the progress of the FinCEN Proposed Rule and can answer any questions you may have.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.