By: Maria Pigna, Rachel Trickett and William L. Bricker, Jr.
On December 11, 2020, Congress passed a measure designed to curtail the use of U.S. shell companies. The Corporate Transparency Act (“CTA”), which was enacted as part of the National Defense Authorization Act,[1] authorizes Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to issue regulations requiring most corporations, LLCs and other entities formed under state laws to disclose the identities of their beneficial owners to FinCEN, which will store the information in a nonpublic database. The National Defense Authorization Act has now been enacted into law as of January 1, 2021.
Overview of the CTA
The CTA requires a reporting company, at the time of formation, to report the names, addresses, dates of birth, and unique identification numbers from certain acceptable identification documents (U.S. passport or driver’s license, identification document issued by a state or local government or Indian Tribe, or foreign passport) of its beneficial owners to FinCEN. An existing reporting company will have two years to report its beneficial ownership information and any change in beneficial ownership will require disclosure of the new owners to FinCEN within a year of such a change.
Specific Requirements
A reporting company includes any corporation, LLC, or other similar entity that is: (i) formed under the laws of any U.S. state or (ii) formed under the laws of a foreign country and registered to do business in any U.S. state. Numerous categories of regulated, publicly traded, non-profit, and government entities are excluded from the definition.
A beneficial owner is as an 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 at least 25% of the ownership interests in the entity. Certain exceptions apply.
Access to the CTA Database
FinCEN will store the reported information in a private database that will not be accessible to the public. However, FinCEN may disclose information, upon request, to: (i) domestic law enforcement agencies, (ii) U.S. federal agencies requesting information on behalf of a foreign law enforcement agency, and (iii) with the consent of a reporting company, financial institutions subject to customer due diligence requirements.
Enforcement Measures
Civil and criminal penalties, including fines of up to $10,000 and imprisonment for up to two years, may apply to anyone who willfully provides false beneficial ownership information to FinCEN or fails to report or update information about a reporting company’s beneficial owners.
Unanswered Questions
By its terms, the CTA does not apply to partnerships or trusts. FinCEN is instructed to study and report to Congress within two years whether partnerships, trusts or other legal entities should be covered by the disclosure requirements. In the meantime, questions arise. For example:
Is a grantor trust treated as a trust for CTA purposes? (For income tax purposes, grantor trusts are effectively disregarded.)
What are the reporting obligations of a U.S. company owned by a domestic trust that is treated as a foreign trust for income tax purposes?
Should foreign investors structure U.S. investments through partnerships or trusts rather than corporations or LLCs?
The CTA also does not require reporting by foreign companies that are not registered to do business in a U.S. state.
Will foreign companies choose not to register in U.S. states where registration is either required or beneficial, in order to avoid CTA reporting? (And what effect will this have on states?)
Will enforcement of the CTA come down to interpretations of state laws requiring registration to do business?
CTA reporting requirements are not the same as other federal reporting rules applicable to foreign-owned entities. For example, certain foreign-owned U.S. corporations, single member domestic LLCs, and multi-member domestic LLCs that are treated as corporations are required to file an IRS Form 5472. The CTA could apply to any of these entities but the rules for determining whether or not filing is required by any particular entity and what information must be disclosed are quite different.
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[1] H.R. 6395, 116th Cong. §§ 6401-6403 (2020). The CTA has been introduced in the House of Representatives multiple times in the past. The ACLU, Heritage Foundation and American Bar Association all have opposed it.