The Act is the result of years of effort from a bipartisan group of legislators in response to criticism from other countries and international organizations that have been threatening to put the United States on tax haven blacklists due to its lack of transparency over beneficial ownership information.
The Act is intended to set a clear federal standard for obtaining information about entities’ incorporation. It requires entities to report beneficial ownership information to FinCEN, which is authorized and encouraged to share it with other federal and state national security, intelligence, and law enforcement agencies, and to help financial institutions facilitate their compliance with anti-money laundering and counter-terrorist financing laws. Treasury is required to take measures to ensure that the national database in which this information is to be maintained will be kept private.
Who has to report what?
The Act obligates “reporting companies,” to file a report with FinCEN. Reporting companies include corporations, LLCs, and other similar entities created by the filing of a document with a secretary of state or similar office (or Indian Tribe). Companies organized under foreign law are also required to report if they are registered to do business in the United States.
The list of exempt entities includes governmental entities, publicly traded companies, banks and insurance companies, and investment companies and investment advisors. Also exempted from the reporting requirements are entities that have more than 20 US employees and that have filed US tax returns demonstrating more than $5 million in gross receipts, as well as entities in existence for over one year that are not engaged in an active business and are not owned, directly or indirectly, by foreign persons, engaged in any material financial transactions (i.e., greater than $1,000), and do not own an interest in another entity.
The statute requires that the report to be filed with FinCEN includes the following information about each beneficial owner and each applicant (the person filing the organization documents):
- Legal name
- Date of birth
- Address
- Unique identification number from a government-issued ID (if no such number exists, the person can request one from FinCEN)
The statue defines beneficial owner broadly to mean any individual who, directly or indirectly (including through a contract, arrangement or understanding) exercises substantial control over the entity or owns or controls at least 25% of the ownership interests.
Someone whose only interest in an entity is through a right of inheritance or as a creditor is not considered a beneficial owner for this purpose.
In cases where an entity is owned by an exempt entity, the reporting company is only obligated to list the name of the exempt entity (under this limitation, a subsidiary of a publicly held company, for example, would only need to list the publicly held company on the report). A special reporting requirement for pooled investment vehicles obligates an exempt entity formed under foreign law to file written certification with information about any individual who exercises substantial control over the pooled investment vehicle.
Effective date
The Act imposes reporting obligations not only with respect to newly formed entities, but also to existing entities. Companies already in existence are required to submit the same information required from newly formed companies within two years of the effective date of implementing regulations.
For new companies, the reporting requirements apply as of the time of formation (effective for companies formed after the regulations’ effective date). Any time an entity undergoes a change in beneficial ownership, an updated report must be submitted within a year of such ownership change.
How will it work?
Because company organization documents are filed with state agencies, these reporting obligations require FinCEN to work with state agencies on implementation. The Act requires that states, within two years of the implementing regulations’ effective date, periodically notify filers of their requirements as reporting companies, including at the time of any initial formation or registration, assessment of an annual fee, or renewal of any business license, and in connection with corporate tax assessments or renewals.
Penalties
The statute creates civil and criminal penalties for willful noncompliance. Penalties apply where there has been a willful provision of false beneficial ownership information or a willful failure to comply with reporting obligations. The civil penalty is $500 per day (with a maximum penalty of $10,000) and the criminal penalty is up to two years in prison. These penalties are not immediately applicable because the Act itself will not become effective until after implementing regulations are promulgated.
Mazars’ Insight
The reporting obligations imposed by the Corporate Transparency Act are not effective until the date of implementing regulations and, even then, are not immediately effective for entities currently in existence. However, taxpayers contemplating forming new companies and privately held companies should be aware that these reporting obligations, which represent a significant change in the amount of beneficial ownership information required to be provided to U.S. government agencies, are on their way.
Please contact your Mazars LLP professional for additional information.
This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.
Published on January 8, 2021
The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.