Beneficial ownership reporting – new FinCEN regulations

Introduction

On Sept. 29, 2022, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) released a 330-page final rule implementing the beneficial ownership information (BOI) reporting requirements as part of its implementation of the Corporate Transparency Act (CTA) passed by Congress in January 2021.

The final rule describes who must file a BOI report, what information must be reported and when a report is due. Specifically, the final rule requires reporting companies to file reports that identify (1) the beneficial owners of the entity and (2) the company applicants of the entity. FinCEN expects to issue two additional rules focusing on safeguards to protect access and confidentiality of information and revising FinCEN’s customer due diligence. Reporting forms are also expected in advance of the reporting due date.

Requirements and purpose

Effective Jan. 1, 2024, reporting companies are required to disclose their BOI. Existing entities have one year from the effective date to file an initial report (due no later than Jan. 1, 2025); however, newly formed or registered entities only have 30 days.

The rule is designed to enhance the government’s ability to protect U.S. national security and the U.S. financial system from illicit use. The federal government expects to gather data deemed essential to national security to help prevent drug traffickers, fraudsters and corrupt actors from laundering money and other assets in the country. Furthermore, the rule is intended to strengthen the U.S. financial system by making it more difficult to use shell companies to illegally access and transact in the U.S. economy.

Report due dates

Companies required to file BOI reports, referred to as reporting companies, will file an initial report and will be required to file updated reports as relevant information changes.

• Initial reports for existing companies – domestic companies formed and foreign entities registered before Jan. 1, 2024, have one year to file their initial report (due by Jan. 1, 2025)
• Initial reports for new companies – domestic companies formed and foreign entities registered after Jan. 1, 2024, have 30 days after the date of their formation or registration to file their initial report
• Initial reports for companies that no longer meet exemptions – companies that no longer meet the criteria for an exemption have 30 days after the date that they no longer qualify to file an initial report
• Updated reports – if there is a change with respect to required information previously submitted, updated reports need to be filed within 30 days of the change
• Inaccurate reports – companies with inaccurately reported information must file a corrected report within 30 days of when the inaccuracy is, or should have been, discovered

The 30-day period modifies the original 14-day reporting period under the proposed rule. It also matches with the correction period time frame in an effort to lessen the burden on reporting companies.

Reporting companies

The final rule adopts the proposed rule definitions of the two types of reporting companies: domestic and foreign.

A domestic reporting company includes a corporation, limited liability company (LLC) or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.

A foreign reporting company includes a corporation, LLC or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or similar office.

These definitions include limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships in addition to corporations and LLCs. Other types of legal entities, including certain trusts, are excluded if they are not created by filing a document with a secretary of state or similar office.

The proposed rule exempts 23 types of entities from reporting requirements. Principal among these are:

• Large operating companies – entities that employ more than 20 full-time employees (measured on an entity-by-entity basis) in the U.S., with an operating presence at a physical office within the U.S. and filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (excluding sales from outside the U.S.). Unlike the full-time employee count, the $5 million gross receipts threshold is aggregated with the other entities owned by the entity in question as well as other entities through which the entity operates.
• Tax-exempt entities – organizations described in Internal Revenue Code (IRC) section 501(c) and exempt from tax under section 501(a), political organizations defined under IRC section 527(e)(1) and exempt from tax under section 527(a), or a trust described in IRC section 4947(a) paragraphs (1) or (2)
• Inactive entities – entities that were in existence before Jan. 1, 2020, are not engaged in active business, are not owned by a foreign person (directly or indirectly, wholly or partially), have not experienced any change in ownership in the preceding 12-month period, have not sent or received any funds in an amount greater than $1,000 in the preceding 12-month period, and do not otherwise hold any kind or type of assets (including ownership in any corporation, limited liability company or similar entity).

The remaining 20 exemptions include:

1. Securities reporting issuers
2. Governmental authorities
3. Banks
4. Credit unions
5. Depository institution holding companies
6. Money transmitting businesses
7. Brokers or dealers in securities
8. Securities exchange or clearing agencies
9. Other Exchange Act registered entities
10. Investment companies or advisers
11. Venture capital fund advisers
12. Insurance companies
13. State-licensed insurance producers
14. Commodity Exchange Act registered entities
15. Accounting firms (registered under section 102 of Sarbanes-Oxley Act of 2002)
16. Public utilities
17. Financial market utilities
18. Pooled investment vehicles
19. Entities assisting a tax-exempt entity
20. Subsidiaries of certain exempt entities

While the law allows the Treasury Department to provide further exceptions as long as certain standards are met, the final rule makes no adjustments at this time.

Information to be reported

A reporting company must identify itself by disclosing its name, any trade name under which it does business, the current street address, the state or tribal jurisdiction of formation or registration and the taxpayer identification number (TIN). In addition, the full legal name, date of birth, address and a unique identifying number (including an image of the underlying document) for each beneficial owner must be provided.

Reporting companies and beneficial owners may obtain a FinCEN identifier, which is a unique identifying number assigned by FinCEN. Once a FinCEN identifier is issued, an individual or reporting company may use this in lieu of supplying required information.

Beneficial owners

A beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company.

Substantial control

The final rule states “substantial control” is exercised by an individual if the individual serves as a senior officer of the company; has authority over the appointment or removal of any senior officer or a majority of the board of directors; directs, determines or has substantial influence over important decisions; or has any other form of substantial control such as a trustee of a trust or similar arrangement.

The exercise of substantial control can be direct or indirect and can be attained through board representation; ownership or control of a majority of voting power or rights; rights associated with financing arrangements; control over intermediary entities that separately or collectively exercise substantial control; arrangements or relationships with nominees; or any other contract, arrangement, understanding or relationship.

Control of 25% of ownership interests

Determining whether an individual owns or controls at least 25% of a reporting company is determined by dividing the total ownership interests owned by the individual, both directly and indirectly, by the total outstanding ownership interests. Ownership interests can come in the form of equity, stock, capital and profits interests, convertible instruments, options or a variety of other instruments or mechanisms used to establish ownership. Additionally, ownership can be direct or indirect, exercised through a variety of different mechanisms including joint ownership, the use of an intermediary and some trust arrangements (including as a trustee or other individual with the authority to dispose of trust assets or as a beneficiary who is the sole recipient of income and principal from the trust, has the right to demand a distribution or withdraw substantially all assets from the trust or is a grantor or settlor with the right to revoke the trust or otherwise withdraw assets of the trust).

Ownership is current at the present time and any options or similar interests must be treated as if they are exercised.

• For companies with capital and profits interests (including partnerships) – the individual’s ownership includes both capital and profits interests of the company, calculated as a percentage of the total outstanding capital and profits interests
• For corporations – the individual’s ownership percentage is the larger of: (1) the owner’s percentage of combined voting power or (2) the owner’s percentage of value of all classes of stock
• For other companies – if the facts and circumstances don’t permit the calculations described above to be performed with reasonable certainty, any individual who owns or controls 25% or more of any class or type of ownership interest of a reporting company is deemed to own or control 25% or more of the ownership interests

The final rule provides exceptions for certain individuals, including: minors (provided the company reports the required information for a parent or legal guardian); anyone acting on behalf of another individual as a nominee, intermediary, custodian, agent or similar; an employee whose control is derived solely from their employment and is not a senior officer; individuals whose only interest is a future interest through the right of inheritance; or the creditor of a reporting company.

Conclusion

FinCEN is currently creating a secure infrastructure in order to protect and store submitted data. The CTA has strict confidentiality and security requirements that must be met. The actual reporting form, also under development, is expected to be published for comment in advance of the due date. In addition, FinCEN anticipates issuing two more sets of rules in the near term: access and disclosure of BOI and revising customer due diligence to reflect CTA requirements.

While the deadline for this BOI reporting is not due for a couple of years, businesses may want to begin taking steps to facilitate the collection and reporting of beneficial ownership information.

For more information on this topic, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.