Beneficial ownership reporting – new FinCEN regulations

FinCEN (the U.S. Department of Treasury’s Financial Crimes Enforcement Network) recently issued a Notice of Proposed Rulemaking, adding a new reporting requirement of beneficial ownership information (BOI).

The purpose of the rule is to stop bad actors from using legal entities to hide illicit funds behind anonymous shell companies or other opaque corporate structures. By reporting BOI to FinCEN, law enforcement, financial institutions and other authorized users — which FinCEN will define in a future rule — will have timely access to information to help combat corruption, money laundering, terrorist financing, tax fraud and other illicit activity.

The proposed rule describes who must file a BOI report, what information must be reported and when a report is due. Specifically, the proposed rule would require reporting companies to file reports that identify (1) the beneficial owners of the entity and (2) individuals who have filed an application with specified governmental or tribal authorities to form the entity or register it to do business.

While unclear when final regulations will be issued, because reporting requirements will begin soon after they become effective, companies should begin compiling necessary data.

Key takeaways

• The BOI reporting targets small companies and businesses. Many private U.S. companies where someone has 25% control will have to report. Namely, those with 20 or fewer full-time employees, less than $5 million in gross receipts and an operating presence in the U.S. Inactive entities seem to be excluded.
  The $5 million gross receipts threshold, as reported on the federal income tax return, is aggregated with other entities owned by the entity in question as well as other entities through which the entity operates.
• A BOI report is due within one year after the effective date of the final regulations for existing entities and 14 days of formation or registration with a state or tribal authority for entities formed after the effective date of the final regulations. To date, final regulations have not been issued.
• The proposed rule identifies 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 Native American 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.
  FinCEN expects that these definitions would include limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships in addition to corporations and LLCs. Whereas other types of legal entities, including certain trusts, appear to be excluded if they are not created by filing with a secretary of state or similar office. Because FinCEN is seeking public comment on state and tribal trust formation, trusts may be a reporting company under the final rule.
• Both domestic and foreign companies registered with a state or tribal jurisdiction must file unless they fall within a list of 23 types of exempted entities, including governmental authorities, banks, credit unions, brokers or dealers in securities, venture capital fund advisors and tax-exempt entities.
• Willingly failing to report complete or updated beneficial ownership information could be subject to a civil penalty of $500 per day, up to $10,000, and two years of imprisonment. FinCEN reserves the right to investigate reporting violations.

Information to be reported

A reporting company would need to report its name, any trade name, the business street address, the state or tribal jurisdiction of formation or registration, and the Taxpayer Identification Number (TIN). In the absence of a TIN, a reporting company would need to report either a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).

Additionally, a reporting company would be required to report the name, birthdate, address, and an image and unique identifying number from an acceptable identification document for each of its beneficial owners and company applicants.

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

• The definition of substantial control is designed to capture anyone who can make significant decisions on behalf of the entity. In its definition, the proposed regulation specifically includes service as a senior officer, authority over the appointment or removal of a senior officer or board of directors, control over a variety of important matters or any other form of substantial control.
• An individual’s ownership interest is determined by aggregating all the individual’s ownership interests in comparison to the undiluted ownership interests of the company.
• Exempted individuals include minors, those acting on behalf of another, employees, future interest holders and creditors.

A company applicant is the individual who files the document that forms the entity or first registers the entity to do business in the United States. In both cases, anyone who directs or controls the filing of the relevant document would also be a company applicant.

If an individual provides their BOI to FinCEN, they can obtain a “FinCEN identifier,” which can then be provided to FinCEN in lieu of other required information about the individual. The proposed regulations also include a voluntary mechanism to allow reporting of the TIN for a beneficial owner or company applicant.

Conclusion

As part of its congressional mandate, FinCEN aims to provide law enforcement and other authorized users a highly useful database to combat the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States.

While there is currently no indication when a final rule with be issued, businesses should take steps now to facilitate the collection and reporting of beneficial ownership information.

We encourage you to connect with your Baker Tilly advisor regarding how the above may affect your tax situation.

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.