On January 1, 2024, the Corporate Transparency Act (CTA) will go into effect. The CTA is designed to combat fraud, corruption, money laundering, terrorism, and other financial crimes by the creation of a new federal database of beneficial ownership information (BOI). This new reporting system will require corporations, limited liability companies, and other entities to furnish BOI reports to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
While many businesses are accustomed to filing annual reports, these new reporting requirements are quite expansive and include information beyond the scope of disclosure typically required by state regulators.
Unless an exemption applies, domestic entities such as a corporation, limited liability company, or other entity created by the filing of a document with a Secretary of State or similar State or Tribal office is considered a “reporting company” for purposes of the CTA. Foreign entities that have registered to do business in the United States by the filing of an application for authority to do business, or similar instrument are also subject to the CTA reporting requirements. FinCEN has yet to provide guidance on how it will address foreign entities that should have registered in a U.S. jurisdiction but fail to do so.
The CTA offers over 20 exemptions which include: highly regulated entities such as banks, insurance companies, and reporting issuers registered under the Securities Exchange Act of 1934, as amended; “large operating companies” which the CTA defines as entities that have more than 20 full-time employees in the U.S., an operating presence at a physical office in the U.S. and filed a tax return for the previous year showing more than $5 million in gross receipts or sales from a U.S. source; government authorities and certain tax-exempt entities; and certain subsidiaries of CTA exempt entities.
We note that for purposes of the large operating company test, gross receipts or sales from sources outside the United States are excluded. For example, a large Canadian corporation (worldwide annual revenue of over $5 million in the aggregate) has registered to do business in New York. However, when foreign revenue is excluded, U.S. source income is less than $1 million. Under the CTA, the Canadian company would likely be considered a reporting company obligated to file BOI reports with FinCEN, unless a different exemption is available. Similarly, if instead of being registered in the U.S. itself, the Canadian entity did business through a wholly-owned subsidiary incorporated in New York, that U.S. subsidiary would be considered a reporting company and obligated to file BOI reports about itself and its beneficial owners.
Reporting companies are obligated to report the following information about itself and its beneficial owners:
Failure to file required reports could result in a civil penalty of up to $500 for each day that the violation continues and criminal penalties, including a fine of up to $10,000 and/or up to 2 years imprisonment.
BOI will be accessible only to federal agencies engaged in national security, intelligence and enforcement, state and local law enforcement, foreign law enforcement, and financial regulators. Financial institutions may have access to BOI reports for due diligence matters if consented to by the reporting company.
Determine if the entity is a reporting company or exempt. As a threshold matter, every business should review the list of exemptions to determine what, if any, reporting obligations they have under the CTA.
→ We are a large Canadian company (assets and annual revenue over $5 million) with a wholly-owned subsidiary that is registered to do business in New York State.
→ We are a Canadian company that has a wholly-owned subsidiary company in the United States but that company is not registered in any state.
→ We are a Canadian company that makes material sales in the United States and we have a salesperson in the United States, but we are not registered in the United States.
→ We are a Canadian company whose shares trade on the TSX in Canada. We have a wholly owned United States subsidiary. How do we show beneficial ownership given that we are a “public” company in Canada?
→ What form of identification is required for Canadian citizens disclosed in a FinCEN report?
FinCEN requires government photo ID. We recommend a form of government photo ID be provided by all non-U.S. persons disclosed in a report.
→ We have multiple special purpose entities that own a single property. Must every entity file separately or can we do a group filing? Do the principal individuals who control the subsidiaries indirectly have to be disclosed?
→ Our business entity has multiple passive family members as shareholders. Must we identify all of them in the filing? What about children and family trusts?
→ My company has shares outstanding that are owned by a family trust. Must I identify the beneficiaries of the trust or can I identify the trustee only?
→ We are a foreign company owned entirely by one or more United States citizens. Ancillary question – we are a foreign company controlled by one or more United States citizens.
→We are a United States company with foreign investors who have no meaningful control of the company but may have a substantial investment.
Please note, the discussion of the CTA contained herein is based on regulations and guidance published to date and should not be construed as legal advice. No attorney-client relationship is created by our offering information through this website. You should seek legal counsel regarding your own obligations based on your specific circumstances.