Corporate Transparency Act, 2020

To start 2021, the U.S. Senate passed H.R. 6395, the National Defense Authorization Act, 2021 (NDAA) over the presidential veto. Part of the NDAA incorporates the Corporate Transparency Act of 2020 (CTA). An earlier version of the CTA, H.R. 2513, was passed by the House of Representatives in 2019.

The stated purposed of this act is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the U.S. government. This act is intended to target individuals who own or significantly control businesses that act as “fronts” for illegal and/or illicit activities.

The Corporate Transparency Act will become effective within one year after regulations are issued. Reporting Companies include domestic entities or foreign entities registered to do business in the United States and they must identify their Beneficial Owners. A Beneficial Owner is any individual who directly or indirectly exercises substantial ownership over the Reporting Company or owns or controls 25% or more of the ownership interests of the Reporting Company.

Reporting Companies must submit the following information to the Financial Crimes Enforcement Network (“FinCEN”) for each Beneficial Owner:
1. Full Legal Name;
2. Date of birth;
3. Current residential or business address; and
4. Either (a) a unique identifying number from an acceptable identification document, such as unexpired passport, driver’s license number, or other government-issued identification document, or (b) the Beneficial Owner’s FinCEN identifier, which the Beneficial Owner can obtain by submitting the above information to FinCEN.

An entity must submit the above information at the time of its formation (or at the time it registers to do business in the U.S. if it is a foreign entity). Existing entities must submit the information to FinCEN within two (2) years of the Effective Date. Any person who willfully fails to report or provides false information is subject to a fine of up to $10,000 and possible imprisonment of up to two years.

There is a scope of confidentiality to the CTA. Beneficial Ownership information is primarily used for law enforcement and national security efforts. “FinCen” is the financial intelligence unit of the U.S. Department of Treasury and the beneficial ownership reports are not generally made publicly available from this department. The CTA states that beneficial ownership information “will be kept confidential and treated as sensitive information, protected under the highest information security standards.”

The beneficial ownership information may be permitted to be disclosed to state and local governments only by a court order. One other exception to disclosing information is in response to requests of a federal agency on behalf of foreign authorities for an investigation.

Many questions may also arise around IRS form 5472 and how the CTA acts differs. By way of broad overview, Form 5472 must be filed annually by certain companies (referred to as “reporting corporations”) when there is a so-called “reportable transaction” with a “related party” occurring in that particular tax year. Assuming one has such a “reportable transaction”, the Form is required to be filed by (i) any US company that is at least 25% owned by non-US shareholders (single member US LLCs are now included under recent tax rules), and (ii) foreign companies that are engaged in a US trade or business. In contrast, the CTA generally requires beneficial ownership information to be reported at the time of formation or registration under state law to FinCen, regardless of any transactions that occurred during a tax year. It is important to note that these reporting requirements are done with different departments of the US Government.

Moving forward, LLC’s, Corporations and other entities registered to do business in the U.S., along with the Beneficial Owners, investors and creditors should evaluate and determine their chain of beneficial ownership, especially in holding company structures, to comply with FinCen reporting requirements.

DISCLAIMER: IBCF is a corporate services provider and cannot and will not provide any legal and/or tax advice. IBCF and its employees are not licensed to provide such advice. Information contained in this article is publicly available information and should not be used as legal and/or tax advice.

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