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.
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.
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.
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.
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:
The remaining 20 exemptions include:
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.
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.
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.
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.
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.
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.
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.