The Corporate Transparency Act and its implications on foreign entities doing business in the United States
Christian Scali
by Christian Scali
The Corporate Transparency Act (CTA) has been a point of contention between the United States federal government and businesses, evidenced by the lawsuit brought by the National Small Business Association (NSBA) on behalf of its members. While the Northern District of Alabama recently prohibited the Financial Crimes Enforcement Network (FinCEN) from enforcing the CTA against NSBA members, the court’s order does not appear to apply to non-NSBA members, and the US Department of Justice has signalled its intent to appeal the decision.
Considering these developments, it's imperative that businesses understand the nuances of compliance, particularly those with international operations.
Understanding the CTA’s scope and purpose
On 01 January 2024, a new reporting requirement went into effect requiring millions of businesses to file a Beneficial Ownership Information Report (BOI) with the US Department of Treasury’s FinCEN. The purpose of the CTA is to combat money laundering, financing of terrorism, tax fraud, and other illegal acts stemming from the use of shell corporations.
What to file, where to file it
Every corporation, LLC, or similar entity created by the filing of a document with a secretary of state or similar office is required to file a BOI, though some exemptions exist. These are considered domestic reporting companies.
Foreign corporations, LLC, LPs and similar entities formed under the laws of the foreign county and registered to do business with any US state are considered foreign reporting companies. For foreign-owned businesses operating in the US or engaging in cross-border transactions, navigating CTA compliance adds an additional layer of complexity, given the company’s country of origin may have additional rules for corporate transparency, such as the European Union’s Fifth Anti-Money Laundering Directive.
Exemptions
While there are 23 categories of exemptions, the exemption most likely to apply to businesses is the Large Operating Company Exemption. A large company, as defined by statute, is one that: (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office in the US, and (3) has filed a federal income tax return in the US for the previous year demonstrating more than USD 5 million in gross receipts or sales.
For an entity that is part of an affiliated group of corporations within the statutory meaning, gross receipts can be determined on a consolidated basis. It is important to note that due to the USD 5 million gross receipts requirement, startups will unlikely be able to take advantage of this exception. Furthermore, a subsidiary of an exempt entity may qualify for exemption, even if the subsidiary alone would not have exempt status.
Who is a beneficial owner and an applicant?
Assuming a company is not exempt from BOI obligations, a BOI must be filed for each beneficial owner and applicant. A beneficial owner is an individual who, directly or indirectly, either (1) exercises substantial control over the reporting company, or (2) controls at least 25% of its ownership. Substantial control includes senior officers or anyone who has authority to appoint or remove officers or directors, among others. Company applicants are those who directly file the document to create or register the reporting company and the individual who is primarily responsible for directing and controlling the filing. There can only be two applicants.
BOI: deadlines and details
A domestic reporting company created before 01 January 2024 must file its initial BOI by 01 January 2025. A domestic reporting company created on or after 01 January 2024, but before 01 January 2025 must file a report within 90 calendar days of the date it receives notice that its creation has become effective. A domestic reporting company created on or after 01 January 2025, must file a report within 30 calendar days of the date on which it receives notice its creation has become effective.
Foreign companies may own subsidiaries in the US that no longer conduct business and are thus considered inactive. While the CTA provides an exemption for an inactive entity, it is important that companies owned by a foreign person are not eligible for the inactive entity exemption by definition.
The initial BOI and all updates and corrections therein are filed electronically with FinCEN through a system made available through www.fincen.gov.
An entity-by-entity analysis is required by a corporate compliance professional to verify eligibility for exemption. Under the CTA, it is unlawful for any person to wilfully provide, or attempt to provide, false or fraudulent beneficial ownership information, and unlawful for that person to wilfully fail to report complete or updated beneficial ownership information to FinCen. Any person who violates either of the above is liable to the US for a civil penalty of not more than USD 500 for each day that the violation continues or has not been remedied, and may be fined not more than USD 10,000, imprisoned for not more than 2 years, or both.
If any of your clients who have operations in the US have questions about their status, or believe an exemption status has been misapplied, we are here to assist.
XLNC member firm Scali Rasmussen, PCLos Angeles, CA, USAT: +1 213 239 5622Legal, Corporate Finance
Christian ScaliContact Christian
Christian Scali is the founder and co-managing shareholder of Scali Rasmussen, PC., California.
