Law Unmasking Anonymous U.S. Companies May Require New Tax Planning for Foreign Investors in U.S. Entities by Arthur J. Dichter, JD, LLM
With so much attention paid to the impact of the COVID-19 pandemic and the various forms of U.S. government stimulus, international businesses with foreign investors may have missed the passage of a new U.S. law imposing stricter anti-money-laundering compliance procedures for disclosing the identities of their beneficial owners beginning as soon as 2022.
On Jan. 1, 2021, Congress enacted the Fiscal Year National Defense Authorization Act, which includes the Corporate Transparency Act (CTA), aimed at disclosing the identities of individuals, businesses and similar entities that use the U.S. financial system for legitimate, legal purposes or for illicit activities, such as hiding wealth from taxing authorities or engaging in money laundering. Under this new law, “reporting companies” will be required to file with the Financial Crimes Enforcement Network (FinCen) detailed reports containing the names, addresses, passport numbers and other personally identifiable information of all U.S. and foreign beneficial owners who have certain interests in those entities. An entity’s failure to report beneficial ownership information can result in fines of as much as $10,000 and up to two years in prison.
Over the past several years, the U.S. has gained a reputation around the world as one of the best jurisdictions for wealthy families to maintain privacy and keep their identities secret. While the impact of the CTA on that reputation remains to be seen, it is important to recognize that secrecy and anonymity are not necessarily nefarious objectives. Rather, most companies formed in the United States have been formed for perfectly legitimate business and asset-protection purposes. In many countries, individuals seek financial secrecy not to evade taxes or launder money but to provide for their personal safety and security. Knowledge of financial information in the wrong hands can put individuals and their families in danger.
Who is a Beneficial Owner?
The CTA defines “beneficial owners” of required reporting companies as individuals who directly or indirectly:
- exercise substantial control over an entity, or
- own or control at least 25 percent of the entity’s total ownership interests.
Specifically excluded from the definition of beneficial ownership are 1) minor children; 2) individuals acting as intermediaries, custodians or agent on behalf of another individual; 3) individuals acting as employees who assume control or ownership interest in the company solely due to their employment status; 4) individuals whose only interest in the entity is through a right of inheritance; and 5) creditors of the reporting entities that do not meet the substantial control and minimum ownership interest definition of a beneficial owner.
What Types of Entities Must Meet Reporting Requirements?
The law broadly defines a reporting company as a corporation, limited liability company or similar entity “created by the filing of a document with a secretary of state or similar office under the law of any U.S. state or Indian Tribe” or “formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe.”
Under this definition, foreign entities that have not registered to do business in any state may be exempt from the reporting requirement. This will require further evaluation of an entity’s legal structure. Moreover, the law specifically excludes from the reporting requirements 1) most non-profits; 2) most financial institutions, including banks, credit unions and financial investment and securities trading firms; as well as 3) entities with a physical presence in the U.S. that employ more than 20 workers and report more than $5 million in annual revenue on their U.S. tax returns.
The treatment of trusts under the CTA is generally unknown and will likely remain so until the U.S. Treasury Department issues regulations. While not likely to be considered a reporting company, a trust is subject to being disclosed as the beneficial owner of a reporting company. It is unclear whether the trust, its trustee or its beneficiaries will be considered as the beneficial owners.
When Must Companies Begin CTA Reporting?
The CTA will become effective when the Treasury Department issues regulations, which is mandated to occur no later than one year after the law’s enactment on Jan. 1, 2020.
Once the CTA is in force, new entities will need to provide the required information at the time of formation or registration. Existing companies will have two years after the regulation’s effective date to submit the required information. If there is a change to an entity’s reported information, the reporting company will need to file an update with FinCen within one year from the date of the change.
Disclosures of Information
FinCen will maintain a private and encrypted database of reported beneficiary information, which it is not permitted to disclose except when a request is made through “appropriate protocols” from 1) a federal agency engaged in national security, intelligence or law enforcement activity, or state or local law enforcement agency pursuant to a court order; 2) a federal agency on behalf of a law enforcement agency, prosecutor or judge of another country under an international treaty or other agreement or, if not subject to a treaty or other agreement under other special procedures; 3) a financial institution subject to customer due diligence requirements with the consent of the reporting company; or 4) a federal functional regulator or other appropriate regulatory agency.
For individuals living in jurisdictions where anonymity is essential for purposes of personal safety and security, the risk of disclosing beneficial owner information will have to be evaluated when considering whether to continue to use U.S. entities for tax planning.
What to Do Now?
Applicable entities will not need to begin complying with the CTA’s beneficial ownership reporting requirement until as early as January 2022. However, it is not too early for taxpayers to begin evaluating their exposure to the new law and gathering the specific information they will need to report to FinCen when the regulations go into effect, including the following details about each beneficial owner:
- Full legal name
- Current address (business or personal)
- Date of birth
- Acceptable identifying number, including those contained on a driver’s license issued by a U.S. state, a U.S. passport or a passport issued by a foreign country.
In planning for CTA compliance, non-resident aliens (NRAs) with beneficial ownership interests in U.S. entities should meet with their CPAs and advisors to assess their short- and long-term goals against the new law and consider the impact of restructuring their ownership interest for maximum tax efficiency.
About the Author: Arthur Dichter, JD, is a director of International Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where we works with multi-national businesses and high-net worth foreign individuals to structure their assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.