Corporate Transparency Act (CTA)
The Corporate Transparency Act (CTA) is an important U.S. legislation aimed at combating illegal activities facilitated through the use of anonymous shell companies. It was enacted as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, which became law on January 1, 2021.
The CTA was enacted to enhance corporate transparency and accountability with the goals to close loopholes with the use of shell companies and align with the global standards.
Effective January 01, 2024, business ownership reporting is mandated for certain U.S. entities and foreign entities.
Who must report under CTA?
Business Ownership Information (BOI) needs to be reported for the U.S. entities and in certain cases for the foreign entities as well.
What U.S. entities need to report?
Under the Corporate Transparency Act (CTA), “covered entities” refer to specific types of business entities that are required to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Here’s a detailed look at what constitutes a covered entity under the CTA:
- Corporations and Limited Liability Companies (LLCs): The primary focus is on corporations, LLCs, and other similar entities that are created by filing a formation document with a state or tribal jurisdiction in the United States.
- Other Similar Entities: The CTA also applies to any other entity that is created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. This broad definition is intended to encompass a range of business structures that might otherwise be used to conceal beneficial ownership.
Exclusions and Exemptions
While the CTA covers a wide range of entities, it also specifies certain exclusions:
- Publicly Traded Companies: These are typically excluded as they are already subject to significant disclosure requirements under other federal securities laws.
- Certain Regulated Entities: Entities such as banks, credit unions, and insurance companies are exempt since they are subject to other regulatory disclosure regimes.
- Larger, Operational Companies: Companies that employ a substantial number of employees, have significant operating expenses or revenues and have a physical presence in the United States are often exempt, under the assumption that they are less likely to be used for illicit purposes.
- Other Specific Exemptions: The CTA outlines additional categories of entities that are exempt based on certain criteria.
Does CTA require reporting from Foreign Corporations?
The key criterion for a foreign entity’s obligation to report under the CTA is its engagement in business activities within the United States.
Foreign entities that are registered or qualified to do business in any state or tribal jurisdiction in the United States fall under the purview of the CTA. This includes entities like corporations, limited liability companies (LLCs), and other similar legal entities created under the laws of a foreign country but registered to operate in the U.S.
Examples of Foreign Entities Required to Report:
- Foreign Corporation with U.S. Operations: A corporation formed in another country (like Canada, Germany, Japan, etc.) that has registered to conduct business in one or more U.S. states. For example, a German manufacturing company that registers to open a factory in Ohio needs to report BOI to FinCEN.
- Foreign LLC Operating in the U.S.: A limited liability company formed in a foreign jurisdiction but registered to do business in the U.S. For instance, a tech startup from India setting up a branch or office in Silicon Valley, California, would be required to comply with the CTA.
- Other Business Entities: Any other entity that is equivalent to a corporation or LLC in its structure and purpose, formed under the laws of a foreign country, and registered to do business in the U.S.
Canadian entities that may be required to report:
Due to the complex trade relationships, it’s not a surprise that, many Canadian entities are subject to reporting under CTA.
Some of such examples are:
Example 1: Canadian Tech Startup Expanding to the U.S.
Let’s assume, “InnovateCanada Inc.”, is a Canadian technology startup based in Toronto. InnovateCanada Inc. decides to establish a subsidiary in California to enter the U.S. market. It registers in California as a foreign entity authorized to do business. As a foreign entity registered to do business in the U.S., InnovateCanada Inc. is required to report its beneficial ownership information to FinCEN.
Example 2: Canadian Retail Chain Opening U.S. Stores
“Northman Retailers”, is a Canadian retail chain with headquarters in London, Ontario. Retailers opens several stores in New York and registers with the New York State Department as a foreign business entity. By registering and operating in New York, Northman Retailers becomes subject to the CTA and must report the identities of its beneficial owners to FinCEN.
Example 3: Canadian Investment Firm with U.S. Operations
“Cana Investments Ltd.”, is an investment firm based in Montreal. Cana Investments Ltd. establishes a branch in Miami, Florida, for its U.S. clients and registers as a foreign entity eligible to conduct business in Florida. This registration obligates Canuck Investments Ltd. to disclose beneficial ownership information to FinCEN under the CTA.
What about having an EIN with no Permanent Establishment in the U.S.?
According to FinCEN and the CTA, the reporting requirement for BOI is primarily based on whether an entity is created or registered to do business in the U.S. This is applicable to both domestic entities and foreign entities operating in the U.S.
An Employer Identification Number (EIN) is a federal tax identification number for businesses in the United States. While many foreign entities operating in the U.S. will have an EIN for tax purposes, having an EIN in itself does not automatically trigger the CTA reporting requirements.
For example, an IT Consultant who provides remote services to its U.S. clients from her office in Canada may have an EIN to file protective or treaty based returns at end of the year. Since this particular company did not register or file with state departments in the U.S., it is not required to report.
What about U.S. persons in Canada having U.S. LLCs?
A “disregarded entity” is a business entity that is not separate from its owner for federal tax purposes, with the most common example being a single-member LLC. These entities, despite being disregarded for federal tax purposes, are still considered separate entities for the purposes of the CTA.
Even if the U.S. LLC is a disregarded entity but owned by a Canadian who claims treaty based position, is also subject to reporting.
What must be reported?
Beneficial Ownership Information
This includes name, date of birth, address and identification number of each beneficial owner. For U.S. persons: A valid U.S. passport number, a U.S. Social Security number, or a driver’s license or other state-issued identification number. For non-U.S. persons: A valid passport number and country of issuance, or another similar identification number issued by a foreign government.
Information about the Reporting Company
The reporting company needs to report company name, address, identification number, and State or Tribal Jurisdiction of Formation: Or, if a foreign entity, the state or tribal jurisdiction where it is registered to do business.
Under the Corporate Transparency Act (CTA), the term “applicant” refers to the individual(s) who files the document that creates a new entity or registers a foreign entity to do business in the United States. Applicants for the entities created before Jan 01, 2024, are not required to be reported, however, moving forward, applicants must be reported if the entity is created on or after Jan 01, 2024.
Who will use this information?
FinCen is building this database so who are the users of this information?
The whole objective of CTA is to ensure transparency and combat illegal activities. The information collected by FinCEN has an ultimate use. FinCEN has published a fact sheet: Beneficial ownership information access and safeguards final rule.
When and Where to Report?
FinCEN has prepared a long list of FAQs answering many of the questions about BOI reporting.
Reporting entities must file the BOI with FinCen to avoid penalties:
- Entities created or Registered before Jan 01, 2024 – Due January 1, 2025
- Entities created or registered on or after 01/01/2024 and before 01/01/2025 – Within 90 days of creation/registration
- Entities created or registered on or after 01/01/2025 – Within 30 days
- Updates to previously submitted BOI must be submitted within 30 days.
Noncompliance with BOI reporting also comes with hefty penalties. There are both civil and criminal penalties for disregarding the reporting obligations. A person who willfully violates the BOI reporting requirements, may face $500 a day up to $10,000 penalty. For errors and omissions on actual reporting, FinCEN allows a temporary 90 days grace period to correct. As this is an evolving compliance area , you must check FinCEN website to ensure that you have the most accurate information.
Many clients should be able to file this information themselves. FinCEN has done a great job, we recommend at least viewing the brochure.