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As dissected in an earlier blog - The Corporate Transparency Act – Who must file, the term “Reporting Company” under the Corporate Transparency Act is defined to include: (1) a US corporation; (2) a US limited liability company (LLC) or (3) any other US entity that is created by the filing of a document with state authorities (plus any non-US entity that registers to do business in a US state). The third prong is subject to interpretation, but envisaged to include limited liability partnerships, limited liability limited partnerships, business trusts (a/k/a statutory trusts or Massachusetts trusts), and most limited partnerships. Critically for trustees and other fiduciaries, the definition seems to exclude most trusts because few such trusts must file a document with a secretary of state or similar office of a jurisdiction within the United States for their establishment.
On this basis, trustees will not need to disclose Beneficial Owner Information (or “BOI”) of any US trusts they administered unless the trust owns underlying companies that qualify as Reporting Companies, for example US LLCs. In that admittedly common circumstance, the trustee must review the Beneficial Owners of any Reporting Company it administers and disclose their Beneficial Owner Information. There is also a requirement to disclose the “Company Applicant”, generally referring to the person who signed the document registering the Reporting Company. The Corporate Transparency Act roughly aligns the definition of a Beneficial Owner for a Reporting Company with the one set out in the Financial Action Task Force’s 2012 recommendations (known as the “FATF Recommendations”). Accordingly, a Beneficial Owner is any natural person–
Crucially for trustees, any qualifying Beneficial Owner interests held through a trust are attributable as indirect holdings of the trust to one or more parties to the trust. Furthermore, throughout the NPRM, FinCEN appears inclined towards a maximalist approach that treats any Persons connected with the trust with the authority to demands distributions for themselves–as a mandatory beneficiary or as the sole discretionary beneficiary–or to mandate them for others–such as settlors, trustees or other parties vested with powers of appointment–as potential BOs (Prop. Reg. 31 CFR 1010.380(d)(3)(ii)(C)). But the scope of the term indirect beneficial ownership as applied to interests held through trusts is in not-yet fully settled.
As set out in the preamble to the NPRM, FinCEN is calling for comments in advance of the final regulations as to which parties to a trust will be indirectly attributed the holdings of the trust. The two familiar methods for assigning indirect ownership of trust assets are the IRS one and the FATF one. The IRS method ascribes tax ownership to settlors of grantor trusts and beneficiaries of non-grantor trust under a facts and circumstances test that is rife with subjectivity. FinCEN may prefer the blunter–but more easily administered–FATF method. Under FATF definitions (imported into the FATCA IGAs and CRS), certain parties are classified as Beneficial Owners (i.e. “Controlling Persons”) of the trust based on their title. As FinCEN is seeking a binary answer–reportable or not–and does not calculate a tax on a portion of the trust’s income, the FATF method is probably the more attractive one.
As such, it seems likely that trust companies may need to conduct a non-trivial amount of reporting on their clients, as well as on their own trustees and other personnel. Therefore, every US and non-US trust company administering US holdings for its clients, should prepare for such an outcome and assess the compliance resources necessary to satisfy the reporting for the LLCs and other Reporting Companies it administers.
That is not the end though. If a non-US trustee administers a structure that holds US assets (even where no component entity of that structures is itself US), clients may be reportable by Reporting Companies not administered by the trustee. Most prominently, such reporting will involve US private equity and real estate investments, which often involve US LLCs or LLPs. These holding structures often divide and allocate income streams for US income tax profiles. Due to these apportionments, a fund investor with a non-major share in the overall fund may in fact own controlling portions of certain US entities embedded within the structure. As a client service, trustees may opt to analyze these scenarios in advance and ready its clients for the consequences (for example, reportable parties may apply for a “FinCEN identifier” to maintain anonymity towards third-party Reporting Companies).
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