The Corporate Transparency Act – Who must file

At the end of 2020, the US Congress enacted the Corporate Transparency Act, mandating that the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury establish and operate a US Federal Beneficial Owner Registry. On 7 December 2021, FinCEN released the Notice of Proposed Rulemaking (NPRM) for FinCEN Rule 6403, setting forth the pending regulations for the Corporate Transparency Act after having digested the comments submitted from interested parties. The proposed regulations in the NPRM address: (1) who must file; (2) when and how you must file; and (3) what information you must provide (including the scope of reportable Beneficial Owners). The following blog looks at point (1).

For an analysis of points (2) and (3), please refer to:

• The Corporate Transparency Act - When and how you must file
• The Corporate Transparency Act - What information must you provide

For an assessment of the impact of the Corporate Transparency Act on trusts, please refer to:

• The Corporate Transparency Act - The impact on trusts

 
Who must file (Prop. Reg. 31 CFR 1010.380(c))
 
In order to grasp the scope of entities charged with a reporting duty under the Corporate Transparency Act, it warrants considering the purpose of it. It is not tax-driven. Instead, this is an anti-money laundering and anti-terrorist financing tool. Accordingly, there are no efforts to identify which entities are likeliest to be used for tax evasion or to limit the information collected to that of US taxpayers. As such, it seems that Congress and FinCEN favor maximum coverage and enforceability over subtlety and efficiency; the Corporate Transparency Act is a mallet, not a scalpel.
 
To that end, the term “Reporting Company” 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.
 
This scope is broad and the exceptions to it are limited to publicly traded companies, government entities and financial institutions, utilities, and other regulated firms. It is, however, neither consistent–as state laws may vary as to which entities must register–nor comprehensive–as it omits some partnerships, most trusts and all non-US entities except the handful registered to do business in a US state. On the other hand, it will be straightforward for FinCEN to compare registrants under the Corporate Transparency Act with the companies registered with the secretaries of state to identify scofflaws. Thus, in sum, it seems to be child’s play to avoid being in scope for the Corporate Transparency Act, but extremely difficult to get away with ignoring it, if you are in-scope.
 
For Swiss and other non-US administrators of US entities qualifying as Reporting Companies, the definition will be straightforward to apply with little need for a demanding analysis. However, in other circumstances, the presence of or a connection to a Reporting Company may be unexpected. For example, in many situations, people–US and non-US–hold US real property via a US LLC. As these LLCs are invariably disregarded for income tax purposes, they play little daily role in the investment structure. Now, they will trigger a disclosure duty. Less clear-cut scenarios may emerge out of fund structures, especially for alternative investments like private equity. These holding structures are set up using LLCs and other US entities in order to divide and allocate income streams for US income tax purposes. Due to these apportionments, a fund investor with a non-major share in the overall fund may in fact own significant portions of certain US entities embedded within the structure. In sum, Swiss and other non-US Persons will need to dissect their holding structure in order to conclusively determine which, if any, of the US entities they own or manage will qualify as Reporting Companies per the Corporate Transparency Act.
 
If you wish to learn more about the Corporate Transparency Act, please select one of the following topics–

• The Corporate Transparency Act Starter FAQs – The Genesis of a National Beneficial Owner Registry
• The Corporate Transparency Act – When and how must you file
• The Corporate Transparency Act – What information you must provide
• The Corporate Transparency Act – The impact on trusts

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