Amongst the unexpected and peculiar features of the proposed Qualified Intermediary (QI) Agreement–as expanded to cover withholding on payments from publicly-traded partnerships (PTPs)–the new nominee reporting requirement per §6031 of the Internal Revenue Code (IRC) stands apart.
 
Background to the Revamped Sections of the Proposed QI Agreement
In May 2022, the US Treasury Department released IRS Notice 2022-23, a proposed revision to the QI Agreement. Under the new draft sections, QIs may assume withholding and reporting obligations under §§ 1446(a) and 1446(f) of the US Treasury Regulations for payments connected to PTPs. The new provisions for PTP withholding are needed because a Non-US Person who sells an interest in a partnership that could earn income effectively connected with a US trade or business is subject to US federal income taxation per §864(c)(8) of the 2017 tax legislation. In parallel to this substantive rule, Congress added a new withholding dimension under §1446, imposing on a buyer of an interest subject to §864(c)(8) the obligation to withhold 10% of the amount realized.
 
For further elaboration on these concepts, please refer the MTL blogs on §§ 864(c)(8) and 1446(a) and (f), here.
 
The §1446(f) statutory provision, however, did not explain how that ought to work for PTPs, where the buyer and seller are typically invisible to one another. As such, the US Treasury Department promptly suspended the withholding regime for PTPs via IRS Notice 2018-02 and, via a series of subsequent notifications and the publication of the withholding regulations in late 2020, eventually, pushed the activation date to 1 January 2023. With the revamped QI Agreement, the PTP withholding regime is moving into the implementation phase. As stated in the preamble to Notice 2022-23, the objective of the new PTP sections to the QI Agreement is straightforward: To align the treatment of PTP payments with those of payments traditionally processed by non-US custodial institutions. However, rather than ensuring frictionless continuity from dividend withholding to PTP payment withholding, the proposed QI Agreement introduces a few novel aspects to the QI Regime.
 
Nominee Reporting Requirements under the Proposed QI Agreement for PTP Withholding
Some novel aspects of the proposed QI Agreement for PTP Withholding, such as the new official QI status of the “Disclosing QI” and strict demands for US Taxpayer Identification Numbers (TINs) from non-US Persons, may be disruptive of existing QI operations. Only one new feature, however, obliges parties to set up and maintain a fresh tax reporting mechanism: Nominee reporting.
 
Nominee reporting per §6031(c) of the IRC is not a new provision and it serves an essential role outside the QI Regime. Anytime a nominee holds a partnerships interest (of any partnership, not just a PTP), the nominee is charged with ensuring that the partnership has sufficient information on the beneficial owner to provide an accurate Schedule K-1 to the partner and analogous return to the IRS. Prior to this year’s draft QI Agreement, the §6031(c) concept of a “nominee” was commonly understood to refer to a Person holding the reportable partnership interest during the partnership’s tax year in its own name on behalf of the beneficial owner of the interest (see e.g. Treas. Regs. §1.6031(c)-1T). For this reason and because PTP and other partnership interests were previously held in non-QI accounts, nominee reporting did not concern the QI system. That has now changed.
 
Proposed Section 2.92 of the new draft QI Agreement adds a series of new definitions to accommodate the jargon of PTP withholding and partnership taxation, one of which is a definition of a “Nominee,” which explicitly includes Withholding QIs. Furthermore, proposed Section 8.07 widens the nominee reporting requirement to the other types of QI statuses, as follows–

• Withholding QIs may EITHER prepare the nominee reporting information set forth in Treas. Regs. §1.6031(c)-1T(a) and deliver it to the PTP or its designated agent OR prepare the nominee reporting information set forth in Treas. Regs. §1.6031(c)-1T(h) and provide it to the PTP interest’s account holder (i.e. the beneficial owner partner or to the next intermediary in the payment chain).
• Non-withholding QIs must fulfill identical nominee reporting duties as Withholding QIs (despite not being explicitly named in the definition of a “Nominee” in Section 2.92).
• Disclosing QIs must deliver the information described above for §1.6031(c)-1T(a) to the PTP or its designated agent or to its own nominee (i.e. the intermediary immediately upstream from it in the payment chain), which must formally operate as either an agent of the PTP or of the QI.

 
While the mechanics of nominee reporting under IRC §6031 are markedly less cumbersome than some of the other reporting required of QIs, it constitutes an additional reporting function that must be set up, tested and maintained. First, the QI must be certain it can collect all mandatory information (notably, US TINs) before it opts for a strategy, which may depend upon interchanges of information with third parties, which tend to slow down or complicate tax reporting. Second, PTP interests may need to be shifted across custodial accounts in order to avert duplicative reports to the IRS. Third, if the QI decides to adopt the option under§ 1.6031(c)-1T(h) to intermediate the K-1s from the PTP to the beneficial owner partner, it will need a grasp of US partnership taxation concepts to provide a meaningful review of the information for which it is responsible. Finally, any defect with respect to nominee reporting is a material failure (Section 10.03(B)(1)) which, if left uncorrected, would lead to an event of default and the termination of the entity’s QI status.
 
While any of the above challenges around nominee reporting under IRC §6031 and the new PTP Withholding provisions of the proposed QI Agreement may be softened in the final version of the QI Agreement (the IRS expressly requested comments on Section 8.07 in the preamble), It is a necessary evil. Thus, nominee reporting will likely remain a new and unexpected obligation for most QIs to fulfil.
 
If you wish to discuss the above analysis or any other aspects of the QI Regime in greater detail, please contact us at paul@millentaxandlegal.ch to arrange a conversation.

On 23 August, the IRS released Notice 2022-37, extending the current lite version of the §871(m) regime, which has been in effect since the issuance of Notice 2016-76 (and was further prolonged via Notices 2018-72 and 2020-2). Per the terms of the new Notice, the “§871(m) Lite” regime shall remain in effect for at least another two years.
 
The lite version of §871(m) relaxes the following key elements of the §871(m) regime, each of which was prolonged per the new Notice–

• Only derivative instruments with a delta equal to one at the time of issuance will be in-scope for §871(m) withholding. This limitation to delta one products has multiple material consequences, such as–
  • The exclusion of virtually any product with an optionality dimension
  • A reduction in the overall volume of in-scope derivative instruments
  • The sidelining of the Substantial Equivalent Test for complex contracts (as their deltas by definition cannot be measured and thus cannot equal one)
• The simplification of the “combination transaction” anti-abuse rule so that only products that are deliberately packaged together must be treated as a single derivative instrument under §871(m) Lite
• The extension of a “good faith” defense for Withholding Agents and taxpayers in cases of non-compliance
• The allowance for Qualified Derivatives Dealers (QDDs) qua QDDs to continue to receive actual dividend payments gross (i.e. not just synthetic ones), thereby allowing QDDs to continue to hedge their exposures as derivative issuers with physical equites, rather than only with equity derivative instruments
• The relief for QDDs until 2025 to satisfy the full set of compliance duties prescribed by the Qualified Intermediary Agreement, such as periodic reviews and the determination of their so-called “net delta”

 
Undoubtedly, the extension is welcome news. Few affected parties were ready to revamp their withholding mechanisms and other system’s requirements by 1 January 2023 in time to fulfill their duties under a new §871(m) regime or under a reversion to the 2015 §871(m) Treasury Regulations. Thanks to Notice 2022-37, all affected parties will enjoy another full two-year period to implement any changes to the §871(m) regime. The problem now is not knowing what those changes are.
 
The latest §871(m) extension provided scant indication of how or when the IRS intends to revise the regime as set out in the 2015 §871(m) Treasury Regulations. We can reasonably draw two conclusions about the future of §871(m): It will neither remain in its Lite form nor revert to the regime described in the 2015 Treasury Regulations. If either of those outcomes were its permanent destiny, then presumably the IRS would have said so by now. Instead, we must wait and wonder what regime change will come.

Q1. What is the Corporate Transparency Act?
A1. 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 federal beneficial owner registry.
 
Q2. How does the Corporate Transparency Act function?
A2. The Corporate Transparency Act compels entities qualifying as “Reporting Companies” to disclose all US and non-US Person beneficial owners of the Reporting Company.
 
Q3. What counts as a Reporting Company pursuant to the Corporate Transparency Act?
A3. The Reporting Companies includes all US corporations, US limited liability companies (LLCs) and other similar enterprises that are created by the filing of a document with a secretary of state or similar state office.

For more on Reporting Companies please refer to:

• The Corporate Transparency Act - Who must file

Q4. Are any US entities not Reporting Companies under the Corporate Transparency Act?
A4. Yes, entities that do not need to register with or submit a form to a secretary of state or similar state office in order to be set up do not qualify as Reporting Companies. Examples vary by state, as each state sets its own requirements, but generally the omitted entities include simple partnerships and trusts.​

For more on trusts under the Corporate Transparency Act, please refer to:

• The Corporate Transparency Act - The impact on trusts

Q5. So only a US entity can qualify as a Reporting Company per the Corporate Transparency Act?
A5. No, but a non-US entity will not qualify unless it actively registered to do business in a US State.
 
Q6. Who counts as a “Beneficial Owner” for purposes of the Corporate Transparency Act?
A6. The definition of Beneficial Owners refers to “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.”
 
Q7. What counts as substantial control under the Corporate Transparency Act?
A7. There is no definition of substantial control provided, but three of the indicators of substantial control specified are (1) service as a senior officer; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors; and (3) direction, determination, or decision of, or substantial influence over, important matters of the Reporting Company.
 
Q8. Does indirect ownership by a Beneficial Owner refer to ownership stakes held through other entities?
A8. Yes, and there are no blockers.
 
Q9. Will the Reporting Company need to apply ownership aggregation rules in order to calculate ownership percentages?
A9. Yes, almost surely, but hopefully milder versions than the ones set out in the US tax code.

For more on Beneficial Owners please refer to:

• The Corporate Transparency Act - What information must you provide

Q10. Are the Beneficial Owners the only reportable parties under the Corporate Transparency Act?
A10. No, a Reporting Company must also disclose its Company Applicant, who is the person who signed or authorized the Reporting Company’s registration or application for establishment with the relevant secretary of state or similar state office.
 
Q11. What information needs to be disclosed under the Corporate Transparency Act?
A11. The Reporting Company must disclose the following “Beneficial Owner Information” (or “BOI”) for each of its natural persons qualifying as reportable–

• Full legal name;
• Date of birth;
• Current residential or business street address; and
• A unique identifying number from one of a set of approved documents and a copy of that document.

The Reporting Company must also disclose information on itself, as follows–

• Full legal name;
• A trade name or “doing business as” name, if any;
• Current business street address;
• The jurisdiction of formation; and
• The TIN or EIN issued by the IRS.

 
Q12. Is the information reported under the Corporate Transparency Act confidential?
A12. The registry is non-public, but the information is not completely off-limits. The registry information will be made available to other federal agencies for purposes of law enforcement and, in limited circumstances, to other governments pursuant to a valid request
 
Q13. How many times must a Reporting Company disclose its Beneficial Owner?
A13. Just one time is mandatory, but the Reporting Company must update the disclosure within one year of a change in circumstance to the beneficial ownership information originally submitted.
                                                                                         
Q14. By when must a Reporting Company disclose its Beneficial Owners and Company Applicant?
A14. The Corporate Transparency Act’s mandatory disclosures must be made at the time of formation for Reporting Companies established on or after the effective date of the forthcoming final regulations. Reporting Companies already in existence at that time must submit the disclosure within two years from the effective date of the final regulations.​

For more on the reporting mechanics and confidentiality safeguards under the Corporate Transparency Act, please refer to:

• The Corporate Transparency Act - What information must you provide

Q15. Can any of this change before the Corporate Transparency Act comes into force?
A15. Yes, but it is most unlikely. 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 final regulations are expected in a few months and are unlikely to contain material revisions.
 
If you wish to learn more about the Corporate Transparency Act, please select one of the following topics–

• The Corporate Transparency Act – Who must file
• 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​

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–

• Owning–directly or indirectly–25% or more of the ownership interests (broadly, equity interests) in a relevant entity; or
• Exercising “substantial control” over the entity, including via any contracts, arrangements, understandings, relationships, or otherwise (as reviewed in this previous blog - The Corporate Transparency Act – What information must you provide)

 
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).
 
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 – Who must file
• The Corporate Transparency Act – When and how must you file
• The Corporate Transparency Act – What information must you provide

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 (3).

For an analysis of points (1) and (2), please refer to:

• The Corporate Transparency Act – Who must file
• The Corporate Transparency Act – When and how must you file

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

• The Corporate Transparency Act – The impact on trusts

 
What information must you provide (Prop. Reg. 31 CFR 1010.380(d))
 
The Corporate Transparency Act compels Reporting Companies to disclose all US and non-US Person Beneficial Owners of the Reporting Company. The definition of Beneficial Owners per the Corporate Transparency Act refers to “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.”
 
There is no definition of “substantial control” provided for purposes of the Corporate Transparency Act, but three indicators of substantial control specified are (1) service as a senior officer; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors; and (3) direction, determination, or decision of, or substantial influence over, important matters of the Reporting Company. However, a fourth miscellaneous category seeks to captures anyone exercising any other form of “substantial control” over the Reporting Company. This control may be exercised directly or indirectly via proxies.
 
As for the ownership prong, in most cases of direct ownership the application of the threshold will demand little more expertise than grade school arithmetic. However, FinCEN is already safeguarding against the anticipated efforts to avert reporting through opaque structuring (“indirectly”) or financial chicanery (“through any contract, arrangement, understanding, relationship, or otherwise”).
 
Any equity interests in a Reporting Company (or interests treated as such, see below) that are held through another entity must be calculated as a percentage of ownership of the Reporting Company and attributed to the natural person(s) owning the other entity. This amount must be added to any other amounts owned directly or indirectly in the Reporting Company. Further, FinCEN intends to promulgate an aggregation requirement such that equity interests held by related or subordinate parties must be added to any other amounts owned directly or indirectly in the Reporting Company. The complexity of these aggregation rules is not yet settled. Finally, there are essentially no blocker companies to obscure or dilute Beneficial Ownership. Only if the Reporting Company is owned via a company exempt from reporting under the Corporate Transparency Act (e.g. utilities, banks, charities; see this blog - The Corporate Transparency Act – Who must file, for further elaboration) may the identity of the ultimate Beneficial Owner be withheld.
 
Furthermore, the use of capital or profit interests (including partnership interests), options, warrants, convertible debt instruments and any other type of contract right granting the holder control over a Reporting Company akin to equity-based control all count too. Thus, the concept of beneficial ownership for purposes of the Corporate Transparency Act is broad, tall, and deep. In theory, therefore, only the five specifically excepted parties–minor children, nominee agents, employees qualifying solely due to their employment, rights holders due to future inheritance and certain creditors–will escape disclosure of their “Beneficial Ownership Information.” In fact, the only parties from whom Beneficial Owners can conceal their identities under the Corporate Transparency Act are the Reporting Companies they ostensibly control. By means of a FinCEN Identifier, Beneficial Owners may be reported under an identifying number obtained from FinCEN. In this way, the Reporting Companies can fulfil their disclosure obligations without learning the identity of their Beneficial Owners.
 
In addition to its Beneficial Owners, a Reporting Company must also disclose its “Company Applicant” to FinCEN under the Corporate Transparency Act. The Company Applicant is the person who signed or authorized the Reporting Company’s registration or application for establishment with the relevant secretary of state or similar state office.
 
The Reporting Company must disclose the following Beneficial Ownership Information for each of its natural persons qualifying as a Beneficial Owner or Company Applicant–

• Full legal name;
• Date of birth;
• Current residential or business street address; and
• A unique identifying number from one of a set of approved documents and a copy of that document.

 
Furthermore, the Reporting Company must also disclose information on itself, as follows–

• Full legal name;
• A trade name or “doing business as” name, if any;
• Current business street address;
• The jurisdiction of formation; and
• The TIN or EIN issued by the IRS.

 
The Reporting Company and Beneficial Ownership Information reported on the FINCEN registry is non-public, but not completely inaccessible to outside parties. While the confidentiality measures around Beneficial Ownership Information will be the core theme of a subsequent FinCEN NPRM, the statute itself contemplates the distribution of confidential information to other US government agencies, to banks in special circumstances and even to foreign government authorities. The topic of confidentiality safeguards will be the focus of a later blog, once the NPRM for the Corporate Transparency Act focused on that subject is issued.
 
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 – Who must file
• The Corporate Transparency Act – When and how must you file
• The Corporate Transparency Act – The impact on trusts ​

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 (2) and the enforcement provisions.

For an analysis of points (1) and (3), please refer to:

• The Corporate Transparency Act - Who 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 this blog.

• The Corporate Act - The impact on trusts 

When and how must you file (Prop. Reg. 31 CFR 1010.380(a))
 
All non-exempt Reporting Companies–US or non-US–must file at least one Beneficial Owner disclosure (the “Initial Report”) under the Corporate Transparency Act. US Reporting Companies in existence (and non-US Reporting Companies already registered) as of the activation date of the final regulations will have one year from that date to file the Initial Report with FinCEN. US Reporting Companies set up (and non-US Reporting Companies first registered) on or after the activation date of the final regulations will be required to file their Initial Report with FinCEN within 14 calendar days of the date on which they are set up or registered, respectively.
 
Submission of the Initial Report is the most significant step–but not the final one–to compliance under the Corporate Transparency Act. Reporting Companies must monitor their Beneficial Owners for any relevant changes in circumstances, such as a change to the information reported in the Initial Report or the identities of the Reporting Company’s Beneficial Owners. In the case of such a relevant change in circumstance, the Reporting Company must submit an Updated Report within 30 days of the change.
 
Prior to the activation date, FinCEN will organize a reporting portal and issue instructions, prescribing the form and manner for disclosure under the Corporate Transparency Act. Whether each disclosure will be made under penalties of perjury is not yet certain. However, each person filing a report will have to certify that it is accurate and complete, so at a minimum FinCEN intends to hold accountable the individuals filing on behalf of the Reporting Companies too.
 
How is it enforced (Prop. Reg. 31 CFR 1010.380(g))
 
Penalties for non-compliance with the Corporate Transparency Act can accrue swiftly. Intentional non-compliance in all its forms–including the non-disclosure of required information, the disclosure of inaccurate information or documentary evidence and the failure to file an Initial Report or Updated Report by the applicable deadlines–is punishable by civil penalties of up to USD 500 for each day the non-compliance continues. Furthermore, criminal non-compliance may result in fines of up to USD 10,000 and imprisonment for up to two years, or both.
 
Of perhaps greater interest than the amounts of the penalties is the scope of their application. Not only are Reporting Companies themselves subject to these penalties, but evidently any Beneficial Owners who refuse to provide (or provide false or misleading) information are too. It is plain from this pressure on all parties to cooperate at the risk of penalty that FinCEN is determined that non-compliance with the Corporate Transparency Act not be seen as a cost of doing business.
 
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 – Who must file
• The Corporate Transparency Act – What information you must provide
• The Corporate Transparency Act – The impact on trusts

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

No rest for the compliant. So soon as one task ends for Swiss Financial Institutions (FIs), a new one rises up in its place. This hydra-headed regime for account reporting began with FATCA classification and registration in 2014, followed by due diligence and first reporting in 2015 and 2016 and then the same cycle again for OECD CRS in 2017, 2018 and 2019. The current year will be unforgettable for so many reasons, one of which is the emergence of a fully-fledged FATCA and CRS enforcement regime. Elements of this regime are varied, ranging from the issuance of FATCA group administrative requests to the evolution of the OECD’s Model Mandatory Disclosure Rules (MDRs) into the EU’s DAC6 and beyond. Swiss FIs though will endure one more burden that arrives in earnest this year: Statutory CRS audits.
 
Many outstanding questions remain about the shape and scope of the statutory CRS audits in Switzerland, especially as applied to trust companies, single family offices and other specialized operations. In light of this uncertainty, the Swiss Federal Tax Administration (SFTA) and at least one major audit firm orchestrated some pilot programs for late 2018 and 2019 in order to explore these questions in advance of the full-throated audit process set to begin in fall 2020. I advised and consulted with several large Swiss FIs, including leading trust companies, undergoing such CRS test audits. Below please find some of the key lessons learned.
 
Written materials are essential

• The initial acts for the audit will be conducted off-site. The SFTA audit team will request and review your written documents related to the CRS compliance of the Swiss FI, such as policies and procedures, training materials, IT updates and form templates.
• The availability, accuracy and comprehensiveness of these written materials will help determine the course of the audit.
  • Any Swiss FI providing a complete set of policies and procedures, documenting the underlying interpretations with references to Swiss-specific regulations and evidencing an operational framework for CRS compliance, will set the audit on its own terms.
  • On the other hand, the auditors for a Swiss FI without comprehensive policies and procedures must fill in the gaps based on assumptions and undocumented assurances, meaning that even where the CRS strategy is compliant, its execution will remain in constant doubt.
• MTL advice: Prepare or purchase a comprehensive, written CRS Compliance Program for Switzerland (if you don’t have one already); compare your written CRS Compliance Program with your unwritten policies and procedures; and ensure that the two are compatible and then put them together to demonstrate a CRS-compliant FI based on these policies and procedures.

 
The auditor is expert

• So soon as the SFTA announced their plans for far-ranging CRS audits of all Swiss FIs, the questions emerged: Does the SFTA have the resources to audit the tens of thousands of Swiss FIs themselves? If not, whom will they hire (or allow the Swiss FIs to hire) to conduct all these audits? Can the SFTA train the auditors sufficiently in CRS? How will the SFTA auditors handle the different interpretations and applications of CRS for different industries (e.g. banks, trusts and fiduciaries, asset managers and insurers)?
• While several of these concerns remain viable, the final one–the expertise of the auditors as relates to specialized financial fields–appears settled. The early paranoia was that the SFTA would send in teams of under-trained junior staff with generic checklists that would prove ineffective or even useless in contact with the idiosyncrasies of the real world. However, that is not the case. In my experience with Swiss CRS audits thus far, the auditors are knowledgeable of CRS in general and of its application to the specific circumstances of different financial industries.
  • The very good news is, therefore, that certain niche industries will not need to exhaust their energies explaining a) how things work in their business and b) why, therefore, a certain CRS provision must be interpreted slightly differently for them than it would be for banks or the like.
  • Conversely, however, the same niche industries can no longer mystify the auditor by claiming that a certain CRS interpretation is customary and necessary in the special context of their business.
• MTL advice: Review your CRS compliance interpretations in order to ensure that they conform to the Swiss norms as set out in the assortment of Swiss guidance, including the law, the ordinance and the guidance notes. Ideally, you can identify any inconsistencies in advance and either justify or remedy them. If, however, the auditor spots a disconnect between the Swiss FI’s operations and Switzerland’s regulatory requirements, do not dismiss the disconnect as industry-based; the auditors will be familiar with any such industry customs for CRS and such brashness could undermine your credibility.

 
On-site data must be accessible

• Following a review of the requested written manuals, the auditors will conduct an on-site inspection, seeking to confirm through sample testing that the Swiss FI’s policies, practices and processes are implemented as designed.
• The on-site audit team will specify an array of pre-selected entities, designed to capture the range of different CRS classifications. The inspection consists primarily of a review of records and of sample accounts for these entities, including documentation that is not CRS-related (e.g. trust deeds, offering memoranda).
• MTL advice 1: Make sure the information sought by the audit team is readily accessible or you will needlessly irritate them and/or squander time as you hastily compile the requested information upon demand.
• MTL advice 2: Be ready to explain and perhaps justify any aggressive classifications you either assumed for yourself or accepted from your FI’s own account holders and controlling persons. While the SFTA auditors will examine documentation covering a full range of different CRS classifications, they will tend to focus their follow-up questions on the higher risk classifications, such as Active NFEs or non-reportable statuses, including certain FIs. Inexplicable inconsistencies in the use of these classifications would be damaging.

 
The interviews will test the compliance methodology

• As part of the written materials provided to the SFTA audit team at the onset of the CRS Audit, Swiss FIs must supply details on the project‘s logistics and team personnel. These details inform the selection of interviewees during the on-site portion of the audit and the questions they face.
• The interviews ought not be underestimated. The SFTA audit team will conduct multi-hour interviews that aim to test to test the knowledge of team members and confirm consistency across organization. For example, an interviewee might be asked to explain all the CRS-related steps undertaken in an account opening situation or in the preparation of a CRS report. Proper answers to these open-ended scenarios must be learned through repetition and should not be crammed into the interviewee’s head the night before the interview.
• MTL advice: Carefully select the CRS compliance team personnel you identify to the SFTA and define every role with precision because each member of your CRS compliance team might be interrogated about any topic covered by their ostensible role. Do not inflate the number of team members by adding junior colleagues or aggrandizing their contributions as they will struggle to respond to the interviewer’s questions.

 
The Swiss CRS audits will be a long, arduous journey for the SFTA. Despite impressive efforts to train staff and assemble audit teams, the sheer number of Swiss FIs necessitate a multi-year process. Further, whether you are a one-client Treuhand or a global banking behemoth, no Swiss FI knows when its time will might come or how much notice it will have to prepare itself for the audit. So far, the SFTA has notified the audited FIs well in advance, but that may easily shift once the audit program starts rolling. As such, the final item of MTL advice in this blog is this: Get started promptly in order to control the tempo of the process, rather than wait for the call from the auditors and subject yourself to their timeline.
 
For further support on the subject of Switzerland’s CRS audits, please email: paul@millentaxandlegal.ch
 
For A CRS Compliance Program for Fiduciaries (Swiss Edition)–and other materials critical to your CRS and FATCA compliance needs–please visit the CRS & FATCA General Store. Please see below for further information about our Swiss CRS Compliance Program.
 
A CRS Compliance Program for Fiduciaries (Swiss Edition)

• With the Federal Tax Authority launching its CRS-specific audits for Swiss Financial Institutions (FIs), many Swiss trustees, Single Family Offices and other fiduciaries will need to enhance and further document their compliance programs.
• Pursuant to the requirements in the Swiss CRS legislation, CRS Guidance Notes and other sources of applicable guidance (all reviewed in the original German), this document sets out a CRS Compliance Program for fiduciaries connected to Swiss private wealth management structures. It is, however, readily adaptable to other jurisdictions and types of FIs.

Per Article 32 of Switzerland’s CRS Law, failure to comply with CRS obligations is an offence punishable by a fine of up to CHF 250,000.

Last month, some EU Member States determined that a one-time deferral of the 2020 DAC6 reporting deadlines is preferable to the contingent measures and extendable delays proposed by the European Commission (EC). In response to the EC’s 8 May proposal to postpone the key 2020 reporting dates for three months with an option to extend the postponement for another three months, if necessitated by the novel coronavirus crisis, several EU Member States (e.g. Belgium, France, Holland, Luxembourg) streamlined the process, adopting a single, six-month delay from the onset.
 
Originally, the EU had scheduled 1 July 2020 as the pivotal date for 2020 DAC6 reporting: Reports for Reportable Cross-Border Arrangements (RCBAs) entered into on or after 1 July were due within 30 days of the trigger event, whereas those RCBAs initiated between 25 June 2018 and 30 June 2020 were due in bulk by 31 August 2020. These dates no longer apply, at least in some EU Member States. Pursuant to their announcements of last week, 2020 DAC6 reporting in those jurisdictions is pushed back by 6 months (or less, depending on the date of the specific trigger event). Accordingly, the new onset date is 1 January 2021 and the bulk report are due on or before 28 February 2021.

The outstanding question is whether the other EU Member States will follow the lead of Belgium, France, Holland and Luxembourg or adopt another set of mooted deadlines. Alternative packages of deadlines could include the original deadlines with 1 July 2020 as the pivot date or the 8 May EC proposal deadlines with 1 October 2020 as the pivot date. Ideally, however, the other EU Member States will adopt the full 6-month delay as it will preserve cohesion across the regime, avoiding uncertainty in the rules, delays in reporting and needless complications for RCBAs involving multiple EU jurisdictions. However, as we have already seen that Germany and Austria opted for their own shorter delays, the possibility of fragmentation cannot be excluded. 
 
By retaining the overall reporting structure, the EU ensures that all information intended to be reported still needs to be reported in spite of the shifting deadlines. However, as a core aim of DAC6 is to identify an “aggressive” tax-planning scheme before it spreads widely, the longer delay saps more force from the DAC6 regime. Nonetheless, as was made clear in the preamble to the EC’s delay proposal, the pandemic and consequent EU-wide lock-downs left few alternatives as the reporting preparations of the affected parties–essentially, financial intermediaries and the tax authorities–were severely impaired due to emergency work limitations and personnel re-allocations.
 
For those not yet versed in the incoming disclosure regime, now is the time to ready yourself for it. DAC6 specifies sets of characteristics indicative of aggressive tax planning–labelled “Hallmarks”–and compels the disclosure of any cross-border transactions or other activities evidencing these Hallmarks. DAC6 mandates that for any reportable arrangements, the EU intermediaries involved in the transaction–such as tax advisors, lawyers, accountants and fiduciaries–or the taxpayers affected by it (if no intermediary qualifies) must:
●      Disclose specified information
●      About the arrangement and the parties involved in it
●      To their local competent authority
●      Within 30 days
●      For exchange on an automatic basis with other EU member states

As welcome as it was inevitable, on 8 May the European Commission (EC) proposed a postponement to the dates for report submissions under the Amendment to Directive 2011/16/EU on administrative cooperation in the field of taxation (known colloquially as “DAC6”), which is–in part–the EU version of the OECD’s Mandatory Disclosure Requirements (“MDRs”). Originally, the EU had scheduled 1 July 2020 as the pivotal date for DAC6: Reports for Reportable Cross-Border Arrangements (RCBAs) entered into on or after 1 July were due within 30 days of the trigger event, whereas those RCBAs initiated between 25 June 2018 and 30 June 2020 were due in bulk by 31 August 2020. While these dates no longer apply, the general reporting structure remains intact.
 
According to the notification issued on 11 May 2020, everything is pushed back by 3 months (or less, depending on the date of the specific trigger event), as set forth below:

• RCBA trigger event: First step implemented between 25 June 2018 and 30 June 2020
  
• Original due date: 31 August 2020
• New due date: 30 November 2020

• RCBA trigger event: Entered into/relevant services provided between 1 July 2020 and 30 September 2020
• Original due date: 30 days from applicable trigger date
• New due date: 31 October 2020
  

​

• RCBA trigger event: Entered into/relevant services provided on or after 1 October 2020
• Original due date: 30 days from applicable trigger date
• New due date: 30 days from applicable trigger date

Additionally, the EC proposal sought authorization to postpone the DAC6 reporting deadlines further, if warranted by an on-going novel coronavirus outbreak or attendant lock-down measures. According to the proposal provisions, at the sole discretion of the EC, the deadline may be postponed again, but only one more time and for another three months.
 
By retaining the overall reporting structure, the EU ensures that all information intended to be reported still needs to be reported. However, as a core aim of DAC6 is to identify an “aggressive” tax-planning scheme before it spreads widely, the delay saps some force from the DAC6 regime. Nonetheless, as was made clear in the preamble to the proposed delay, the pandemic and consequent EU-wide lock-downs left few alternatives as the reporting preparations of the affected parties–essentially, financial intermediaries and the tax authorities–were severely impaired due to emergency work limitations and personnel re-allocations.
 
For those not yet versed in the incoming disclosure regime, now is the time to ready yourself for it. DAC6 specifies sets of characteristics indicative of aggressive tax planning–labelled “Hallmarks”–and compels the disclosure of any cross-border transactions or other activities evidencing these Hallmarks. DAC6 mandates that for any reportable arrangements, the EU intermediaries involved in the transaction–such as tax advisors, lawyers, accountants and fiduciaries–or the taxpayers affected by it (if no intermediary qualifies) must:
●      Disclose specified information
●      About the arrangement and the parties involved in it
●      To their local competent authority
●      Within 30 days
●      For exchange on an automatic basis with other EU member states
 
In light of the analytical and operational demands of DAC6 disclosures–including new, sweeping definitions, strict liability standards and rapid turn-around times–many affected parties are seeking outside support. In addition to offering consulting services through Millen Tax & Legal, I co-founded BlueBridge, a company dedicated strictly to DAC6 and MDR reporting services. We at BlueBridge offer three distinct services, each tailored to the willingness and capacity of our clients to become experts themselves in DAC6, as follows:

1. The BlueBridge DAC6 Report Production Service: Designed for our clients with sufficient DAC6 analytical expertise, who are in need of reliable and punctual IT support.
2. The BlueBridge DAC6 Reportability Analysis Service: Designed for our clients with basic DAC6 technical understanding, who are in need of deeper DAC6 analytical and operational support.
3. The BlueBridge DAC6 Report Submission & Liability Relief Service: Designed for our clients with no spare time or capacity to learn DAC6, who are, thus, in need of complete relief from DAC6.

 
Please visit our website to learn more about how BlueBridge can lighten or fully assume your DAC6 disclosure compliance burden so that you can focus your team’s resources on core business matters with complete peace of mind.