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The Corporate Transparency ACT

The Corporate Transparency Act (the “CTA”) was adopted by Congress on January 1, 2021, and will enter into effect on January 1, 2024. The Treasury promulgated Final Regulations on September 29, 2022.

Information to be Reported

The CTA and the Final Regulations require the Reporting Company to file with FinCEN a report disclosing specific information about itself, its Beneficial Owner(s)s and the Company Applicant(s), including the name, dates of birth, addresses, jurisdiction of formation, and IRS TINs or EINs, or a unique identification number.

Reporting Deadlines

Reporting Companies in existence prior to 1 January 2024 must file their initial reports with FinCEN by 1 January 2025. Reporting Companies formed (for domestic) or registered (for foreign) on or after 1 January 2024, must file their initial reports within 30 days after formation or registration.

If there is a change in beneficial ownership or a change in Reporting Company information, the entity must file an updated report within 30 days of the change. If reports contain errors, the Final Regulations require the Reporting Company to correct the error within 14 days after discovery.

Reporting Company

For purposes of the CTA, “Reporting company” means a corporation, LLC, or “other similar entity” that is created by the filing of a document with a Secretary of State or a similar office under the law of a US state or Indian Tribe. Partnerships and trusts are not included in the definition of “other similar entities” in the Final Regulations.

A foreign company can also be a Reporting Company if it is formed under the laws of a foreign country and registered to do business in the US by the filing of a document with a Secretary of State or a similar office under the laws of a US state or Indian Tribe. Foreign pooled investment vehicles are treated as Reporting Companies and must report to FinCEN the Beneficial Owner information of the individual who exercises substantial control over the legal entity.

Exceptions to Reporting Company

The Corporate Transparency Act provides a list of 23 exceptions to the definition of “Reporting Company,” including for financial institutions, such as banks and trust companies, insurance companies, publicly traded companies, operating companies of a certain size (more than 20 employees, more than $5,000,000 in revenue with a physical presence in the US), dormant companies (not engaged in any active business, hold no assets, and are not owned by a foreign persons), tax exempt organizations, and any entity that the Secretary determines to exempt.

Beneficial Owner

The CTA defines a “Beneficial Owner” as an individual who, directly or indirectly, either (i) exercises “substantial control” over the Reporting Company, or (ii) owns or controls at least 25% of the ownership interests of the Reporting Company. The Final Regulations provide guidance on how to interpret the key terms “substantial control” and “ownership interest” for purpose of identifying beneficial owners.

Beneficial Owners do not include: minors; nominees, intermediaries, custodians, or agents; employees, heirs or creditors. The Act prohibits a corporation, LLC, or other similar entity, from issuing bearer shares.

Substantial Control

An individual exercises “substantial control” over a Reporting Company if the individual (i) serves as a senior officer of a Reporting Company, except corporate secretary or treasurer; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of a Reporting Company; and (iii) directs, determines, or has substantial influence over, important decisions made by the a Reporting Company, detailed in the Final Regulations; and (iv) has any other form of substantial control over the Reporting Company.

Direct or Indirect Exercise of Substantial Control

An individual may, directly or indirectly, including as a trustee of a trust, exercise substantial control over a Reporting Company through board representation, ownership or control of a majority of the voting power or voting rights of the Reporting Company, rights associated with any financing arrangement or interests in a company, control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company, arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees, or any other contract, arrangement, understanding, relationship or otherwise.

Ownership Interests

“Ownership Interests” are defined by the Final Regulations and include both equity and other types of interests, capital or profit interests, interests convertible into shares, puts, calls, straddles and options, to acquire equity, capital or profit interests, and any other instrument, contract, or arrangement used to establish ownership.

An individual may directly or indirectly own or control an ownership interest of a Reporting Company through any contract, arrangement, understanding, relationship, or otherwise, including joint ownership with one or more persons, through a nominee, intermediary, custodian, or agent. In the case of a trust or similar arrangement that holds such ownership interests, ownership and control over ownership interests in a Reporting Company will be held by a trustee or other individual with powers to dispose of trust assets (except a corporate trustee), beneficiaries who are the sole permissible recipients of both income and principal of the trust, or have the right to demand distributions, or withdraw substantially all of the assets of the trust, and settlors or grantors who have the rights to revoke the trust or otherwise withdraw all of the trust assets.

In determining whether an individual holds at least 25% of the Reporting Company, the total ownership interests should be calculated as a percentage of the total ownership interests of the Reporting Company. Rules are provided in the Final Regulations to calculate ownership interests for corporations as well as partnerships.

Company Applicant

The Company Applicant is the person responsible for filing the report with FINCEN, and is (1) any individual who files an application to form a corporation, LLC, or other similar entity, under the laws of any State of the US, or registers application for a foreign company to do business in the United States; and, (2) any individual who directs or controls the filing of such document. A Reporting Company should have no more than two Company Applicants.

Non-Public Database

The beneficial ownership information provided under the CTA will be kept in a secure, nonpublic database. FinCEN may disclose beneficial ownership information to federal, state, or local agencies or to foreign governments where properly requested. Furthermore, the Reporting Company may consent to provide the information to a Financial Institution in order to verify the beneficial ownership.

Penalties

The beneficial ownership information provided under the CTA will be kept in a secure, nonpublic database. FinCEN may disclose beneficial ownership information to federal, state, or local agencies or to foreign governments where properly requested. The Reporting Company may consent to provide the information to a Financial Institution in order to verify the beneficial ownership.

In summary, the Corporate Transparency Act (CTA), effective from January 1, 2024, marks a critical move towards increased corporate transparency in the U.S. It requires detailed reporting of beneficial ownership and company applicant information to FINCEN, targeting the prevention of illicit use of corporate entities. Applicable to both domestic and foreign entities, the Act defines “Reporting Companies” and “Beneficial Owners”, outlines specific exceptions, and establishes penalties for non-compliance. Key to this initiative is the creation of a secure, nonpublic database for beneficial ownership information, accessible under certain conditions. This legislation is a significant stride towards reinforcing corporate accountability and combating financial crimes.

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