Corporate Transparency Act

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By Muhammad Nasir

The Corporate Transparency Act (CTA) introduces a significant change starting on January 1, 2024. Eligible corporations are now obligated to submit a report known as the Beneficial Ownership Information (BOI) Report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

The CTA sets forth strict guidelines and exemption criteria that determine which corporations must adhere to the new BOI reporting regulations. Both U.S. and foreign-based companies must carefully evaluate these criteria and the specified reporting deadlines to ensure future compliance.

The CTA, established as a new tool against money laundering and corruption within the National Defense Authorization Act of 2021, requires the disclosure of individual ownership details of eligible companies through the BOI reporting.

The CTA defines eligibility and exclusion criteria that govern the necessity of submitting a BOI report. First, any company, whether domestic or foreign, operating within the U.S. with a beneficial owner must assess its eligibility. A “beneficial owner” is an individual who either directly or indirectly owns at least 25% of a company’s ownership interest or exercises “substantial control” over it.

Substantial control encompasses individuals who hold positions like senior officers, possess authority over senior office appointments or board majorities, or have direct influence over company decisions. Indirect control, such as joint ownership or individuals acting as intermediaries, custodians, agents, trustees, grantors, beneficiaries, or controlling intermediary entities with collective ownership, also falls under this definition.

Exemptions from filing the BOI report are available for companies that are:

  1. SEC-reporting companies
  2. Regulated financial services companies
  3. Insurance companies
  4. PCAOB-registered accounting firms
  5. Tax-exempt entities
  6. Inactive entities
  7. Subsidiaries of certain exempt entities

Additionally, a company is exempt from filing the BOI report if it meets all the below:

  1. Employs over 20 full-time employees in the U.S.
  2. Maintains an operational presence at a physical U.S. office
  3. Demonstrates over $5 million in gross receipts on its federal tax return

Companies exempt based on these three criteria must consistently evaluate potential changes in eligibility. Any alterations in business operations, like changes in ownership or identifying documents, could lead to the loss of the exemption. When such changes occur, the company must submit an updated BOI report within 30 days of the change.

The first BOI report for eligible companies is due no later than January 1, 2025. However, companies created on or after the CTA’s effective date (January 1, 2024) must submit their initial report within 30 days of their creation. This means some newly established companies may have to file a BOI report as early as January 31, 2024.

As of September 28, 2023, a proposed regulation has been introduced to extend the 30-day window to 90 calendar days for companies established between January 1, 2024, and January 1, 2025.

The BOI report requires distinct information for both the reporting company and the beneficial owner. Reporting companies must provide details such as the legal and trade name, current address, jurisdiction of formation, and FEIN or taxpayer identification number. Additionally, the report must contain specific information about the beneficial owner, including their full legal name, date of birth, current address, unique identifying number, issuing jurisdiction (e.g., passport or driver’s license), and an image of the document bearing the identifying number. All this information will be submitted via a secure FinCEN portal.

In conclusion, the deadline for the initial BOI report filing is quickly approaching. It’s crucial for companies and their owners to prepare by assessing eligibility, identifying beneficial owners, assembling the necessary information, and submitting the final report. The specific characteristics of your company, including its structure, size, location, and industry, may introduce complexity into this process. Not adhering to the reporting obligations or making unauthorized disclosures of BOI can lead to civil or criminal consequences. Deliberate failure to submit a full initial or updated report to FinCEN may incur fines of US $500 per day, with a maximum penalty of US $10,000, and a potential prison sentence of up to two years. Similarly, individuals who knowingly disclose BOI without proper authorization may face a penalty of US $500 per day, with a maximum of US $250,000, and the possibility of up to five years of imprisonment.

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