United States Corporate Transparency Act (CTA)
With the commencement of the new year, the recently implemented Corporate Transparency Act (CTA) is now in full force. In recent years, many so-called “tax haven” countries, to avoid black- or grey-listing by the US Treasury Department, have had to increase their beneficial ownership transparency. The CTA brings the US more in line with these and other countries that require significant beneficial reporting requirements, including regarding key personnel with control over reporting entities. This post covers some of the most frequent questions that we have received regarding the CTA and its beneficial ownership information (BOI) reporting requirements.
Is the CTA’s beneficial ownership reporting requirement a new requirement?
This beneficial ownership information reporting requirement is not entirely new. Those of you who engage in international business transactions, especially investment or other M&A activities, have heard of CFIUS (the Committee on Foreign Investment in the US), even if you do not know how to pronounce the acronym (SIFF-ee-us). Since 2018, CFIUS has required a review of certain types of control transactions relating to US entities.
We have assisted clients in conducting CFIUS reviews and engaging with the CFIUS committee. Each CFIUS-reviewed transaction requires a disclosure of beneficial ownership information. However, not all transactions require CFIUS review. In that regard, the CTA requirements are significantly different because each US entity, regardless of ownership, must now disclose its beneficial ownership information.
Is BOI reporting a state or federal requirement?
The CTA is a federal law, and the CTA reporting program is operated by FinCEN (the Financial Crimes Enforcement Network), which is a bureau of the US Department of the Treasury. This federal law means that it is implemented country-wide and supersedes conflicting state laws.
Federal corporate law in the US does not change frequently because business entities are creations of state law (see here). Individual states implement their own requirements (see here), create new types of legal entities, and largely govern matters relating to business entities formed in or operating in their jurisdiction. This type of federal overlay is unusual (see here), but it is limited to financial reporting purposes to assist FinCEN with its mission of safeguarding the financial system from the illicit use of funds, including money laundering and threats to US national security.
What is considered a reporting company?
All US entities are reporting companies that are required to comply with the CTA requirements. There are 23 exemptions to these reporting requirements, but most of those exemptions relate to entities that are subject to more stringent reporting requirements, such as securities reporting issuers, financial institutions, insurance companies, and investment funds.
What needs to be reported to FinCEN?
Beneficial ownership information needs to be reported, as well as those individuals and entities that exercise substantial control. In a future blog post, we will discuss these categories of individuals and entities in more detail.
What are the key deadlines in 2024 and 2025 under the Corporate Transparency Act?
Entities formed before January 1, 2024, do not need to file their initial report until January 1, 2025. Entities that are formed starting January 1, 2024, need to file their initial report no later than 90 days after their state registration is effective. Entities that are formed starting January 1, 2025, need to file their initial report no later than 30 days after their state registration is effective.
Will these BOI requirements increase the length of time to set up a US entity?
This requirement will not increase the length of time to set up a US entity, which can typically be done in a matter of days or hours, depending on the formation state.
Who can access this beneficial owner information?
This beneficial owner information will not be publicly available. It will be available to state and federal law enforcement agencies, as well as financial institutions if the reporting company consents to the financial institution’s use of the information. The information will be kept in a secure, non-public database.
What does the CTA’s BOI requirement mean for Chinese companies?
The US continues to be a popular destination for foreign capital investment. Chinese investors are no exception. NikkeiAsia reported that capital flight from China reached a seven-year high in 2023. This net outflow was the result of reduced investment from outside China, as well as wealthy Chinese moving assets from China or not repatriating profits back to China. Nikkei Asia indicated that Chinese companies are also establishing more operations in foreign countries as global supply chains continue to rebound from COVID-19 shock.
We have seen an increase in two areas particularly. First, we are receiving more inquiries from Chinese businesspeople who are interested in setting up US entities to avoid repatriating profits back to China. And second, we have seen an increase in the number of Chinese companies that are looking to gain a greater foothold for their brands outside of China, taking more control of their value chain.
Chinese nationals seeking to set up US entities will be required to provide their beneficial ownership information to FinCEN, like everyone else. FinCEN indicates that it will permit certain foreign officials who submit a request through a US federal government agency to obtain beneficial ownership information for law enforcement purposes. However, given China’s expansive definition of law enforcement and national security, FinCEN will likely not be sharing that information with the Chinese government. We will keep an eye on this issue in particular as the implementation and enforcement rolls out for the CTA.
Conclusion
Because the Corporate Transparency Act’s requirements are now fully implemented, all individuals and entities are on notice regarding the reporting of beneficial ownership and certain control relationships. This is not an entirely new requirement, but it is far-reaching beyond certain prior CFIUS reporting requirements.
Existing reporting entities will enjoy a grace period in 2024, but new reporting entities will be immediately subject to these requirements, starting with a 90-day window in 2024, which decreases to a 30-day window in 2025. These requirements should not significantly increase the time or expense of establishing an entity in the US.
Fortunately for Chinese nationals and others who live under more heavy-handed government oversight, the BOI data will be held in a secure US government database and shared under very limited circumstances. That is good news for Chinese nationals seeking to invest in the US, as long as the US can keep that database secure. We will continue to monitor significant news surrounding the CTA’s rollout this year.
