The US Federal Corporate Transparency Act (CTA) takes effect on January 1, 2024. It will require all corporate entities to register their list of beneficial owners with the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury.
The CTA defines “beneficial owners“ as individuals who own over 25% of the entity or exert significant control over it. The law aims to combat illicit activities conducted via shell entities, including money laundering, tax evasion, and financing terrorism. Non-compliance may lead to fines and imprisonment.
While most non-profit bodies and trusts are exempt from reporting obligations, certain entities will fall under the regulations. The exemption doesn’t cover organizations awaiting tax exemption approval from the IRS.
The initial rules established by FinCEN outlined that entities in existence by that date would have until January 1, 2025, to submit their beneficial ownership reports. Under the new timetable, entities established on or after January 1, 2024, have a 90-day window post-creation to comply.
However, due to the IRS taking six to ten months to review exemption applications, newly formed non-profits will likely receive tax-exempt status after the filing deadline.
Consequently, they’ll likely need to submit an initial report and adhere to the Act’s reporting requirements until IRS tax-exempt status is granted.
Non-profit entities established before January 1, 2024, have a more lenient timeframe, allowing a year to adhere to the Act.
Yet, they might need help if their current tax exemption faces temporary revocation due to specific events, like forming a subsidiary or engaging in a joint venture with a for-profit entity.
In such instances, they must submit an annual report within 180 days of the IRS revoking their tax-exempt status. Typically, this deadline precedes the non-profit’s ability to reinstate its tax-exempt standing.
The trust exemption is restricted to non-statutory trusts not established by filing legal documents with a government agency. Nevertheless, even non-statutory trusts could be impacted by the Act if they hold direct or indirect interests in companies falling under the legislation.
According to Saul Ewing of Saul Ewing LLP, a Philadelphia-based law firm, individuals like the trustees, settlor, and other beneficiaries as well as others involved in the trust might be considered beneficial entity owners.
The company is primarily responsible for filing beneficial ownership reports in such instances. However, a trustee overseeing a trust who owns or controls said company might arguably bear some responsibility to assist in gathering and reporting the required information.
Routine changes within trusts, such as altering a trustee’s address, changing trustees, beneficiaries, or in the event of the settlor’s, trustee’s, or beneficiary’s passing, may have to be reported to FinCEN.
Ewing notes that the Act’s deliberately expansive “substantial control” criteria for beneficial ownership implies that nearly any individual capable of influencing significant decisions for the reporting company could fall within the scope of these reports.
Any trust or group holding stakes in entities should be scrutinized to identify beneficial owners accurately. Trustees must now acknowledge the potential responsibility for gathering this new information set.
Failing to report on time can lead to potential fines and imprisonment. FinCEN is actively conducting an extensive outreach and education campaign to increase awareness and assist reporting companies in understanding the new reporting requirements.
However, despite these efforts, there are lingering uncertainties regarding the Act’s scope. It remains to be seen whether an individual who serves as a trustee for multiple distinct trusts that together own or control a reporting company qualifies as a beneficial owner.
Similar ambiguities arise when multiple current trust beneficiaries collectively hold substantial ownership or control over a reporting company, or when an individual is a beneficiary across multiple trusts that jointly possess significant ownership or control over a reporting company.