The US Government is seeking to increase transparency around the “true” beneficial owners of U.S. entities or entities doing business in the US.

In particular, the US wants to:

  1. Cut through all the layers of company ownership to identify the individuals or companies that ultimately own or control the company, and
  2. Determine whether any of them are foreign individuals or foreign entities.

As a result, beginning in 2022, the US will require entities to file a new informational form to disclose their “beneficial owners.”

Here is what you need to know regarding the new mandatory filings.

Which owners are being targeted by the new disclosure requirements?

The new disclosure requirements specifically seek to obtain information on beneficial owners who are:

  • Non-resident aliens (including individuals living inside the US on tax-exempt visas, such as A, F, G, J, and M visa holders), or
  • Foreign entities.

“Beneficial owners” are those who “directly or indirectly, through any contract, arrangement, understand, relationship, or otherwise” (1) exercise substantial control over the entity, or (2) own or control at least 25% of the entity.

Beneficial ownership information does not need to be provided for US tax residents, such as individuals who meet the Substantial Presence Test for residency, green card holders, and US citizens.

Who needs to file the new beneficial ownership information forms?

Certain types of entities (see below) must file the new forms to disclose details on any beneficial owners who are foreign individuals or foreign entities.

Since many of the entities in question are small businesses or LLCs, this means that it will fall to the owners themselves to do the filings.

For what types of entities must ownership information be provided?

US entities, including

    1. Corporations
    2. LLCs
    3. LPs, LLPs, LLLPs
    4. Business trusts
    5. Other “similar entities” created by filing a document with a US state

Foreign entities that have filed and registered to do business in the US, including

    1. Corporations
    2. LLCs
    3. Limited and limited liability partnerships
    4. Trusts
    5. Other “similar entities” formed under the laws of a foreign country

The new requirements affect not only small businesses but also:

  • LLCs and other US entities created solely to hold property or other assets
  • LLCs and other entities that hold rental properties
  • LLCs and other entities created to conduct consulting work or small business activities

Are there any exceptions?

Yes, the proposed regulations include 23 different exceptions. If an entity meets one of those exceptions, the new forms need not be filed to disclose ownership.

The two primary exceptions are:

  1. Exempt organizations (non-profits) that fall under Internal Revenue Code §501(c), and
  2. Large operating companies with more than 20 employees, with gross receipts over $5 million, and a physical presence in the US

What information must be reported on the new forms?

Three types of information must be reported:

Information on the entity itself, including

    1. Official name and trade names
    2. Address information
    3. Jurisdiction where the entity was formed
    4. Unique identifier numbers

Information on beneficial owners, including

    1. Legal name
    2. Date of birth
    3. Address information
    4. Unique identifying numbers from acceptable identification documents (e.g., unexpired passport number) or FinCEN ID number

A “beneficial owner” is defined as any individual who, directly or indirectly, owns or controls at least 25% of the entity.

Information on company applicants, including

    1. Legal name
    2. Date of birth
    3. Business and residential address information
    4. Unique identifying numbers from acceptable identification documents (e.g., unexpired passport number) or FinCEN ID number

A “company applicant” is anyone who files an application with a Secretary of State (or with another State office) to form an entity. It also includes the person who directs or controls the person filing the report.

When are the filings due?

The new requirements were supposed to go into effect on January 1, 2022. Implementation has been delayed, as the US Treasury has not yet issued the Final Regulations.

We expect that the Treasury could issue the Final Regulations at any time now. Once it does so, we will have a better understanding of the final deadlines, and some filers will need to move quickly.

At this point, here’s what we expect in terms of deadlines for the filings:

Initial Beneficial Ownership Disclosure Forms

  • Entities that were in existence before the “effective date” listed in the Final Regulations will likely have up to one year to file their initial beneficial ownership disclosures.
  • Entities that were formed after the “effective date” will have 14 business days to file.

Updates or Corrections to Beneficial Ownership Disclosure Forms

  • If ownership changes, entities will have up to 30 days to file an updated beneficial ownership form.
  • If an entity type changes (from an exempt entity type to a different entity type or vice versa), entities will have up to 30 days to update their information.
  • If an error is discovered within 90 days of filing a beneficial ownership disclosure, the entity will likely have up to 14 days to correct the filing.

Do the forms need to be filed annually?

No. An initial filing is needed to provide the information. After that, filings are only needed to update or correct any information.

How will the reports be filed?

The disclosure form must be filed with the Financial Crimes Enforcement Network (FinCEN), which falls under the US Department of Treasury. This is a separate filing from the entity’s formation paperwork and annual tax returns.

What happens if my entity doesn’t file or files late?

Like many FinCEN forms, the beneficial ownership disclosures will be subject to $10,000 penalties for failure to file or for late filing. In addition, if failure to file is deemed willful, criminal charges may apply.

Why are these forms required?

For years, the US has been partnering with other nations to improve transparency into entity ownership, in order to better identify and reduce illegal activity. While other nations have made great progress on this front, the US has grown into one of the most secretive tax havens in the world. See our blog post, Why the US is the 2nd Largest Tax Haven in the World.

However, in early 2021, the US Congress enacted the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the CTA is to curtail the concealment of illicit activity by bad actors through their use of anonymously held shell companies.

The CTA explicitly directs the US Treasury to obtain and share information on beneficial ownership of entities formed in the US or operating within the US.

How will the information be used?

The CTA authorizes the FinCEN to disclose beneficial ownership information to law enforcement agencies so it can assist their efforts in combatting terrorism, money laundering, and other misconduct involving companies that are present in the United States.

This seems like a violation of privacy. Is there any way my entity can opt out?

In creating this reporting requirement via the CTA, the US Congress expressly intended to cut through the layers of privacy that have enabled certain individuals and companies to hide illicit activity. Transparency was the objective. And the requirements are mandatory. Unless an entity meets one of the stated exceptions, it must provide the information on the beneficial ownership disclosure.

Unfortunately, while the CTA is intended to target shell companies and owners hiding behind layers of trusts and entities, the new requirements also affect many legitimate businesses and business owners, leading to additional reporting requirements, costs, and administrative burden for them.

Can I prepare these disclosures on my own for my entity?

Absolutely. That said, the new requirements include significant penalties for failing to accurately complete the disclosures. In addition, there are several tie-in tax filings that could have an impact on the disclosures. For example, some beneficial owners may be required to file “Foreign Owned US Disregarded Entity (FDE)” filings, which consist of Form 1120 page 1 and IRS Form 5472. If the FDE is filed late or not at all, it can trigger a $25,000 penalty for each year that it has not been filed. Also, beneficial owners may have items to report on annual income tax returns, such as IRS Forms 1040NR or 1120-F.

I’m not sure whether I need to file the new form. How can I confirm?

If you are not sure whether you need to file the new beneficial ownership disclosures, we can help you determine how the criteria apply to your entity and whether an exception applies. Please contact us.

If I would like assistance with the filings, is The Wolf Group able to prepare them for me?

Yes, if you would like assistance preparing the filings, we are providing this service to our clients. Please contact us for more information on our process and professional service fees.

The Wolf Group has been assisting clients with non-tax filings through FinCEN for decades, including most commonly, the filing of FinCEN Form 114, Foreign Bank Account Report (FBAR). The Wolf Group also assists clients with non-tax filings required by the Department of Commerce for its 5-year benchmarking surveys on US direct investment abroad.

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any US tax advice contained in the body of this writing is not intended or written to be used, and cannot and should not be used, by any recipients as specific tax advice related to their facts and circumstances. Taxpayers should consult their local tax professional and/or attorney to obtain specific tax advice related to their facts and circumstances.