By January 1, 2022, many U.S. companies and foreign companies that are registered to do business in the U.S. (“Reporting Companies”) will be required to disclose who, directly or indirectly, controls or owns the Reporting Company. This is a new requirement under the Corporate Transparency Act (the “Act”), which is part of the National Defense Authorization Act that passed into law on January 1, 2020.
Notably, Reporting Companies do not include entities that satisfy all of the following:
(i) have more than 20 full-time employees,
(ii) reported more than $5 million in gross receipts or sales in their previous year tax returns (which includes gross receipts and sales of entities they own or operate through), and
(iii) have a physical presence in the U.S.
The Act requires disclosure of the name, address, date of birth, and unique identifier of each “beneficial owner.” Beneficial owner is defined as entities and persons that, directly or indirectly, exercise substantial control over the Reporting Company, or that own or control 25% or more of the ownership interests of the Reporting Company. Some exceptions apply.
The Act instructs the Secretary of the Treasury to draft regulations for the Act by January 1, 2022. Once the regulations are effective, existing Reporting Companies have two years to report beneficial owners. Reporting Companies formed or registered after the regulations are in place are required to report beneficial owners at the time of formation or registration. Reporting Companies are also obligated to update beneficial ownership information within one year of a change in the information.
Reported information will be stored in a non-public database of the Treasury that can be accessed by U.S. federal, state, and local government agencies and regulators for national security, intelligence, or law enforcement activities, as well as by certain other entities for purposes specified under the Act. A federal agency may also request information on behalf of a law enforcement agency, prosecutor, or judge of another country. General members of the public are not authorized by the Act to access the database directly. Financial institutions are permitted, however, to request information for customer due diligence purposes with the consent of the Reporting Company.
Failure to meet the Act’s reporting requirements may result in up to $10,000 in civil penalties, with the daily fine being capped at $500 for each day the violation continues, and/or imprisonment of up to two years. The Act also provides civil and criminal penalties for improper use or disclosure of beneficial owner information.
If you believe you may be subject to the Act and would like our assistance in determining its applicability to you, please contact Kai Bitter or Emily Tanji of Frost Brown Todd’s International Services Group.