Alvarez and Marsal

A&M Tax Advisor Weekly

Anonymous Shell Companies Will Need to Disclose Ownership Under New Law

Kevin M. Jacobs, Managing Director

kjacobs@alvarezandmarsal.com

Dylan Jeannotte, Senior Director

djeannotte@alvarezandmarsal.com

Lee Zimet, Senior Director

lzimet@alvarezandmarsal.com

January 4, 2021 / North America

On Friday, January 1, 2021, the U.S. Congress voted to override President Trump’s veto in order to pass the National Defense Authorization Act (NDAA) for fiscal year 2021. This legislation approved certain annual spending by the Department of Defense and other agencies. Tucked into the defense authorization legislation this year was the Corporate Transparency Act (the “Act”).

The Act is a milestone, as it represents some of the most sweeping anti-corruption legislation enacted in decades and continues recent efforts to root out tax evasion, money laundering, terrorism financing, and other perceived threats to U.S. national security interests. The Act requires the Treasury Department to issue regulations within one year which will require certain entities (both new and existing) to file a report with the U.S. federal government which discloses information regarding certain beneficial owners of the entity.  This alert highlights the information we know thus far regarding the required disclosures.

The Intent Behind the Act

Prior to the Act’s passage, disclosure requirements of beneficial ownership were left to the state in which an entity is formed or registered. Most, if not all, states are like Delaware (the most common state of formation) in that they require little information on the actual owners of companies formed or registered under state law. As a result, Congress believed that the system allowed malevolent actors to form “shell companies” with many layers of entities (similar to Russian nesting “Matryoshka” dolls) across various jurisdictions in order to avoid disclosure of the actual owners of the entities.

In order to address this, Congress passed the Act to set federal standards for required disclosure of beneficial owners, which brings the U.S. in line with similar international initiatives. The Act makes this information available only to authorized governmental authorities, subject to safeguards and controls, to facilitate law enforcement and national security activities, and to allow financial institutions to comply with existing customer due diligence requirements.

The Act, however, does not impose a requirement for business entities to file annual financial statements with any governmental agency (or make them public). This was surprising as it is a requirement in many countries.

While the Act deals with beneficial ownership of U.S. corporations and limited liability companies (LLCs), it also requires reporting by foreign entities that register to do business in the United States. When coupled with the Foreign Account Tax Compliance Act of 2010 (FATCA) which was enacted to target non-compliance by U.S. taxpayers using foreign accounts, the Act is expected by its backers to serve as an important deterrent to unlawful behavior.

Entities Subject to Reporting Beneficial Ownership

The Act generally would apply to corporations and LLCs (and other similar entities) formed under the laws of a state (including the District of Columbia and any territory or possession of the United States) and foreign entities that are registered to do business under the laws of any state. Foreign entities that do not register to do business under the laws of any state would not be covered by the Act.  Additionally, the Act does not require disclosure of beneficial owners from the following entities:

  • Certain enumerated entities (including public companies, financial institutions, regulated accounting firms, public utilities, and tax-exempt entities);
  • Entities that (1) employ more than 20 employees on a full-time basis in the United States, (2) filed United States income tax returns in the previous year showing more than $5 million in gross receipts or sales (including certain subsidiaries), and (3) have an operating presence at a physical office within the United States;
  • Entities that are formed and owned by an entity that is exempt from the disclosure requirement of the Act; and
  • Dormant entities that (1) have been in existence for over one year, (2) are not engaged in active business, (3) are not owned, directly or indirectly, by a foreign person, and (4) have not experienced a change in ownership in the last twelve months…

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