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What International Businesses Need to Know About the Corporate Transparency Act

Corporate Transparency Act and International Businesses

International businesses are important players in the U.S. economy, particularly in the digital era with where about $588.4 billion dollars in services are imported by the U.S. annually.  

See: BEA’s “U.S. International Services: Trade in Services in 2019 and Services Supplied Through Affiliates in 2018”

It is common for international businesses to establish their presence in the U.S. through LLCs and Corporations which are normally the client-facing entity that signs services agreements with U.S.-based firms.  These international businesses  have traditionally not had to disclose their senior officers or underlying beneficial owners (who by and large are usually foreign citizens) when filing to do business in the United States or when creating U.S. based entities.  That is now set to change with the enactment of the Corporate Transparency Act (CTA) and the proposed rules by the U.S. Department of Treasury’s federal Financial Crimes Enforcement Network (FinCen).   The CTA was the culmination of multi-year efforts by Congress, the Department of Treasury (Treasury), other national security agencies, law enforcement, and other stakeholders to bolster the US corporate transparency framework.  These stakeholders believe that the current lack of a corporate transparency framework allows illegal activity to be hidden behind corporate and other entities. This is especially poignant now with the sanctions against certain persons in connection with the Russian-Ukrainian conflict.

In addition to international businesses, the Corporate Transparency Act and compliance raises issues for start-ups, private equity, small businesses, and family offices.

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Who needs to file?

The proposed FinCen regulations apply to international businesses which plan enter the U.S. market by either forming a U.S. corporation or limited liability company or registering to do business in the United States.  While there are exceptions, many international businesses without at least $5 million in U.S. revenue in the prior year, 20 full-time U.S. employees, and a physical U.S. office will not qualify, and, even if they qualify, they will need to monitor if they cease to be exempt from reporting.  As a practical matter, firms for the first time creating an entity to begin doing business in the U.S. or which have not done business in the U.S. previously after the effective date of the proposed FinCen rules will be required to file with FinCen.  

What would be required to be filed under the Corporate Transparency Act?

The CTA and the proposed FinCen regulations require covered entities to report their senior officers, investors with 25% or greater holdings, individual investors with substantial control (which under the proposed FinCen rules would include many investor common control features (such as board representation)) to FinCen along with listing certain information on these individuals.  In addition, companies have an obligation to keep these reports current as information changes.  The proposed FinCen regulations require not only information on the covered company (such as business address and Tax identifier, and information on the person/company forming the entity), but also information on  beneficial owners, such as name and address, number associated with a form of government issued identity document (such as a passport or drivers license), and a photo of the document.  Finally, the initial application will also require information on the firm that files the paperwork with the secretary of state or similar tribal authority along with information on the individual who authorized the filing of the paperwork.  This will require the company to gather this information before filing and quickly file for a federal tax identifier after request to do business or the creation of the entity. 

What constitutes a person with substantial control may require the listing of individuals which have considerably less than 25% ownership.  For example, the proposed FinCen rules state that the following, among other things, may constitute substantial control: 

  • Representation on a board;

  • Ownership of a majority or dominant minority of the voting shares of the company;

  • Rights associated with any financing arrangement or interest in the company; and

  • Through arrangements of financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees or through any contract, arrangement, understanding, relationship, or otherwise.

Moreover, any right to exercise control, even if not exercised, is nonetheless considered to be the exercise such control and require that party to be reported.  Further, anyone who is a senior officer of the covered entity would need to be listed.  Senior officers means, among others, the CEO, president, chief operating officer, secretary, treasurer, chief financial officer, general counsel, and anyone else who holds a similar title or responsibilities. 

When would filing be required?

Under the proposed FinCen rules, covered entities which register to do business or are created after the FinCen rules are final will have 14 days to file the required information with FinCen.  Given the short timeframe, as part of the process of filing to do business with the secretary of state, the company will need to also apply for a federal tax identifier as it is required to be filed with the initial paperwork within 14 days of registration.  Under the proposed FinCen rules, all covered entities registered to do business or created prior to the FinCen rules becoming final would have 12 months to file their initial report.

What happens if you fail to file as required by Corporate Transparency Act

Failure to file these reports will result in significant fines and potential jail time.  The proposed FinCen rules also will require the company to monitor its beneficial owners and file information when it changes – which will require companies to establish systems to track their beneficial owners.  International businesses will likely also lose business opportunities if the U.S. buyer of services determines that the international business is non-compliant with the CTA and its regulations. 

What should companies with existing U.S. operations or seeking to do business in the U.S. do now?

International businesses  will need to be aware of this new requirement if they want to do business successfully in the United States.  Companies should gather the necessary information from all beneficial owners and those with substantial control which are required to be disclosed before filing to create an entity in the U.S. or register to do business.  Once a company has filed to create the entity, it should immediately seek a federal tax identifier which is required by the proposed FinCen rules. Finally, the company should, or ask their attorney to, file the necessary information with FinCen within 14 days of formation.  While the requirement could be seen tedious, it will result in a healthier business environment and more business opportunities through trust in international companies that are compliant.  

Final Thoughts on Family International Businesses and Corporate Transparency Act

The proposed FinCen rules are not yet final and may change.  Klemchuk is closely following the FinCen rules as they get finalized and stand ready to assist clients in assessing whether they have to file the beneficial owner reports and to assist in such filings.

If you have any questions, please contact Mark Stachiw or Gabriela Smith.

For more information on corporate law, see our Corporate and Commercial Legal Services and Industry Focused Legal Solutions pages.

This post has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorneys in connection with any fact-specific situation under federal law and the applicable state or local laws that may impose additional obligations on you and your company. © 2022 Klemchuk LLP

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