This article highlights what US reportable entities or foreign reportable entities doing business in the US, and their beneficial owners, need to know about the Corporate Transparency Act (CTA) rules, which are effective from 1 January 2024.

There has been a global trend over a number of years for transparency, informational reporting, and exchange of information within the financial world. Governments have been pushing corporate transparency legislation for persons with significant control, corporate registers, trust registers, and property ownership registers.

With transparency comes regulations and with regulations comes informational reporting. The overall aim is to help deal with money laundering, terrorist financing, tax evasion, and so forth.

What is the Corporate Transparency Act (CTA)?

The CTA is a recent law introduced by the US government, which deals with beneficial ownership reporting for corporates and similar entities in the US, or foreign entities doing business in the US.

If your business is a US reportable entity or foreign reportable entity that is considered to be doing business in the US, you’re required to register and report some company information as well as information on beneficial owners, under the CTA regulations. Beneficial owners are individuals who exercise substantial control or own or control at least 25% of a reporting entity’s ownership interests.

The rules are effective from 1 January 2024. Reporting entities created or registered before 1 January 2024 will have one year (until 1 January 2025) to file their initial reports. Reporting entities created or registered after 1 January 2024 will only have 30 days after creation or registration to file their initial reports. After that there is 30 days to report a change in the beneficial ownership information.

Which businesses does the Corporate Transparency Act (CTA) apply to?

The CTA appears to apply to US entities (unless exempt), including US LLCs, C-Corps, S-Corps, and potentially LPs, LLPs. LLLPs. Wording such as “similar entities” and “similar office” means that we need to look at LPs, LLPs, and LLLPs and similar entities on a State-by-State basis. The reporting requirements apply to smaller, more lightly-regulated entities that are less likely to be subject to any other beneficial ownership requirements. Therefore, there are exemptions for certain categories of larger, more heavily-regulated entities from its reporting requirements.

A large company is defined as an entity that employs more than 20 full time employees in the US, has an operating presence at a physical office within the US, and filed a Federal income tax or information return in the US for the previous year demonstrating more than $5,000,000 in gross receipts or sales.

Foreign (non-US) entities that are registered to do business in a US state are also on the list. For example, if you have a foreign business that has real property in a State in the US, which requires you to register as doing business in the State with the secretary of State, you will be required to register under the CTA rules and FinCEN regulations, and report various information including beneficial owners. This assumes that there is no exemption that applies.

With foreign companies, the first question is whether the company is doing business in the US, and this opens up various questions, such as whether there is a State registration requirement as well as a requirement to register under the CTA. In addition, if your company is doing business in the US, are there any sales tax requirements, any corporate tax requirements, and would there be protections under a tax treaty? What each State defines as doing business in that State depends on each individual State’s rules, and a question for each business and their activities in that State. As an example, California State’s definition is transacting interstate business, which is business conducts repeated and successive business transactions (sales, deals etc) in California. Holding meetings or having bank accounts in California could be indications of this.

How is the US Corporate Transparency Act (CTA) different from the UK rules?

The UK has had a Companies House corporate public register for years, and it seems the US is beginning to catch-up with the reporting requirements to FinCEN (Financial Crimes Enforcement Network). However, there will still be big differences between the US and UK systems, such as the register in the US will not be publicly available, so the US is still hanging on to some form of opaqueness. In certain circumstances, FinCEN are authorised to share this information with other government agencies, financial institutions, and financial regulators.

The CTA will bring the US into closer alignment with UK corporate reporting, which has been heading towards greater disclosure of ultimate ownership for some time. For instance, the UK has always had a public register requiring the disclosure of immediate shareholders. In 2016 this was expanded to include people with significant control. This is a broad category that includes ultimate shareholders whose ownership exceeds certain thresholds. From August 2022, non-UK entities that own real property in the UK have been required to disclose beneficial owners or face restrictions on the transfer of that property.

What should you do?

To understand your CTA requirements, as well as any US/UK tax implications for your company or entity, and help minimise any penalties for non-compliance, get in touch with our experts. We can also assist you with any Companies House disclosure requirements for UK entities, to ensure you’re compliant and up-to-date in both jurisdictions.