Introduction. On October 22, 2019, the United States House of Representatives passed H.R. 2513, titled, Corporate Transparency Act of 2019 (the “Act”). The Act, a bi-partisan-sponsored bill, would require certain legal entities to disclose the beneficial owner upon formation under the laws of a U.S. State or Indian Tribe.
Legislative Intent. The Act is intended to prevent domestic and cross-border illicit activities by precluding concealment of the true owner of a corporate entity. Although there is some dissent that the Act would place undue burdens on small businesses, both the House and the Administration agree the disclosure of beneficial ownership of a corporation or limited liability company (“LLC”) would assist with international regulatory compliance and law enforcement efforts.
Foreign Investments Through Domestic Single-Member LLCs Under the Act. Currently, an LLC with a foreign person as the sole member must disclose the beneficial owner as a related party in an annual filing on IRS Form 5472 under section 6038A (“Section 6038A”) of the Internal Revenue Code of 1986, as amended (the “Code”). Noncompliance with reporting or recordkeeping obligations under Section 6038A may result in an annual $10,000 penalty on the LLC for each year of noncompliance, but may be abated for reasonable cause.
Additional penalties on the LLC accrue 90 days after the IRS notifies the LLC of noncompliance, which may not be excused by reasonable cause. Thus, a $10,000 penalty is imposed on the LLC for each 30-day period, during which the LLC or a related party fails to comply with Section 6038A. Multiple $10,000 penalties may apply to an LLC. Additional penalties under Sections 7203 or 7207 may apply in certain circumstances.
The Act amends the Bank Secrecy Act for the first time since 2001 by adding section 5333 under subchapter II of Chapter 53, Title 31 of the United States Code. Under the Act as it applies to LLCs, an applicant to form an LLC or an agent of an LLC generally would have to file a report with the U.S. Financial Crimes Enforcement Network (“FinCEN”) identifying any beneficial owner of the LLC, or certify to FinCEN that the Act does not apply. If the applicant is not a beneficial owner, he or she would have to provide further identification information relating to such applicant. In addition, an LLC would have to submit to FinCEN an annual filing updating the beneficial ownership information.
Generally, a beneficial owner is an individual who, directly or indirectly, exercises substantial control over, owns 25 or more percent equity interests of, or receives substantial economic benefits from the assets of a corporation or an LLC. The Act applies broadly to include non-U.S. entities eligible for registration or registered to do business as a corporation or LLC under the laws of the applicable State or Indian Tribe. Therefore, this definition would include dual-chartered LLCs, unless an exception under the Act applied. A corporation or LLC owned by a business concern that employs 20 or more full-time employees in the U.S., files income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales and has an operating presence at a physical office within the U.S. is excluded under the Act.
Knowingly or willfully failing to disclose, or knowingly providing or attempting to provide false or fraudulent, beneficial ownership information may result in a penalty of up to $10,000 and potential additional penalties as set forth under proposed section 5333(c). The IRS may waive the penalty if the IRS determines the violation was due to reasonable cause and was not due to willful neglect. Thus, foreign persons structuring investments through domestic single-member LLCs subject to Form 5472 reporting would be subject to additional disclosure requirements under the Act.
Conclusion and Practical Pointers. As of this date, the Act is pending in the Senate. Foreign persons investing in assets through U.S. corporations or LLCs must be aware of the beneficial ownership disclosure requirements and ensure compliance if H.R. 2513 is enacted into law.