Similar to the controlling beneficiary regulation in Mexico, next year the United States will enter into force a new obligation for most U.S. companies, including those with Mexican shareholders, to report information about their Beneficial Owners under the Corporate Transparency Act and its regulations (jointly, CTA).

Background

The CTA requires most companies in the U.S. to submit a beneficial ownership report to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) identifying their Beneficial Owners and other company information described below. Although some types of companies will be exempt from reporting, FinCEN has estimated that 32.6 million companies will be affected by this new obligation in 2024.

The act’s purpose is to prevent corporations and other entities from being used as vehicles for money laundering, terrorist financing, tax fraud and other illegal activities.

Failure to comply can lead to a maximum penalty of $500 per day (but no more than $10,000) and imprisonment for up to two years.

Persons subject to these penalties include the Reporting Company, its senior officers, and any individual or entity responsible for filing the report.

Obligated Companies

Entities that have to report their Beneficial Owners include the following: corporations, limited liability companies (LLCs), limited partnerships, limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), and any company (U.S. or foreign) registered to do business in any U.S. state by filing a document with a secretary of state or similar office (Reporting Companies).

If a single-member LLC is required to file with a secretary of state, it would be a Reporting Company, even if the Mexican shareholder has not opted to treat that entity as a corporation for tax purposes in the U.S.

Moreover, a statutory trust, business trust or foundation also will be deemed a Reporting Company, but only if it was created through the filing of a document with a secretary of state or similar office.

State laws vary on whether certain entity types, such as trusts, require the filing of a document with the state to be created. Similarly, not all states require foreign entities to be registered to do business. So, this will have to be a case-by-case analysis.

On the other hand, there are 23 statutory exemptions from being a Reporting Company that lead to some entities not having to comply with this obligation. Among others, these include banks, certain pooled investment vehicles, insurance companies, trusts, issuers registered before the U.S. Securities and Exchange Commission (SEC), “inactive companies” and large operating companies (i.e., those with 21 full-time employees, an operating presence and $5 million in gross receipts on the previous year’s tax return). Whenever any of these entities loses the attribute that grants the exemption, a 30-day clock starts ticking for filing.

Reporting Companies will have to send to FinCEN the identifying information set forth below. FinCEN has clarified that beneficial ownership reporting is the responsibility of the Reporting Company – not its beneficial owners, and that each Reporting Company must ensure the accuracy of the report.

Persons to Be Reported

The persons to be reported are the Beneficial Owners and the Company Applicants.

Beneficial Owners are defined as any individual who, directly or indirectly, either 1) exercises substantial control over a Reporting Company or 2) owns or controls at least 25 percent of the ownership interests of such company. Shareholder residents in Mexico will have to be reported if they comply with any of the following tests:

1) Substantial Control

An individual resident in Mexico will have substantial control over a Reporting Company if such individual:

• is a senior officer or a person that exercises such authority – a senior officer is an individual holding the position or exercising the authority of a president, chief executive officer (CEO), chief financial officer (CFO), chief operating officer (COO), general counsel, manager or any other officer, regardless of title, who performs similar functions; but not, for example, individuals performing ministerial tasks, such as a treasurer or executive secretaries
• has the authority to appoint or remove senior officers or a majority of the directors or managers of the Reporting Company
• directs, determines or has substantial influence over important decisions of the Reporting Company (e.g., major expenditures or investments, leases, issuances of equity, incurrence of debt, selection or termination of business lines, reorganizations or dissolution of the company), or
• otherwise has direct or indirect substantial control over the Reporting Company – a catch-all provision that makes this a facts and circumstances inquiry

Some examples of direct or indirect substantial control include: ownership or control of a majority of the voting power/rights; control over one or more intermediary entities that separately or collectively exercise substantial control over a Reporting Company; and arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees.

A lawyer or accountant who is designated as an agent of the Reporting Company may qualify for the “nominee, intermediary, custodian, or agent” exception from the Beneficial Owner definition. However, an individual who holds the position of general counsel in a Reporting Company should be a “senior officer” of that company and would be therefore a Beneficial Owner.

2) 25 Percent Ownership or Control

Mexican individuals with 25 percent or more “ownership interests” will also have to be identified. Ownership interests include all forms of equity, stock, capital or profits, interests, convertible instruments, warrants, rights, options or privileges to acquire equity. Ownership interests can be owned or controlled through joint ownerships, trusts or other indirect arrangements. The general principle is that “an individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise.” Although the rules are similar, partnerships and corporations have different ways to measure such percentages.

In the context of succession and estate planning trusts owning an underlying Reporting Company, the provisions of the trusts should be reviewed closely to determine which parties within the trust should be reported as Beneficial Owners. Aside from the settlors and beneficiaries, depending on the circumstances, other figures can be deemed as Beneficial Owners. For example, trustees, protectors and investment advisors could be considered as having substantial control or ownership interests in the company.

A Reporting Company will always have at least one or several owners with substantial control, regardless of whether any individual owns 25 percent or more.

Shareholders and residents in Mexico who could be deemed substantial control holders or as 25 or more percent owners of a Reporting Company, either directly or indirectly, must then start defining and confirming their status, sharing their information, and setting straight their ownership records and the powers that each has in the relevant U.S. Reporting Company in order for the same to be able to timely comply with the CTA new obligations.

Company Applicants

The CTA specifies that a Company Applicant also must be included in the report to FinCEN. A Company Applicant is generally the individual who directly files the document that creates a domestic Reporting Company or, if more than one individual is involved in the filing, the individual who is primarily responsible for directing or controlling such filing.

Reporting Companies in existence before Jan. 1, 2024, do not have to provide any information about the Company Applicant.

A Company Applicant may not be removed from a beneficial ownership report even if the Company Applicant no longer has a relationship with the Reporting Company.

Type of Information Reported

The beneficial ownership report must include, among others, the following information about the Beneficial Owners and Company Applicants:

• legal name
• date of birth
• residential address
• an image of, and the identifying number shown on, any one of the following: current U.S. passport, driver’s license, current state or local identification document, or if none of the foregoing are applicable, the individual’s current foreign passport

Alternatively, Reporting Companies and individuals may apply to obtain a FinCEN identifier number that may be submitted to FinCEN in lieu of this information. This will avoid providing their personal information to every Reporting Company with which they may be associated. There are still, however, certain outstanding questions as to how to obtain it.

Furthermore, the CTA requires the following information about the Reporting Company itself:

• full legal name and any trade name or “doing business as” name
• U.S. street address of its principal or primary place of business
• jurisdiction of formation or, if foreign, the jurisdiction where the company is formed and the jurisdiction where it first registers in the U.S.
• IRS tax identification number (TIN) of the Reporting Company or foreign tax identification number

Deadlines

Companies already formed or registered before Jan. 1, 2024, will be required to submit their beneficial ownership reports before Jan. 1, 2025. Reporting Companies created on or after Jan. 1, 2024, will have 90 days to file initial reports. Reporting Companies created on or after Jan. 1, 2025, will have 30 days after receiving actual or public notice that its creation or registration is effective.

There is no annual reporting requirement. Reporting Companies must file an initial report and updated or corrected reports as needed. Companies will have 30 days to report changes to their initial filing or correct errors in a previous filing.

Mexicans creating Reporting Companies in the following years may face some timing issues because a Reporting Company requires a TIN to file an initial beneficial ownership report. If the TIN claimant (generally the person who will be acting as senior officer of the company) does not have a Social Security number or individual TIN in the U.S., a paper filing request for one will be required. Receiving a TIN from the IRS through this process could take six to eight weeks. Therefore, some Mexicans will need to apply early or implement certain strategies to obtain a TIN for a new company before the 30-day limit.

To Whom Will This Information Be Available?

Beneficial ownership information will not be public. It can be accessed only by the Department of the Treasury, other federal and state agencies for the furtherance of national security, intelligence or law enforcement activity, and in certain circumstances, financial institutions. Any other law enforcement or regulatory agency and any foreign country under a treaty with the U.S. must obtain authorization from “a court of competent jurisdiction” to obtain any beneficial ownership information as part of a criminal or civil investigation.

The beneficial ownership information must be kept “in a secure nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.” Anyone who knowingly discloses Beneficial Owner information without authorization is subject to a fine of $500 per day, up to $250,000 and/or imprisonment up to five years.