What Is “Beneficial Ownership” and Why Is it Relevant to Your Business?

The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued proposed regulations with details to begin compiling a beneficial owner register for US companies under the Corporate Transparency Act (CTA). In the wake of this new regulatory environment, it is more important than ever that you know who really controls/”owns” a company. This alert will help you to better understand what constitutes “beneficial ownership” and how to comply with the transparency required under the law.

At its most basic definition, a “beneficial owner” is a person who enjoys the benefits of ownership even though the title to some form of property – or in this case, a business entity – is in another name.

It also means any individual or group of individuals who, either directly or indirectly, has the power to vote or influence the transaction decisions regarding a specific security, such as shares in a company.

Under the Bank Secrecy Act, the Financial Crimes Enforcement Network (FinCEN) created beneficial ownership as a requirement for businesses. By law, all financial institutions must obtain, verify, and record information about the beneficial owners of legal entity customers. Beneficial ownership is designed to help the US government prevent a wide range of financial crimes, including tax evasion, money laundering, and more.

In the simplest determination, a beneficial owner is an individual who ultimately owns or controls more than 25% of a company’s shares or voting rights or who otherwise exercises control over the company or its management. Where such an interest is held through a trust, the trustee(s) or anyone who controls the trust will be registered as the beneficial owner(s).

However, that is not the only determining factor. Additionally, any controlling person with “significant responsibility” for managing the legal entity is also considered a beneficial owner. Common roles for “controlling persons” who may be considered “beneficial owners”  include:

• Chief Executive Officer
• Chief Financial Officer
• Chief Operating Officer
• Managing Member
• General Partner
• President
• Vice President
• Treasurer

In addition to helping federal law enforcement hinder financial crimes, beneficial ownership helps companies maintain legal transparency, minimize conflict of interests, and ensure their operations comply with all anti-corruption and anti-money laundering requirements.

Proposed New Rules Regarding Beneficial Owners.

In December 2021, the FinCEN issued a notice of proposed rulemaking to implement the beneficial ownership reporting requirements of the Corporate Transparency Act (CTA).

Under the CTA, “reporting companies” are required to report certain identifying information regarding the company and its “beneficial owners” and “company applicants” to FinCEN.

Consistent with the existing Customer Due Diligence Rule (CDD Rule), as described above, the proposed regulation describes beneficial owners as individuals who directly or indirectly exercise substantial control over a reporting company or who own or control at least 25 percent of the entity’s ownership interest.

Under the CTA, the proposed rules specify definitions for substantial control, or “significant responsibility,” as mentioned above, which includes acting as a senior officer and having substantial influence over key matters of import to the reporting company—as well as for ownership interest. Five categories of individuals—minors, agents and nominees, non-senior officer employees of reporting companies, individuals whose sole interest in a reporting company is through inheritance, and reporting company creditors—are exempted from the beneficial owner definition.

• The CTA also would exempt the following entities from the proposed rule:
• SEC reporting issuers and Exchange Act-registered entities
• Investment companies and investment advisors
• Securities brokers and dealers
• Governmental entities
• Banks, credit unions, and depository institution holding companies
• Money-transmitting businesses
• Clearing agencies
• Venture capital fund advisors
• Insurance companies and state-licensed insurance producers
• Accounting firms
• Public utilities
• Financial market utilities
• Pooled investment vehicles
• Commodity Exchange Act registered entities
• Tax-exempt entities and entities assisting tax-exempt entities

Also exempt from the beneficial ownership information reporting requirements would be “large operating companies,” defined as entities that employ more than 20 full-time employees in the US, have an operating presence in the US, and have more than $5 million in annual sales. The definition of exempt entities would include subsidiaries of certain exempt entities and inactive entities.

What Information Needs to be Provided on Beneficial Ownership Under the CTA?

The beneficial ownership information (BOI) you will need to provide under the proposed rules information for each beneficial owner or controlling person will be:

• Name
• Primary residence address
• Date of birth
• Social Security number
• Name of the issuer and number of the driver’s license or passport

How AbitOs Can Help  

Determining what constitutes beneficial ownership can be more complex than it appears to be on the surface. Our international tax experts are well familiar with the current and proposed rules for collecting beneficial ownership information (BOI) and would be happy to look over your operation and key personnel to be sure you are in complete compliance with the reporting information as required by FinCEN and the CTA.

AbitOs specializes in the unique accounting needs of high net-worth individuals with international lifestyles, LATAM, Canadian, and other non-US entities doing business in the US, as well as US entities doing business in those countries and across the globe. Understanding how to comply with reporting beneficial ownership information (BOI) can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Alert, do not hesitate to contact us