US: New Guidance On The Subsidiary Exemption Under The CTA’s Beneficial Ownership Information Reporting Rule

In the two weeks since the Corporate Transparency Act (CTA) went into effect (see our alert here), the Financial Crimes Enforcement Network (FinCEN) has published several Frequently Asked Questions (FAQs) clarifying the new requirements. On January 12, FinCEN released 10 new FAQs, two of which we view as particularly notable. The first concerns the scope of the subsidiary exemption, and the second explains the reporting requirements applicable when a reporting company’s ownership interests are directly held by a corporate entity, rather than an individual. These two FAQs and the other eight newly released FAQs are all included at the end of the alert.

The first clarifies the scope of the subsidiary exemption, which exempts entities whose ownership interests are “controlled or wholly owned” by certain other exempt entities. Recall that the subsidiary exemption does not apply to subsidiaries of entities exempt under the pooled investment vehicle, entity assisting a tax-exempt entity, money service business or inactive entity exemptions.

The newly released FAQ clarifies that the subsidiary exemption does not apply when a reporting company’s ownership interests are only partially controlled by an exempt entity; the exempt entity must, per the FAQ, “fully, 100%” control the ownership interests of the “subsidiary” reporting company for the exemption to apply. Prior to this FAQ, it was unclear whether full control was necessary, given that the statutory and regulatory language is “controlled or wholly owned” rather than “wholly controlled or wholly owned.”

The FAQ goes on to say that “control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests.” FinCEN has not further defined what it means to control the ownership interests of an entity in the context of the subsidiary exemption. In the context of the definition of a beneficial owner, the CTA and accompanying regulation provide examples of how an individual might control the ownership interests of a reporting company. Specifically, an individual can own or control the ownership interests of an entity through “any contract, arrangement, understanding, relationship, or otherwise” including:

Joint ownership
Ownership through a nominee, intermediary or agent
As trustee, beneficiary or grantor of a trust in certain situations
Through ownership or control of one or more intermediary entities or ownership or control of the ownerships of an intermediary entity where the intermediary owns or controls the ownership interests of the subsidiary entity.
The second FAQ answers the question of who to report as a beneficial owner when a corporate entity, rather than an individual, owns 25% or more of the ownership interests of a reporting company. As a general matter, in such scenarios, the reporting company should not report the corporate entity; rather, it should report the individual above the corporate entity in the ownership chain. There is additional guidance on how to calculate the percentage of ownership interests an individual owns in the regulations, as well as in FinCEN’s Small Entity Compliance Guide (accessible here).

There are only two scenarios in which a reporting company can submit information on an intermediate corporate entity rather than an individual beneficial owner.

First, a reporting company may report the name of the intermediate entity if the intermediate entity is itself exempt from reporting. Note that in this scenario, the individual beneficial owner must be a beneficial owner solely through her ownership in the exempt entity. As such, the reporting company in this scenario would still be required to submit information on the individuals who exercise substantial control over the reporting company.
Second, a reporting company may submit the FinCEN identifier of an intermediate company if the intermediate company and the reporting company’s beneficial owners are the same individuals. If the intermediate company has a FinCEN identifier, this means it has already submitted its beneficial ownership information to FinCEN.
We will continue to provide updates as FinCEN continues to release FAQs further clarifying the CTA and its reporting requirements.

L.6. Does a subsidiary whose ownership interests are partially controlled by an exempt entity qualify for the subsidiary exemption?
No. If an exempt entity controls some but not all of the ownership interests of the subsidiary, the subsidiary does not qualify. To qualify, a subsidiary’s ownership interests must be fully, 100% owned or controlled by an exempt entity. A subsidiary whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities is exempt from the beneficial ownership information (BOI) reporting requirements. In this context, control of ownership interests means that the exempt entity entirely controls all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.

D.12. Who does a reporting company report as a beneficial owner if a corporate entity owns or controls 25% or more of the ownership interests of the reporting company?
Ordinarily, such a reporting company reports the individuals who indirectly either (1) exercise substantial control over the reporting company or (2) own or control at least 25% of the ownership interests in the reporting company through the corporate entity. It should not report the corporate entity that acts as an intermediate for the individuals. For an example of how to calculate the percentage of ownership interests an individual owns or controls in a reporting company if the individual’s ownership interests are held through an intermediate entity, please review example 4 in Chapter 2.3, “What steps can I take to identify my company’s beneficial owners?” of FinCEN’s Small Entity Compliance Guide.

Two special rules create exceptions to this general rule in very specific circumstances:

A reporting company may report the name(s) of an exempt entity or entities in lieu of an individual beneficial owner who owns or controls ownership interests in the reporting company entirely through ownership interests in the exempt entity or entities; or
If the beneficial owners of the reporting company and the intermediate company are the same individuals, a reporting company may report the FinCEN identifier and full legal name of an intermediate company through which an individual is a beneficial owner of the reporting company.
E.5. The company applicants of a reporting company include the individual “primarily responsible for directing the filing of the creation or registration document.” What makes an individual “primarily responsible” for directing such a filing?
At most, two individuals need to be reported as company applicants:

The person who directly files the document with a secretary of state or similar office.
If more than one person is involved in the filing of the document, the person who is primarily responsible for directing or controlling the filing.
For the purposes of determining who is a company applicant, it is not relevant who signs the creation or registration document, for example, as an incorporator. To determine who is primarily responsible for directing or controlling the filing of the document, consider who is responsible for making the decisions about the filing of the document, such as how the filing is managed, what content the document includes, and when and where the filing occurs. The following three scenarios provide examples.

Scenario 1: Consider an attorney who completes a company creation document using information provided by a client, and then sends the document to a corporate service provider for filing with a secretary of state. In this example:

The attorney is the company applicant who is primarily responsible for directing or controlling the filing because they prepared the creation document and directed the corporate service provider to file it.
The individual at the corporate service provider is the company applicant who directly filed the document with the secretary of state.
Scenario 2: If the attorney instructs a paralegal to complete the preparation of the creation document, rather than doing so themself, before directing the corporate service provider to file the document, the outcome remains the same: the attorney and the individual at the corporate service provider who files the document are company applicants. The paralegal is not a company applicant because the attorney played a greater role than the paralegal in making substantive decisions about the filing of the document.

Scenario 3: If the client who initiated the company creation directly asks the corporate service provider to file the document to create the company, then the client is primarily responsible for directing or controlling the filing, and the client should be reported as a company applicant, along with the individual at the corporate service provider who files the document.

E.7. If an individual used an automated incorporation service, such as through a website or online platform, to file the creation or registration document for a reporting company, who is the company applicant?
If a business formation service only provides software, online tools or generally applicable written guidance that are used to file a creation or registration document for a reporting company, and employees of the business service are not directly involved in the filing of the document, the employees of such services are not company applicants. For example, an individual may prepare and self-file documents to create the individual’s own reporting company through an automated incorporation service. In this case, this reporting company reports only that individual as a company applicant.

M.2. How can I use a FinCEN identifier?
When a beneficial owner or company applicant has obtained a FinCEN identifier, reporting companies may report the FinCEN identifier of that individual in the place of that individual’s otherwise required personal information on a beneficial ownership information report. A reporting company may report another entity’s FinCEN identifier and full legal name in place of information about its beneficial owners when three conditions are met: (1) the other entity obtains a FinCEN identifier and provides it to the reporting company; (2) the beneficial owners hold interests in the reporting company through ownership interests in the other entity; and (3) the beneficial owners of the reporting company and the other entity are the exact same individuals.

C.7. Can a company created or registered in a U.S. territory be considered a reporting company?
Yes. In addition to companies in the 50 states and the District of Columbia, a company that is created or registered to do business by the filing of a document with a U.S. territory’s secretary of state or similar office, and that does not qualify for any exemptions to the reporting requirements, is required to report beneficial ownership information to FinCEN. U.S. territories are the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam and the U.S. Virgin Islands.

D.11. What should a reporting company report if its ownership is in dispute?
If ownership of a reporting company is the subject of active litigation and an initial BOI report has not been filed, a person authorized by the company to file its beneficial ownership information should comply with the requirements by reporting:

All individuals who exercise substantial control over the company.
All individuals who own or control, or have a claim to ownership or control of, at least 25% ownership interests in the company.
If an initial BOI report has been filed, and if the resolution of the litigation leads to the reporting company having different beneficial owners from those reported (for example, because some individuals’ claims to ownership or control have been rejected), the reporting company must file an updated BOI report within 30 calendar days of resolution of the litigation.

E.6. Is a third-party courier or delivery service employee who only delivers documents that create or register a reporting company a company applicant?
No. A third-party courier or delivery service employee who only delivers documents to a secretary of state or similar office is not a company applicant provided they meet one condition: the third-party courier, the delivery service employee and any delivery service that employs them does not play any other role in the creation or registration of the reporting company. When a third-party courier or delivery service employee is used solely for delivery, the individual (e.g., at a business formation service or law firm) who requested the third-party courier or delivery service to deliver the document will typically be a company applicant. Under FinCEN’s regulations, an individual who “directly files the document” that creates or registers the reporting company is a company applicant. Third-party couriers or delivery service employees who deliver such documents facilitate the documents’ filing, but FinCEN does not consider them to be the filers of the documents given their only connection to the creation or registration of the reporting company is couriering the documents. Rather, when a third-party courier or delivery service is used by a firm, the company applicant who “directly files” the creation or registration document is the individual at the firm who requests that the third-party courier or delivery service deliver the documents.

For example, an attorney at a law firm may be involved in the preparation of incorporation documents. The attorney directs a paralegal to file the documents. The paralegal may then request a third-party delivery service to deliver the incorporation documents to the secretary of state’s office. The paralegal is the company applicant who directly files the documents, even though the third-party delivery service delivered the documents on the paralegal’s behalf. The attorney at the law firm who was involved in the preparation of the incorporation documents and who directed the paralegal to file the documents will also be a company applicant because the attorney was primarily responsible for directing or controlling the filing of the documents.
In contrast, if a courier is employed by a business formation service, law firm or other entity that plays a role in the creation or registration of the reporting company, such as drafting the relevant documents or compiling information to be submitted as part of the documents delivered, the conclusion is different. FinCEN considers such a courier to have directly filed the documents—and thus to be a company applicant—given the courier’s greater connection (via the courier’s employer) to the creation or registration of the company.
For example, a mailroom employee at a law firm may physically deliver the document that creates a reporting company at the direction of an attorney at the law firm who is primarily responsible for decisions related to the filing. Both individuals are company applicants.
F.10. If a beneficial owner or company applicant’s acceptable identification document does not include a photograph for religious reasons, will FinCEN accept the identification document without the photograph?
Yes. If a beneficial owner or company applicant’s identification document does not include a photograph for religious reasons, the reporting company may nonetheless submit an image of that identification document when submitting its report, as long as the identification document is one of the types of identification accepted by FinCEN, such as a non-expired state-issued identification document. Please see Question F.5 for a list of acceptable identification documents.

F.11. What residential address should be reported if a reporting company is required to report an individual’s residential address, but that individual does not have a permanent residential residence?
The residential address that is current at the time of filing should be reported to FinCEN. An updated report should be submitted within 30 calendar days if the address, or any other information previously reported, changes.