Corporate Transparency Act May Obscure Inbound Planning

Feb. 3, 2021, 8:00 AM

When a non-resident alien wishes to invest in the U.S. there are numerous choices. Possibilities for the ownership entity include the non-resident alien herself, a U.S. or foreign general partnership, a U.S. or foreign limited partnership, a U.S. LLC, a foreign LLC, a U.S. trust, a foreign trust, a U.S. corporation, a U.S. subsidiary of a foreign holding corporation, and a foreign corporation.

Before 2021, the non-resident alien’s choice often turned on the U.S. tax aspects, such as: any U.S. income tax, branch tax, and any withholding on operating income and distributions of the owner entity; U.S. income tax and withholding on the gain on sale of the property by the owner entity; the non-resident alien’s U.S. estate tax implications; and the U.S. tax filing requirements. Non-tax U.S. factors, such as limited liability and public records requirements, also must be considered, as must be foreign tax and foreign non-tax factors. Deciding on a chain of ownership is typically challenging, given that these factors often point in different directions.

FinCEN Reporting

In 2021, another factor comes into play: future FinCEN reporting. The Corporate Transparency Act, codified at 31 U.S.C. Section 5336, generally requires a reporting company to report to FinCEN the identity of its foreign and U.S. beneficial owners. A reporting company includes a corporation, limited liability company, or other similar entity that is created by filing a document with the secretary of state or a similar office under the law of any U.S. state. It also includes a corporation, limited liability company, or other similar entity that is formed under foreign law and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the law of any U.S. state. There are civil and criminal penalties for failure to comply with the beneficial reporting requirements.

Commentators have noted that beneficial ownership reporting is apparently not required from non-U.S. entities that are not reporting companies because they have not registered to do business in any state. Several types of entities are excluded from classification as a reporting company, such as entities that: (1) have a physical office in the U.S.; (2) employ more than 20 full-time employees in the U.S., and (3) have reported to the IRS more than $5 million of gross receipts.

A beneficial owner is generally defined to include any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise exercises substantial control over an entity or owns or controls at least 25% of the ownership interests in an entity. For non-resident alien beneficial owners, the reporting company must generally supply the name, address, and foreign passport number (or a FinCEN registration number from a previous investment).

FinCEN is to promulgate prospective regulations by January 2022. Reporting will be required from newly formed reporting entities within one year from the date these regulations become effective, and from pre-existing reporting entities within two years from the date these regulations become effective. Changes in beneficial ownership will require an updated report from the reporting company.

FinCEN is to keep the beneficial ownership database private. Further, it will not be subject to automatic information exchange. However, it may be accessed by U.S. law enforcement, such as through a foreign government’s valid treaty request to the U.S. It may also be accessed, with the consent of the reporting company, by financial institutions performing anti-money-laundering and know-your-customer procedures.

31 U.S.C. Sections 5336(c) and (h)(5) prescribes strict rules to prevent unauthorized disclosure, including encryption and investigations of cybersecurity breaches. However, in view of such reasons as the reportedly successful December 2020 cyber-hacks of U.S. Treasury data bases, one suspects that privacy-conscious non-resident aliens whose U.S. investments are funded by perfectly legitimate sources of funds will not be enamored of being entered into the FinCEN beneficial owner data base. Accordingly, in addition to the pre-2021 factors, FinCEN registration may become a factor in their choice of entity decision.

Condominium Ownership

Consider perhaps the most frequent type of foreign investment in the U.S., the purchase of a U.S. condominium by a non-resident alien. One choice sometimes used is to have the condominium owned by a U.S. subsidiary of a foreign holding company owned by the non-resident alien. One advantage of interposing a U.S. subsidiary is that it avoids the inconvenience of buyer FIRPTA withholding when the condominium is sold. The use of the U.S. subsidiary, however, will require reporting of the foreign individual owner of the foreign holding company to FinCEN, since she will be a beneficial owner of the U.S. subsidiary.

Suppose as an alternative, the condominium is owned directly by a foreign corporation. Must the foreign corporation register to transact business in the U.S. state where the condominium is located, thereby triggering FinCEN reporting of the beneficial owner? What are the state law penalties for failure to register when required?

State laws vary widely on these questions. For example, Florida only requires non-Florida corporations to register if they transact business in Florida. FSA Section 607.1501(2) contains a non-exclusive safe harbor list of activities of non-Florida corporations which do not constitute transacting business in Florida. For example, FSA Section 607.1501(2)(m) states that a non-Florida corporation “owning, protecting, and maintaining, without more, real or personal property” will not trigger the registration requirement. This could be interpreted to mean that a non-U.S. corporation owning a Florida condominium used as a vacation home by its foreign individual stockholder, without any lease to that individual, need not register to transact business in Florida. See Storms v. Haugland Energy Group, LLC, stating that owning a personal residence in Florida is not transacting business in Florida under FSA Section 607.1501(2)(m).

By contrast, Massachusetts General Laws Chapter 156D Section 15.01(b)(1) affirmatively states the general rule that “the ownership or leasing of real estate in the commonwealth” by a non-Massachusetts corporation does constitute transacting business in Massachusetts. This could be interpreted to mean that a non-Massachusetts corporation owning a Massachusetts condominium, even without any lease to the foreign individual, must register to transact business in Massachusetts. See The Bank of New York Mellon Corp. v. Wain.

Before 2021, some tax practitioners have been advocating that, if a foreign corporation is used as the direct owner of a condominium to be used for personal use by the foreign stockholder, the foreign stockholder enter into a lease of the condominium, and, if it produces a lower corporate and branch profits income tax, the foreign corporate condominium owner files a Section 882(d) net basis taxation election. They point to the reported IRS position in Accipitor Trading, Ltd. v. Commissioner, Docket No. 018842-19 (T.C. petition filed Oct. 18, 2019), asserting gross basis U.S. withholding tax on an IRS-determined imputed rental income of a foreign corporation which allowed its ultimate foreign stockholder to use the foreign corporation’s U.S. apartment rent-free.

In 2021, this lease approach must be weighed against the possibility that it will trigger an otherwise inapplicable need for the foreign corporation to register to do business under state law, thereby triggering the need for the foreign stockholder to be reported to FinCEN. To illustrate, Maryland Code Annotated, Corporations and Associations Article Section 7-202.1(b), states that a non-Maryland corporation that is not required to qualify to do business in Maryland, but that owns income-producing real or tangible personal property in Maryland, must register with the Maryland Department of Assessments and Taxation. This suggests that a lease by a foreign corporation of a Maryland condominium to the foreign corporation’s foreign stockholder may trigger FinCEN reporting of the foreign corporate owner.

State law penalties applicable to a foreign corporation, for transacting business in a state without registration, also vary by state. For example, FSA Section 607.1523 provides that the Florida Department of Legal Affairs may maintain an action to prevent an unregistered non-Florida corporation from doing business in Florida. FSA Section 607.1502(1) provides that a non-Florida corporation doing business in Florida may not bring an action as a plaintiff in the Florida state courts until it registers. FSA Section 607.1502(4) imposes a fine of between $500 and $1,000 per year for improper failure to have registered to transact business in Florida. In addition, the delinquent initial registration fee and delinquent annual renewal fees must be paid.


FinCEN beneficial owner reporting may also affect the decision of a closely held foreign corporation as to whether or not to interpose a U.S. corporate blocker, sometimes desirable to avoid the U.S. branch foreign corporate profits tax and for other reasons, between itself and an interest in a U.S. reporting pass-through entity in which the foreign corporation will own less than a 25% interest. For example, suppose a foreign corporation owned by a non-resident alien desires to buy a passive 20% ownership interest in a Florida limited partnership transacting business only in Florida, and suppose that such Florida limited partnership may be viewed under future FinCEN regulations as a reporting entity.

If a U.S. corporate subsidiary is interposed between the foreign corporation and the U.S. limited partnership interest, the 25% indirect beneficial owners of that U.S. corporation, and thus the 25% owners of the foreign corporation, will have to be registered with FinCEN. By contrast, if the foreign corporation is the direct limited partner, registration of the beneficial owners of the foreign corporation may be avoidable, if they are deemed to lack substantial control over the limited partnership under forthcoming FinCEN regulations. That is because the foreign corporate limited partner may avoid the need to register with the Florida Secretary of State under FSA Section 607.1501(2)(l), and thereby avoid federal characterization as a reporting corporation. FSA Section 607.1501(2)(l) provides a safe harbor preventing a non-Florida corporation from being viewed as transacting business in Florida solely by reason of “owning a limited partnership interest in a limited partnership that is transacting business within this state, unless such limited partner manages or controls the partnership or exercises the powers and duties of a general partner.”

Fruitless Exercise?

Seeking to avoid FinCEN reporting under 31 U.S.C. Section 5336, such as by using a foreign corporation or LLC whose activities are below the state law doing business registration threshold, will not necessarily prevent FinCEN from identifying the individual foreign owner of the foreign corporation. For example, 2021 condominium purchases for cash, in certain active U.S. real estate markets, by non-U.S. and U.S corporations and limited liability companies, already are subject to FinCEN beneficial owner reporting by title companies, under a FinCEN geographic targeted reporting order. Further, U.S. anti-money-laundering rules require U.S. financial institutions to obtain beneficial ownership information from their non-U.S. entity customers.

Moreover, the fact that a foreign corporation may not be transacting business in any U.S. state under U.S. state corporate qualification statutes does not necessarily prevent the foreign corporation from being subject to federal income tax reporting and liabilities. For example, if a foreign corporation leases a condominium to its beneficial owner and files a Section 882(d) election, the foreign corporation must file a Form 1120-F with the IRS. Question V of Form 1120-F requests the name of any direct and indirect majority owner of the foreign corporation. If a foreign corporation owned by a non-resident alien buys a passive 20% owner interest in a Florida limited partnership transacting business only in Florida, by reason of Section 875(1) that foreign corporation likewise must generally file a Form 1120-F. Any required Form 5472 reporting from a foreign corporation would also generally require the name of the beneficial owner to be supplied to the IRS. If the requirements of Sections 6103(i)(1) are met, other federal law enforcement agencies can obtain tax information from the IRS. Similarly, foreign tax authorities can obtain information from the IRS under treaties and tax information exchange agreements.

The circumstances, if any, in which the U.S. could successfully impose penalties for non-identification of beneficial ownership of a selected foreign entity which is not required to and does not register to do business in any U.S. state, and thus is not a reporting company, may be cloudy. (Compare 31 U.S.C. Section 5324). However, if a U.S. investment has links to some prohibited activity in the U.S. or a foreign country, or is accompanied by a failure to file a report or return that is required in the U.S. or in a foreign country, then arranging the investment to avoid FinCEN reporting may itself be an adverse fact in a related U.S. or foreign civil or criminal proceeding against the foreign individual. For example, the U.S. Supreme Court, in Spies v. U.S., stated that intentional concealment of asset ownership is indicative of the U.S. crime of willful tax evasion.

Further, in the long term, 31 U.S.C. Section 5336(d) contemplates cooperation between FinCEN and state and local agencies to create an updated beneficial ownership database. Accordingly, in the future, U.S. state legislatures could broaden the scope of what constitutes doing business in U.S. states, and U.S. states’ enforcement of required registration of non-U.S. corporations doing business in their states may be administratively strengthened.


For many years before 2021, varying and often unclear U.S. state laws concerning when U.S. entities formed in a first U.S. state had to register to do business in a second U.S. state created concern among those first state businesses. They had to weigh the possible undesirable costs of unnecessary registration in the second state with the possible penalties and other drawbacks if they inadvertently failed to complete a required registration in the second state. With the 2021 Corporate Transparency Act, foreign beneficial owners of a newly formed U.S. business may confront additional issues.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster,Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.

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