Is a subsidiary of an exempt parent exempt too?
One of the CTA and reporting rule’s exemptions is for a “subsidiary of certain exempt entities” (the “subsidiary exemption”). A subsidiary qualifies for this exemption if its ownership interests are controlled or wholly owned, directly or indirectly, by one or more of the following types of exempt entities: securities reporting issuer, governmental authority, bank, credit union, depository institution holding company, broker or dealer in securities, securities exchange or clearing agency, other Exchange Act registered entity, investment company or investment adviser, venture capital fund adviser, insurance company, state licensed insurance producer, Commodity Exchange Act registered entity, accounting firm, public utility, financial market utility, tax exempt entity, or large operating company.
The subsidiaries of entities that are exempt because they are money service businesses, pooled investment vehicles, entities assisting tax exempt entities, or inactive entities are not exempt under the subsidiary exemption.
If a subsidiary has both exempt and non-exempt owners, is the subsidiary exempt?
The subsidiary must be wholly owned or wholly controlled by exempt entities to qualify for the subsidiary exemption.
The reporting rule states that the subsidiary must be “controlled” or “wholly owned”. Because it states that the subsidiary must be “controlled”, rather than “wholly controlled”, there was uncertainty as to whether partially controlled subsidiaries could qualify for the subsidiary exemption. However, in an FAQ posted on January 12th, FinCEN clarified the issue by stating the following concerning whether a subsidiary qualifies for the subsidiary exemption in those circumstances: “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 percent owned or controlled by an exempt entity.”
Examples of the application of the subsidiary exemption
Example 1 - ABC Inc. and DEF Inc. are publicly held corporations, traded on the New York Stock Exchange. They agree to enter a joint venture. They create three LLCs as part of the joint venture. ABC Inc. and DEF Inc. are exempt from BOI reporting because they are securities reporting issuers. They wholly own and wholly control all three subsidiaries. The subsidiaries could qualify for the subsidiary exemption because they are wholly owned and/or wholly controlled by entities that are exempt as securities reporting issuers.
Example 2 - Holdco Corporation is a privately owned holding company that was created to own and hold the assets and ownership interests of other corporations and LLCs. Holdco wholly owns and controls ten corporations and LLCs and owns and controls a majority interest in 10 other corporations and LLCs. Holdco does not qualify for any exemption and therefore is a reporting company. Because Holdco is not exempt, none of its 20 subsidiaries would qualify for the subsidiary exemption. (And even if Holdco was exempt, the ten subsidiaries for which it only owns and controls a majority interest would not qualify for the subsidiary exemption). Therefore, each of the 20 subsidiaries must be evaluated on an entity-to-entity basis to determine if they qualify for any other exemption or if they are reporting companies and required to file a BOI report.
What happens if the exempt or non-exempt status of a subsidiary changes?
If a subsidiary that had qualified for the subsidiary exemption ceases to qualify, for example, if its exempt entity owner sells shares in the subsidiary to a non-exempt entity, and the subsidiary does not qualify for any other exemption, the subsidiary will be a reporting company and will have to file its initial BOI report with FinCEN within 30 calendar days of its no longer qualifying for an exemption.
If a subsidiary that was a reporting company qualifies for the subsidiary exemption after it files its initial BOI report, for example, if 100% of its ownership interests are acquired by an exempt entity, the subsidiary must file an updated BOI report with FinCEN within 30 days of becoming exempt, indicating that it is now exempt.
Who are the beneficial owners for a subsidiary owned by entities?
A beneficial owner is defined as an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. So, a subsidiary’s beneficial owners may be the individuals who exercise substantial control (for example, its senior officers or the individuals who make important decisions for the subsidiary) or who indirectly exercise control or own the subsidiary through their control or ownership of the entities that own or control the subsidiary.
Take the following example adapted from FinCEN’s Small Entity Compliance Guide. Say a reporting company is a corporation that is owned 50% by Company Y and 50% by Company Z. Individual A is the reporting company’s Chief Financial Officer and Individual C is its president and CEO. Individual A and Individual C are beneficial owners because they are senior officers of the reporting company – which by definition makes an individual a beneficial owner. Individual B owns 70% of Company Y but does not exercise substantial control. Individual B is a beneficial owner because Individual B indirectly owns 35% of the reporting company’s stock through Company Y, which owns 50% of the reporting company’s stock (50% x 70% = 35%). Because Individual B owns at least 25% of the reporting company’s ownership interests, Individual B is a beneficial owner.
Is there a special rule for reporting a beneficial owner who owns the company through an exempt entity?
A reporting company does not have to report information about a beneficial owner whose ownership interests in the reporting company are held through one or more entities, all of which are themselves exempt from BOI reporting. Instead, it may report the name of the exempt entity instead of the personal information about the individual who is the beneficial owner through his or her ownership interests in the exempt entity.
FinCEN’s Small Entity Compliance Guide provides the following example. Say a large operating company owns 50% of the ownership interests in a reporting company. (Large operating companies are exempt entities.) Individual A owns 50% of the large operating company and therefore owns 25% of the reporting company (50% x 50% = 25%). As a 25% owner, Individual A is a beneficial owner of the reporting company. Because Individual A is a beneficial owner solely through Individual A’s ownership interest in an exempt entity, the reporting company may report the name of the large operating company instead of Individual A’s personal information.
When can a company use an entity's FinCEN Identifier instead of an individual's personal information?
A FinCEN Identifier is a unique identifying number that FinCEN will issue to entities that have filed initial BOI reports. A reporting company may report another entity's FinCEN Identifier and full legal name in lieu of the personal information of the individual beneficial owners if: (1) the other entity has obtained a FinCEN Identifier and provided that FinCEN Identifier to the reporting company; (2) an individual is or may be a beneficial owner of the reporting company by virtue of an interest in the reporting company that the individual holds through an ownership interest in the other entity; and (3) the beneficial owners of the other entity and of the reporting company are the same individuals.
Where can I find more information about BOI reporting?
For additional details regarding reporting beneficial ownership information under the Corporate Transparency Act, please visit our Corporate Transparency Act resources page or reach out to us directly.
Discover how the CT Corporation Beneficial Ownership platform can assist you in filing your beneficial ownership reports.
