FinCEN Clarifies Subsidiary Exemption for the CTA’s Beneficial Ownership Information Reporting Rule
The Corporate Transparency Act (the “CTA”), a new federal law, went into effect on January 1, 2024 (see our update and summary here). In the weeks since, the Financial Crimes Enforcement Network (“FinCEN”) has continued to update its Frequently Asked Questions (“FAQs”) clarifying the CTA’s requirements.1
Out of the 23 reporting exemptions in the CTA, one of the most important for public companies and large operating companies is the subsidiary exemption. This exemption pertains to an entity whose ownership interests are “controlled or wholly owned,” either directly or indirectly, by one or more entities, each of which is exempt from reporting.2
The CTA’s intentional use of “controlled or wholly owned,” rather than “wholly controlled or wholly owned” led to debate about whether all of a subsidiary’s ownership interests needed to be controlled by an exempt entity in order to qualify for the subsidiary exemption. Specifically, it was unclear whether the subsidiary exemption would apply if an exempt entity controlled greater than a majority, but not all, of the subsidiary’s ownership interests.3 For example, it was unclear whether an entity that is 90% owned by a public company with a 10% passive non-exempt minority investor could claim the subsidiary exemption. On January 12, 2024, FinCEN issued the below FAQ to clarify that in such a case, the entity could not claim the subsidiary exemption because the public company does not fully control 100% of the entity’s ownership interests.
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 percent 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.
The result of the newly issued FAQ is that, as interpreted by FinCEN, an entity cannot claim the subsidiary exemption if a non-exempt entity (such as a small minority investor that is not exempt from the CTA) owns or controls any portion of the entity’s ownership interests. FinCEN FAQs do not yet include more specific examples as to how “control” of the ownership interests of an entity can be established in the context of the subsidiary exemption, including whether the control test can be satisfied through voting agreements, non-voting interests, restrictions on transfer, pledges or other similar arrangements.
Disclaimer: This update was prepared as of January 30, 2024, and is subject to change as further guidance on the CTA develops.
1 Dep’t of Treasury, Fin. Crimes Enf’t Network, Beneficial Ownership Information Reporting: Frequently Asked Questions (Jan. 12, 2024), https://fincen.gov/boi-faqs.
2 Note, however, that this exemption does not apply to subsidiaries of certain exempt entities, such as subsidiaries of: money transmitting or money services businesses; pooled investment vehicles; entities assisting a tax-exempt organization; or inactive entities.
3 FinCEN’s final rule states 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, including (1) joint ownership, (2) through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual, (3) through a trust or similar arrangement that holds such ownership interest, or (4) through ownership or control of one or more intermediate entities or its ownership interests that own or control the ownership interests of the reporting company. Note that “control” in the subsidiary context differs from “substantial control,” which is a test used to identify beneficial owners.
