CTA Exemptions - Large Operating Company

There are 23 separate exemptions that relieve exempt companies from the duty to file beneficial ownership reports under the CTA.

Previous posts have covered public companies, banks, credit unions, money transmitting businesses and securities broker/dealers. In this post we will outline the exemption requirements for "large operating companies."

CTA Filing Obligations

The Corporate Transparency Act (CTA) obligates most companies in the U.S. to file a beneficial ownership report with FinCEN. FinCEN is the financial crimes enforcement network of the U.S. Treasury Department.

Each beneficial ownership report must identify (i) the company applicant who formed the company and (ii) each beneficial owner. For each individual, the report must provide (a) the person's full legal name, (b) data of birth, (c) residential address and (d) a unique identifying number. The report must also provide an image of the document that provides the unique identifying number. Acceptable documents and numbers include an unexpired passport or drivers license.

Personally-identifiable information (PII) is sensitive, however. Many companies will face an immense challenge to collect, store and compile this data. Once filed, a company must amend its report within 30 days after any change in any item of previously-reported information. Such changes might include a change in home address, or a passport or drivers license renewal.

FinCEN plans to build a database of beneficial ownership data. FinCEN hopes to use this database to assist law enforcement in fighting money laundering. As a result, FinCEN's proposed regulations exempt many types of companies whose beneficial ownership is already regulated by the government.

Exemption for Large Operating Companies

Subsection 1010.380(c)(2)(xxi) of the proposed regulation exempts what it calls "large operating companies" that meet a three part test. An exempt large operating company is one that:

(A)Employs more than 20 full time employees in the United States, with ''full time employee in the United States'' having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term ''United States'' as used in 26 CFR 54.4980H-1(a) and 54.4980H-3 has the meaning provided in § 1010.100(hhh);
(B) Has an operating presence at a physical office within the United States; and
(C) Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity's IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.

Companies that hope to be exempt as large operating companies should carefully apply each prong of this test.

Twenty or More Full Time Employees

The 20 or more full time employees must each be a "full time employee in the United States" as defined in 26 CFR 54.4980H-1(a). The definition of "full time employee" is taken from the tax code and describes "an employee who is employed an average of at least 30 hours of service per week." The definition refers to other tax regulations for measuring average weekly employment, so companies with close cases may need to consult their tax advisors to make sure they are properly classifying employees as 'full time' for purposes of this exemption.

Importantly, the first prong of the exemption requires that the employees that count must be employed "in the United States" as that term is defined in § 1010.100(hhh), a Treasury Department regulation under the Bank Secrecy Act. That definition defines "United States" as "The States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States."

Finally, it is important to note that this first prong, which measures the number of full time employees in the United States, is couched in the present tense. This suggest that if the company should at some point cease to employ at least twenty full time employees, it would lose the exemption at that point in time.

Operating Presence at a Physical Office in the United States

The second prong of the three-part test of the exemption requires the exempt company to have "an operating presence at a physical office within the United States."

This phrase is specifically defined in FinCEN's draft regulation as:

The term ''has an operating presence at a physical office within the United States'' means that an entity regularly conducts its business at a physical location in the United States that the entity owns or leases, that is not the place of residence of any individual, and that is physically distinct from the place of business of any other unaffiliated entity.

Thus, to qualify as an operating presence, it is necessary that (a) the company "regularly conducts its business" there, (b) the location is "a physical location in the United States that the entity owns or leases," (c) the location "is not the place of residence of any individual" and (d) the location "is physically distinct from the place of business of any other unaffiliated entity."

Importantly, it is not necessary that all of the company's full time employees work from the "operating presence" that the company claims for the second prong of the exemption. It is only necessary that the company "regularly conducts its business" at the operating presence, and not that all of its employees work there.

Like the first prong, the second prong is also couched in the present tense. This also suggests that the "operating presence" test could fail at any time if the company ceased to maintain its operating presence in the United States as required.

More than $5 Million in Gross Receipts or Sales

The last prong of the three-part test looks to the company's "gross receipts or sales . . . for the previous year." The test is back-ward looking, referring to the company's income tax return on IRS Form 1120, "or other applicable IRS form."

Unlike the other tests, which are measured in the present tense (or at all times), the gross receipts test always looks back to the income tax return for the previous year.

In a close case for a company that was previously exempt, but falls below the threshold one year because of its sales declining below the $5 million mark, presumably the exemption would fall away at the time the company filed an income tax return for the previously year that produced income below this level.

Key Takeaways for the Large Operating Company Exemption

Congress intended to provide relief from CTA obligations for large operating companies with more than 20 full time employees, gross receipts over $5 million and an established operating presence in the United States. For many large operating companies who have numbers of employees and gross receipts well in excess of the minimum levels, this rule will provide some relief.

For those companies that are closer to the line, however, this exemption can be a trap for the unwary. The first and second prongs of the exemption test are measured at all times, so that the company's CTA compliance officer must constantly remain aware of the metrics that satisfy the exemption test.

If the company's number of full time employees should fall below the threshold, or if the company should cease to "regularly conduct its business" at a "physical office in the United States," the company would cease to satisfy the requirements of the exemption and would immediately need to file a compliant beneficial ownership report.

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