The Corporate Transparency Act takes effect January 1: Top points for Puerto Rico entities

Effective January 1, 2024, the Corporate Transparency Act (CTA)[1] will require reporting companies to provide certain beneficial ownership information related to their controlling stakeholders – a measure that aligns with the US federal government’s aim to mitigate corruption, money laundering, terrorism, fraud, and other illegal activity.

The US Congress enacted the CTA as part of the National Defense Authorization Act for Fiscal Year 2021. On September 30, 2023, the Financial Crimes Enforcement Network (FinCEN) issued the CTA Final Rule[2] (see 31 CFR Part 1010.380). The US Treasury is empowered to enforce the CTA’s provisions through FinCEN.

In this alert, we summarize the applicability of the CTA and CTA Final Rule to Puerto Rico-organized entities (ie, corporations and limited liability companies), with a focus on provisions of the CTA that will enter into effect on January 1.

Applicability

The CTA requires a reporting company to file a beneficial ownership information (BOI) report with FinCEN within a specific time period. A reporting company is defined as a domestic or foreign entity.

A domestic reporting company refers to any corporation, limited liability company, or other type of entity created by filing a document with the Secretary of State or similar office created under state law[3] (ie, the Puerto Rico Department of State, in the case of Puerto Rico organized entities).

A foreign reporting company is a corporation, limited liability company, or other entity created under the laws of a foreign country that is registered or authorized to conduct business in any state by filing a document with the Secretary of State or similar office created under the applicable state law.

Reporting companies organized or authorized to conduct business before the January 1, 2024 will have until January 1, 2025 to file their initial BOI reports. Reporting companies organized or authorized to conduct business on or after the January 1, 2024, but before January 1, 2025, will have 90 days from the date of their organization (or authorization to do business) to file their BOI reports with FinCEN.[4]

As of January 1, 2025, reporting companies organized or authorized to do business on or after such date must file their BOI reports within 30 days after the date of their organization (or authorization to do business).[5]

The CTA and CTA Final Rule provide for the exclusion of 23 entities that would otherwise be considered reporting companies. These companies include, but are not limited to, certain publicly traded companies meeting specific requirements, banks, bank holding companies, investment companies, certain investment advisers, insurance companies, many nonprofits, and large operating companies. The CTA and CTA Final Rule define large operating companies as entities that meet all of the following criteria:

1. having more than 20 full-time employees in the US[6] (including employees in the Commonwealth of Puerto Rico)
2. having an operating presence at a physical office in the US[7] (not explicitly including the Commonwealth of Puerto Rico), and
3. having had filed federal income or information returns for the prior year showing gross receipts or sales of more than $5 million (excluding gross receipts or sales from sources outside the US, as determined for US federal income tax purposes).

For more information on the excluded entities and the applicable exemptions, please refer to Section 5336 of the CTA (See 31 U.S.C. 5336(a)(11)(B)(i)–(xxiii)) or the CTA Final Rule.

Reporting company and beneficial ownership information

Reporting companies will be required to report certain information related to their beneficial owners to FinCEN. A beneficial owner[8] is any natural person[9] who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, owns or controls at least 25 percent of the ownership interests or shares of the reporting company or exercises “substantial control” over the reporting company. The CTA Final Rule refers to “substantial control” of a reporting company if it meets any of the following criteria:

1. the individual is a Senior Officer of the reporting company (ie President, CEO, General Counsel, COO, CFO, or any other position that performs a similar function as any of the above officers)
2. the individual has authority to appoint or remove any Senior Officer (as defined in the CTA and CTA Final Rule) or a majority of directors of the reporting company
3. the individual is an important decision-maker (regarding the Reporting Company’s business, finances, or structure), or
4. the individual has any other form of substantial control over the reporting company.

Furthermore, the CTA does not consider the following a beneficial owner: a minor (though the parent or guardian’s information must be reported); an individual acting solely as a nominee, intermediary, custodian, or agent on behalf of another individual; certain employees; an individual whose only interest in the reporting company is through inheritance; or a creditor of a reporting company.

For the BOI report, the reporting company must provide:

1. its full legal name, trade names, or D/B/As
2. a complete US physical and mailing address
3. its jurisdiction of formation (domestic or foreign, as applicable)
4. the state in which it first registered to conduct business (only applicable to foreign reporting companies), and
5. its Employer Identification Number (EIN), Taxpayer Identification Number (TIN), or foreign identification number (if it does not have a TIN).

For the beneficial owner, the reporting company must provide:

1. their full legal name
2. their birthdate, complete US physical and mailing address, and
3. unique identification number issued by the state or foreign jurisdiction (ie, a valid passport; a current identification issued by a state or local government; a current driver’s license issued by a state; or a current foreign passport, if none of the other documents are available).

An image of the unique identification document must be included with the BOI report (BOI Information). Individuals may obtain FinCEN identifiers[10] by voluntarily submitting the BOI Information to FinCEN. Once a beneficial owner has obtained a FinCEN identifier, reporting companies may report it in place of the otherwise required pieces of personal information.

Confidentiality

BOI Information is confidential and cannot be disclosed, except as authorized by the CTA, the CTA Final Rule, or any protocols promulgated thereunder. However, FinCEN may disclose BOI Information when it receives:

1. a request from a federal agency engaged in national security, intelligence, or law enforcement activities for use in the conduct of such activities
2. a request from a state, local, or Tribal law enforcement agency, if authorized by a court of competent jurisdiction to collect the information as part of a criminal or civil investigation
3. a request by a federal agency on behalf of a foreign law enforcement agency, prosecutor, or judge under an international treaty, agreement, or convention, or at the official request of law enforcement, judicial, or prosecutorial authorities of a trusted foreign country where no treaty, agreement, or convention is available, if certain conditions are met
4. a request made by a financial institution subject to customer due diligence requirements with the consent of the reporting company to facilitate the institution’s compliance with customer due diligence requirements under applicable law, or
5. a request made by a federal functional regulatory agency or other appropriate regulatory agency if the agency (i) is authorized by law, (ii) uses the information solely as authorized, or (iii) enters into a written agreement with the Secretary of the US Treasury Department providing appropriate protocols governing the safekeeping of the BOI Information.

Implications

Puerto Rico organized entities, as well as foreign entities authorized to conduct business in the Commonwealth of Puerto Rico, are advised to review the CTA and CTA Final Rule to determine whether they will qualify as reporting companies.

If such entities are deemed reporting companies, they should note that willful failure to file or update the BOI report, or submitting a BOI report containing false or fraudulent beneficial ownership information, is subject to a $500 penalty per day and/or a maximum of $10,000 penalty and up to two years’ imprisonment.

However, the CTA contains a safe-harbor provision from civil or criminal liability for the submission of inaccurate information, provided that the person voluntarily and promptly submits an amended BOI report containing the correct information no later than 90 days after the submission of the original inaccurate report.

Puerto Rico-organized entities, and those organized outside but authorized to do business in the Commonwealth of Puerto Rico, whose operations are conducted solely in the Commonwealth of Puerto Rico, may not be exempted from the large operating company exemption due to their number of employees and total gross receipts or sales. This is due to (1) the ambiguous definition of “United States” for purposes of the operating presence criteria of the exemption and (2) the fact that these entities may not meet the $5 million gross receipts or sales federal return threshold, which excludes gross receipts or sales from sources outside the US (for these purposes, income sourced from Puerto Rico would be considered to be sourced from outside the US). It is unclear whether this result was intended or whether any relief may be sought from FinCEN.

While the CTA intends to provide law enforcement agencies with BOI Information to assist them in detecting, preventing, and processing crimes such as money laundering, terrorism, corruption, and other criminal misconduct within business entities, the act places a considerable informational burden on smaller companies (and on all Puerto Rico-based entities) with substantial penalties, including possible criminal imprisonment.

For additional information please see FinCEN’s FAQ’s and Small Business compliance guide.[11]

If you have any questions, please contact any of the authors.

^{[1] CTA Act: https://www.govinfo.gov/content/pkg/USCODE-2021-title31/pdf/USCODE-2021-title31-subtitleIV-chap53-subchapII-sec5336.pdf
[2] CTA Final Rule: https://www.fincen.gov/sites/default/files/shared/31_CFR_1010_380_excerpt_from_Final_Rule.pdf
[3] The CTA and CTA Final Rule define a “State” as a state of the United States and any other commonwealth, territory, or possession of the United States, including the Commonwealth of Puerto Rico.
[4] See 31 CFR Part 1010 RIN 1506-AB62 – Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies created or registered after January 1, 2024.
[5] FinCEN may or may not issue additional time extensions to file the BOI report for entities organized or authorized to do business on or after January 1st, 2025.
[6] See 31 C.F.R. §1010.100 concerning the definition of the United States for purposes of employees within the United States: “United States". 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.” Territories and Insular Possessions include “The Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and all other territories and possessions of the United States other than the Indian lands and the District of Columbia.”
[7] See CTA Final Rule, 31 C.F.R. §1010.380 (f)(6); Operating presence at a physical office within the United States. 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 and that is physically distinct from the place of business of any other unaffiliated entity.
[8] See Beneficial Owner Definition, 31 USC §5336 (3)(A).
[9] Please note that beneficial ownership information disclosure only relates to natural persons.
[10] See 31 C.F.R. § 1010.380 (f)(2).
[11] FinCEN FAQ https://www.fincen.gov/sites/default/files/shared/BOI_FAQs_Q&A_11.15.23_508C.pdf and FinCEN Small Business Compliance Guide https://www.fincen.gov/sites/default/files/shared/BOI_Small_Compliance_Guide.v1.1-FINAL.pdf}