Corporate Transparency reporting is coming

Congress enacted the Corporate Transparency Act (CTA) on January 1, 2021, as part of the National Defense Authorization Act. The CTA imposes reporting requirements on companies to promote transparency.

Specifically, the CTA is intended to combat money laundering, terrorism and other illegal activities. According to the FinCEN, "Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the United States." The reporting requirements of the CTA are intended to make it more difficult for actors to use shell companies to hide assets or launder money.

We have previously written on the CTA reporting requirements generally. See "Corporate Transparency Act: New beneficial ownership reporting requirements for all entities with US operations"; "US: The Corporate Transparency Act and its effects on the corporate landscape." This article explores the CTA and its application to healthcare entities, specifically.

Corporate Transparency Act

Background of the CTA

The CTA's reporting requirements become effective January 1, 2024. Once effective, the CTA provides that reporting companies will have a one year period to report the beneficial owners of the company with the Financial Crimes Enforcement Network (FinCEN) (until January 1, 2025). The CTA requires companies to file a report with FinCEN that identifies each company's:

1. beneficial owners,
2. company applicants,
3. legal name,
4. address,
5. jurisdiction of formation and
6. taxpayer identification number.

A beneficial owner includes any individual who directly or indirectly (i) exercises substantial control over a company, or (ii) owns or controls at least 25 percent of the ownership interests of a company. Company applicants include (i) the individual who directly files the document that registers the company, and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document. Each beneficial owner and company applicant must provide to FinCEN their legal name, birthdate, identifying number on a driver's license, passport or other approved document, and current address.

These reporting requirements apply to domestic companies, including corporations, limited liability companies and any entity that was created by filing with the secretary of state or a similar office. They also apply to foreign companies, including corporations, limited liability companies or other entities formed under the law of a foreign country that are registered to do business in the United States or any Tribal jurisdiction.

Non-compliance with the CTA reporting requirements can result in civil penalties of up to US$500 per day, up to a maximum of US$10,000, as well as up to two years in prison.

Application to healthcare entities

The CTA exempts 23 types of entities from its reporting requirements. See generally 87 F.R. § 59498. In the healthcare realm, there are five exemptions most likely to apply: (i) the tax-exempt entity exemption, (ii) the entity assisting a tax-exempt entity exemption, (iii) the large operating company exemption, (iv) the subsidiary of an exempt entity exemption and (v) the inactive entity exemption.

First, the CTA's tax-exempt entity exemption exempts many tax-exempt healthcare entities from the CTA reporting requirements. If a healthcare entity meets the description of Internal Revenue Code (IRC) § 501(c) and is exempt from tax by IRC § 501(a), the entity is exempt from the reporting requirements of the CTA. In the event that an entity loses tax-exempt status under IRC § 501(a), CTA reporting requirements will not kick in immediately. Following the loss of tax-exempt status, the entity will have a 180-day period until it is no longer exempt from the CTA reporting requirements.

Related to the tax-exempt entity exemption, there is also an exemption for entities that assist tax-exempt entities. This type of entity is exempt from the CTA's reporting requirements if the entity (i) operates exclusively to provide financial assistance to, or hold governance rights over, a tax-exempt entity, (ii) is a United States entity, (iii) is owned or controlled exclusively by United States citizens or permanent residents and (iv) obtains most of its funding or revenue from United States citizens or permanent residents.

Next, the exemption for a "large operating company," likely exempts many hospitals, health systems and large healthcare entities. This exemption applies to an entity that (i) employs more than 20 full-time employees in the United States, (ii) has an operating presence or physical office within the United States and (iii) filed a Federal income tax return or information return in the United Stated for more than US$5m in gross receipts or sales. For an entity in an affiliated group (as defined by 26 U.S.C. § 1504(a)), the amount filed on a tax or information return shall be that of the consolidated return for the group.

In addition, the CTA exempts the subsidiaries of tax-exempt entities and large operating companies. Subsidiaries of tax-exempt entities and large operating companies, as described above, are exempt from the CTA reporting requirements, so long as the subsidiary's ownership interests are controlled or wholly owned, either directly or indirectly, by the tax-exempt entity or large operating company. This exemption means that the subsidiaries of many tax-exempt healthcare entities, hospitals, health systems and other large healthcare entities may also qualify for exemption from the CTA's reporting requirements.

The last exemption potentially applicable to healthcare entities is the exemption for inactive entities. This exemption applies to any entity that (i) existed on or before January 1, 2020, (ii) is not engaged in active business, (iii) is not owned by a foreign individual, (iv) has not been involved in a change of ownership within the last year, (v) has not sent or received money in an amount greater than US$1,000 in the last year and (vi) does not otherwise have any assets in the United States or abroad. This exemption will benefit healthcare entities that are no longer active but not dissolved.

While the CTA's exemptions related to tax-exempt entities and large operating companies mean that numerous healthcare entities will not be subject to the reporting requirements of the CTA, active healthcare entities that are not tax-exempt and/or are smaller entities will remain subject to the CTA's reporting requirements.

Conclusion

As January 1, 2024, approaches, healthcare entities should determine whether they are subject to the CTA's reporting requirements and develop a plan of action to ensure compliance.

If you have questions about whether the CTA applies to you or need assistance with preparing your CTA filing, please do not hesitate to reach out to our team at Norton Rose Fulbright.