On January 1, 2021, Congress enacted the Corporate Transparency Act (“CTA”), which mandates certain companies report information about their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”) through Beneficial Ownership Reports (“BOIRs”) beginning January 1, 2024 (the “Reporting Rule”). For a quick overview, you can read about the basics of the CTA here.

Under the Reporting Rule, entities classified as “Reporting Companies” which are formed during the 2024 calendar year must file BOIRs with FinCEN within 90 days of their formation. Reporting Companies formed on or after January 1, 2025 must file BOIRs within 30 days of their formation. Reporting Companies formed prior to January 1, 2024 will have until January 1, 2025 to file their BOIRs.

Not every company is a Reporting Company under the CTA. Although the CTA broadly defines Reporting Companies, it provides a list of 23 exemptions to the Reporting Rule. One of the exemptions is for subsidiaries of certain exempt entities.  

How does an entity fall under the subsidiary exemption?
An entity qualifies for the subsidiary exemption if its “ownership interests are controlled or wholly owned, directly or indirectly,” by another exempt entity. On October 3, 2024, FinCEN issued updated FAQs addressing, in part, whether a Reporting Company qualifies for the subsidiary exemption if its ownership interests are owned or controlled by more than one exempt entity. The updated FAQs state that if a Reporting Company’s ownership interests are controlled or wholly owned by more than one exempt entity, the Reporting Company may still qualify for the subsidiary exemption if the entities are unaffiliated; however, every controlling or owning entity must itself be an exempt entity in order for the Reporting Company to qualify for the subsidiary exemption. In short, if every entity that owns a portion of the Reporting Company’s ownership interests is exempt, then the Reporting Company should qualify for the subsidiary exemption.

Before this update, FinCEN held the position that if multiple exempt entities held a total of 100% of a subsidiary, then the subsidiary would not qualify for the exemption. The subsidiary exemption was reserved for subsidiaries of singular entities that owned 100% of the subsidiary’s ownership interests. 

Now, under FinCEN’s new guidance, if more than one exempt entity collectively owns all of the ownership interests in a subsidiary Reporting Company, the subsidiary Reporting Company may still qualify for the exemption. This shift benefits Reporting Companies because it broadens the criteria for qualifying for the subsidiary exemption, allowing for more flexibility and lessening the burden of the reporting obligations on subsidiary entities and including joint venture subsidiaries wholly owned by exempt entities.

If you have questions regarding the CTA, the subsidiary exemption to the Reporting Rule, or any other requirements, please contact Dan Desmond, Caitlin Long, Anthony Austin or any other member of Barley Snyder’s Corporate Transparency Act Response Team.