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What to know about the 23 exemptions to the Corporate Transparency Act

May 29, 2024
0 min read
Business people discussing Corporate Transparency Act exemptions.

Enacted to combat money laundering, fraud and other illicit financial activities, the Corporate Transparency Act (CTA) requires companies to report detailed information about the individuals who control or own them.

The CTA is relatively new, as it came into effect on January 1, 2024, and with legal teams familiarizing themselves with its requirements, there’s one important thing to know: the final rule outlines 23 types of exemptions.

Exploring the CTA exemptions makes good business sense

Corporations need strong entity management to manage risk and maintain stakeholder trust in today’s complex business world. That being said, claiming a CTA exemption has its advantages. Reporting beneficial ownership information can bring big complications to legal and compliance workloads, from tracking down the latest entity information to securely storing and submitting sensitive data like passport numbers. Filing deadlines can be tight — as short as 30 days in some cases.

Chief legal officers, general counsel and members of the legal team already face a growing compliance to-do list, so it makes sense to streamline reporting obligations to those that are required. Yet proving a CTA exemption in a credible, defensible fashion isn’t necessarily straightforward — and organizations face harsh penalties for getting it wrong.

A quick primer follows for steering your team in the right direction.

Exemptions to the Corporate Transparency Act

Which entities can organizations exclude from CTA mandates? PwC classifies the 23 exemptions into seven types:

  1. Government
  2. Tax exempt
  3. Public entity
  4. Investment related
  5. Specialized services
  6. Regulated financial institutions
  7. A “catch-all” category of more board exemptions

The rationale behind many of these exemptions is that existing regulations, from SEC requirements to the IRS tax code, already provide rigorous levels of oversight.

Here’s an introduction to the categories, with supporting detail from international law firm Baker Donelson.

Is the entity a government authority or regulated public utility?

Under the CTA definition, organizations that provide electric, natural gas, water, wastewater and telecommunications services in the United States can be considered public utilities.

Is the organization tax-exempt or directly assist such a tax-exempt entity?

This includes certain non-profits, trusts, private foundations and political organizations (but not religious organizations) as defined by the IRS tax code, with several nuances and exceptions. If you’re considering this exemption, be aware of potential CTA reporting obligations before an entity receives IRS confirmation of tax-exempt status or after it loses this status.

A variety of other CTA exemptions apply to organizations working in — and therefore regulated by — the U.S. financial sector:

  • Public entities include organizations registered to issue securities, securities exchanges, clearing agencies and other entities registered under the Exchange Act
  • Investment-related entities include investment companies and advisors, advisors for venture capital funds and pooled investment vehicles
  • The specialized services exemption covers public accounting firms registered in accordance with the Sarbanes-Oxley Act and organizations designated by the Financial Stability Oversight Council to be a financial market utility.

Finally, is an entity a regulated financial institution? This category includes banks, credit unions, securities brokers and dealers, insurance companies, state-licensed insurance businesses, money service businesses and the holding companies for institutions that collect deposits, such as banks and savings and loans.

“Catch-all” exemptions — and complications

In addition to the exemptions above, the CTA details a broader group of classifications that may qualify an entity for exemption status.

For example: does an entity qualify as inactive, and therefore exempt from CTA filing? The answer may be yes if the entity hasn’t sent or received more than $1,000 funds in the past year — but only if the entity 1) has been in existence since 2020, 2) is not owned by a non-U.S. person and 3) holds no ownership in another entity.

U.S. subsidiaries of foreign-owned businesses, known as inbound entities in the world of CTA reporting, get unique consideration. And here’s where things get even more complicated. For example:

  • The inactive exemption detailed above may not necessarily apply to this entity.
  • Based on the status of their foreign-owned parents, inbound entities will not qualify for the subsidiary exemption either.

In other “catch all” exemptions, a Large Operating Company exemption is available, but it requires a U.S. presence with 20 or more employees working in U.S. locations. Another important nuance to note: Non-U.S. individuals can be included as beneficial owners based on ownership interest or definitions of control.

Unsure if your organization falls under one of the 23 Corporate Transparency Act exemptions? Here are your next steps

As this high-level overview demonstrates, CTA exemptions are complicated, so any final decisions on CTA exemptions should follow comprehensive legal and regulatory review.

In the meantime, you can consider the above checklist an initial guide for Corporate Transparency Act planning. If credible, defensible proof of a CTA exemption seems unlikely based on all of the above, you may need to prepare your team to collect the required ownership information and submit filings in accordance with CTA mandates.

Especially for an organization operating across multiple subsidiaries and jurisdictions, or one that’s grown through multiple mergers and acquisitions, this could mean a lot of work ahead: mapping your organization’s entity and ownership structure, gathering information from dates of birth to passport numbers, verifying this data, reporting it in the required format and beyond, while keeping everything secure throughout.

The right technology can help. And whether your organization meets the criteria for a Corporate Transparency Act exemption or not, you’ll still want to take the first step to streamline your overall entity management. Explore Diligent Entities to see how.


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