Mexico & the U.S.: New & Proposed Beneficial Owner Information Reporting Requirements

Thoughtware Article Published: Apr 11, 2022
Foreign and US currencies

Governments around the world are implementing policies requiring business entities formed or registered to do business in their respective jurisdictions to identify and disclose substantial information about their beneficial owners. According to the U.S. Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury, these reporting requirements are intended to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit acts. The FinCEN also says that such disclosures will provide law enforcement agencies critical information to help diminish the ability of “malign actors” to obfuscate their activities with anonymous shell and front companies.  

Mexico

In Mexico’s case, the Federal Tax Code established a new obligation for corporate taxpayers in Mexico to identify and collect personal information on their beneficial owners.

Who is subject to this new provision?

  • Companies
  • Fiduciaries, trustors, and trustees
  • Parties or members of legal entities
  • Notaries public and third parties involved in the incorporation of companies
  • Financial entities (including the financial system)

There are three cases to keep in mind:

  • Forming new companies: Incorporating a new company in Mexico will be an issue since it will now be necessary to provide the notary with all the information they deem pertinent; unlike in the U.S., a notary in Mexico is an experienced attorney with the ability to authenticate important legal documents. 
  • Any changes in ownership or structures: Many notaries will likely request information when any shareholding changes take place at the Mexican subsidiary level; however, the company also will be obligated to have this information available upon request. Further guidance from the regulatory authorities regarding whether they want any information submitted when changes occur is required.
  • Providing information upon request by the tax authorities: This documentation must be shared with the local tax authorities when requested. Companies should consider having a defense file ready before it is needed so the taxpayer does not scramble to organize relevant information while subject to a 15-day deadline, plus an additional 10 days upon request.

How to identify beneficial owners

A beneficial owner is understood to be the individual or group of individuals who:

  • Directly or indirectly obtains benefits derived from its participation in a legal entity, a trust, or any other legal figure;
  • Ultimately exercises rights of enjoyment, use, or disposition of an asset or service, or on whose behalf a transaction is carried out; or
  • Directly, indirectly, or contingently exercises control over a legal entity, trust, or any other legal figure

Uncertainties exist related to the classification and treatment of public companies and investment funds.

What information should be collected?

Taxpayers subject to the reporting requirement must collect information on each of their identified beneficial owners, including, but not limited to, the following:

  • Name
  • Date of birth
  • Country of origin and tax residence (including home address)
  • Taxpayer ID
  • Marital status, with identification of the spouse—if applicable—and property regime
  • Key contact information
  • Relationship with the taxpayer and degree of participation in the entity
  • Number of shares and titles on the taxpayer’s capital
  • Start date of activities as beneficial owner
  • Organizational chart
  • Bylaws, countries, tax ID, certificate of residence, and address of all interposed entities
  • Others

Since, by its nature, this information is quite sensitive, companies should maintain this information at their headquarters in a secure setting. Also, it will be necessary to design and have available the internal controls documenting how this information will be kept and updated for review.

Penalties

In the event of noncompliance, the following sanctions would apply for each beneficial owner:

  • From $75,000 to $100,000 USD for failing to obtain, keep, or submit such information
  • From $40,000 to $50,000 USD for not keeping the information updated
  • From $25,000 to $40,000 USD for submitting information that is incomplete, inaccurate, in error, or in a form different from that specified in the provisions

Where a company is found to not be in compliance with the requirements, the authorities could revoke the entity’s ability to invoice and related import licenses. These consequences can sometimes have a greater impact than a fine that could potentially be litigated.

United States

On December 7, 2021, FinCEN issued a notice of proposed rule making (NPRM) promulgating proposed regulations to require reporting companies to disclose information about their beneficial owners and company applicants. The proposed regulations would implement the Corporate Transparency Act (CTA), a component of the National Defense Authorization Act, which was enacted into law on January 1, 2021.  

In summary, the NPRM addresses those persons subject to the contemplated filing requirements, when reporting is required, and what information must be reported. In general, the reporting requirements target smaller entities that may be less regulated and perhaps not subject to other reporting requirements that law enforcement could otherwise use to deter criminal activities and other illicit acts. Entities operating in a highly regulated environment are generally exempt from the contemplated reporting.  

Who is a reporting company?

A reporting company may be either domestic or foreign and includes any corporation, limited liability company, or similar entity that is either (1) created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe or (2) formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe. A “similar entity” is broadly defined as any entity that is created by the filing of a document with a secretary of state or similar office. FinCEN anticipates that a reporting company will include:

  • Corporations
  • Limited liability companies
  • Limited liability partnerships
  • Business trusts
  • Limited partnerships

There are 23 exemptions or exceptions to the definition of a reporting company. Exemptions are provided for securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodity Exchange Act registered entities, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax-exempt entities, entities assisting tax-exempt entities, large operating companies, subsidiaries of certain exempt entities, and inactive businesses.

Of particular note is the definition of a large operating company, which is held to be an entity that (1) employs more than 20 full-time employees in the U.S., (2) filed a U.S. income tax return in the preceding year with more than $5 million in gross receipts or sales in the aggregate, and (3) has an operating presence at a physical office within the United States.

What must be reported?

The NPRM shall require that each reporting company file a report identifying each beneficial owner of the reporting company and each company applicant. The following details are proposed to be included in the report for each beneficial owner and company applicant:

  • Full legal name
  • Date of birth
  • Current residential address or business street address, as applicable
  • Unique identifying number from an acceptable identification document or by FinCEN identifier

Who is a beneficial owner?

A beneficial owner is any individual who directly or indirectly, through any contract, agreement, understanding, relationship, or otherwise, either:

  • Exercises substantial control over the reporting entity; or
  • Owns or controls at least 25 percent of the ownership interests of the entity

The NPRM contemplates three indicators of substantial control:

  • Where an individual serves as a senior officer of a reporting entity;
  • Where an individual has authority over the appointment or removal of any senior officer, or a dominant majority of the board of directors; and
  • Where an individual may exercise direction, determination, or decisions of, or exert substantial influence over important matters of the reporting entity

Ownership of a reporting entity includes those individuals who own or control at least 25 percent of a reporting entity’s ownership interests, which include the following:

  • Equity;
  • Capital;
  • Profits interest;
  • Convertible instruments;
  • Warrants or rights; or 
  • Options to acquire equity, capital, or other interests

Ownership and control are broadly defined by FinCEN intentionally, either of which may come about through an individual’s interest in a trust as a grantor, settlor, beneficiary, or trustee. Measurement of ownership is considered on a fully diluted basis. There are five exceptions to the definition of beneficial owner, including minor children, nominees, certain employees, creditors, and persons with a future interest associated with a right of inheritance.

Who is a company applicant?

A reporting entity also is required to disclose information about a company applicant. A company applicant is any individual who files a document that creates a domestic reporting entity or who first registers a foreign reporting entity with a secretary of state or similar office in the United States. The proposed definition also includes any individual who directs or contracts the filing of such document by another person.

When must a reporting entity file a report?

For newly formed and registered entities coming into existence after the proposed regulations come into effect, the reporting entity must file a report within 14 calendar days of the date on which it was formed or in the case of a foreign reporting entity, within 14 calendar days of the date on which it first became a reporting entity.  

Reporting entities, both foreign and domestic, that were in existence before the proposed regulations come into effect must file a report no later than one calendar year after the effective date of the regulations.

Entities that are not reporting entities by virtue of an exemption but subsequently become a reporting entity must file a report within 30 calendar days after the date on which the entity no longer satisfies the exemption criteria.

A reporting entity will have 14 calendar days to correct inaccurate information on a previously filed report beginning with the date on which the inaccuracy is discovered. Furthermore, where there has been a change in beneficial owner, a reporting entity must provide FinCEN with updated information within 30 calendar days after the date on which there was any change in beneficial owner.

What are the penalties for failure to comply?

Those persons who willfully provide or attempt to provide fraudulent or false information to FinCEN or fail to report complete or updated beneficial ownership information shall be subject to a civil penalty of up to $500 USD for each day the violation continues. Moreover, such person may be subject to a fine of up to $10,000 USD and imprisoned for up to two years, or both, for a criminal violation of the law.  

In summary, the Mexican regulations are currently in effect and must be considered today while the U.S. NPRM is not yet in effect. Accordingly, affected entities should consider how the NPRM may affect them at such time it becomes effective.

For additional information, consider reviewing this previously issued alert. Contact your advisor or submit the Contact Us form below for help assessing whether the new and proposed regulations may impact you, your organization, or your company.
 

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