The Effective Beneficiary for the Corporate Transparency Act: Definition and Identification Criteria

Under the Corporate Transparency Act (CTA) legislation, U.S. companies subject to the reporting requirement are required to provide identifying information regarding the company's beneficial owners.

The Corporate Transparency Act states that a beneficial owner is an individual who, directly or indirectly:

• (i) exercises "substantial control" over a company subject to reporting or
• (ii) owns or controls at least 25 percent of the ownership interests of the reporting company.

An individual exercises "substantial control" if they meet at least one of the following factors:

• 1. holds a senior management position within the company.
• 2. Holds authority over senior managers or a majority of the company's board of directors.
• 3. Has substantial influence on decisions of importance to the company.
• 4. Exercises any other kind of substantial control over the company.

It is important to note that although the criteria for being classified as a beneficial owner may refer to individuals directly connected to the company, individuals indirectly related to the company will also be considered beneficial owners if they meet any requirements for substantial control. Specifically, individuals may indirectly exercise significant control over a reporting company by controlling one or more intermediate entities that, in turn, substantially control the reporting entity.

The following types of individuals are not considered beneficial owners of a reportable U.S. corporation:

• 1. Minors (however, the company subject to reporting must provide information regarding the child's parent or legal guardian).
• 2. An individual acting as nominee, intermediary, custodian, or agent on behalf of another individual (in this case, the latter would be the beneficial owner).
• 3. An employee of the company subject to reporting who acts solely in an employee capacity and whose substantial control or economic benefits derive exclusively from employee status (provided that such person is not a senior manager of the company).
• 4. An individual whose only interest in a reporting society is a future interest through an inheritance right.
• 5. A creditor of the company being reported (unless it exercises substantial control or has a 25 percent ownership interest in the company being reported).