Privacy of a US LLC vs a UK Limited Company for Offshore Trusts

Although many try to make it seem that way, forming a US LLC is often not that simple – https://htj.tax/2019/12/forming-llc-is-not-that-simple/

But the US LLC can be quickly incorporated, is relatively cheap and until recently – can be very private https://htj.tax/2018/12/the-pros-and-cons-of-llcs/

Now we have the Corporate Transparency Act – https://htj.tax/2024/01/corporate-transparency-act-beneficial-ownership-information-reporting-requirement/

The CTA requires the reporting of personal information about every individual who meets the definition of a “beneficial owner” of a reporting company. That includes not only the beneficial owners of a trust that is a reporting company, but also the beneficial owners of a reporting company that is owned or controlled by a trust. Civil and criminal penalties can be imposed on a reporting company and on individuals for violating the CTA’s reporting requirements.

In the case of trusts, there are two issues of concern. 

First, is the trust a reporting company – meaning it must file a BOI report.  

Second, if the trust owns or controls a reporting company, who are the reporting company’s beneficial owners.

Can a trust be a reporting company?

A domestic trust that was created by the filing of a document with a Secretary of State or similar office and a foreign trust registered to do business by filing a document with a Secretary of State or similar office will have to file a BOI report. However, if the corporation, LLC or other entity qualifies for an exemption it is not a reporting company and does not have to file a BOI report.

Note that according to FinCEN, the registration of a trust with a court of law merely to establish the court’s jurisdiction over any disputes involving the trust does not make the trust a reporting company.

Who are the beneficial owners of reporting companies owned or controlled by a trust?

Many trusts own or control, in whole or in part, reporting companies. The personal information of those reporting company’s individual beneficial owners must be reported to FinCEN. (The trust itself is not a beneficial owner. A beneficial owner is an individual.)

A beneficial owner of a reporting company is defined as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. 

Individuals with substantial control include senior officers, individuals with the authority to appoint or remove senior officers or a majority of the governing body, and individuals with significant influence over important decisions made by the reporting company.

Can a trustee exercise substantial control over a reporting company?

A trustee of a trust may exercise substantial control over a reporting company. The rule implementing the CTA’s reporting requirement states as follows:

“An individual may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through:

• Board representation;

• Ownership or control of a majority of the voting power or voting rights of the reporting company;

• Rights associated with any financing arrangement or interest in a company;

• Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;

• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
• any other contract, arrangement, understanding, relationship, or otherwise.”

Can an individual hold ownership interests in a reporting company through a trust?

An individual owning at least 25% of the ownership interests of a reporting company is a beneficial owner. Regarding whether an individual may hold ownership interests in a reporting company through a trust, the rule states:

“An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including:

With regard to a trust or similar arrangement that holds such ownership interest:

• As a trustee of the trust or other individual (if any) with the authority to dispose of trust assets;

• As a beneficiary who:
  • Is the sole permissible recipient of income and principal from the trust; or
  • Has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or
• As a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

Are there exceptions to the definition of beneficial owner?

There are five exceptions to the definition of beneficial owner. These are individuals who would otherwise be a beneficial owner but because they qualify for an exception, they will not be reported as a beneficial owner. And those exceptions are for:

1. A minor child however, the reporting company has to provide the required personal information of a parent or legal guardian to qualify for this exception,
2. An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual,
3. An individual whose only interest in the reporting company is a future interest through a right of inheritance,
4. an employee of the reporting company, acting solely as an employee, provided, however, that the individual is not a senior officer, and
5. a creditor of the reporting company.

What information has to be reported about a beneficial owner?

If an individual trustee, trust protector, beneficiary, grantor, settlor, or other individual meets the definition of a beneficial owner, the following information must be reported to FinCEN:

1. their full legal name
2. their date of birth
3. their residential street address and
4. a unique identifying number and the issuing jurisdiction from one of the following non-expired documents:
   • a US passport
   • an identification document issued by a state, local, or tribal government for the purpose of identifying the individual
   • a driver’s license
   • or if the individual doesn’t have any of those documents, but does have a foreign passport, the foreign passport can be used.

An image of the document from which the unique identifying number was obtained also must be provided to FinCEN.

So what about UK limited companies?  What data needs to be disclosed?

UK law requires disclosure of the PSC.  A person with significant control (PSC) is someone who owns or controls your company. They’re sometimes called ‘beneficial owners’.

You must identify your PSC and tell us who they are. This might be you, or someone associated with your company. A company can have one or more PSCs.

You must record their details on your company’s PSC register, and you’ll need to include this information when you set up (incorporate) your company.

If you cannot identify your PSC, or do not have one, you need to tell HMRC directly

Identifying your PSC

A PSC must meet one or more conditions known as the ‘nature of control’. Your register must show which conditions are met.

Most PSCs are those who hold:

• more than 25% of shares in the company
• more than 25% of voting rights in the company
• the right to appoint or remove the majority of the board of directors

You should check your company’s register of members for information on shareholders and voting rights.

Your company’s constitution and articles of association may also contain information on voting and other rights associated with ownership of shares in the company.

Other significant influence or control

Your PSC might influence or control your company through other means. This could be directly, or on behalf of someone else.

For example, someone may influence or control the actions of directors or shareholders.

This condition will only apply in limited circumstances. The full PSC guidance has more information on the meaning of ‘significant influence or control’.

If your company is controlled by a trust or firm without ‘legal personality’

This condition will only apply in limited circumstances. You should read the full PSC guidance and seek professional advice if you think this applies to your company.

If the trust or firm meets any nature of control, you’ll need to record all trustees or members/partners of the firm as PSCs of your company and register this information at Companies House.

Recording your PSC information

You must confirm certain details with your PSC, before you can record them in your PSC register. The details you’ll need are:

• name
• date of birth
• nationality and country of residence
• correspondence address – known as the ‘service address’
• home address (this must not be disclosed)
• the date they became a PSC of the company
• the date you entered them into your PSC register
• all natures of control which apply

You must include the level of their shares and voting rights, within the following categories:

• over 25% up to (and including) 50%
• more than 50% and less than 75%
• 75% or more

As you can see, both are quite similar although 

1. One can argue that the US rule is slightly more expansive in looking for people with significant control.  
2. But an important point is that FinCEN collects the data in the US – not the tax office as is the case in the UK.  
3. Both require potentially minimal tax filing once the structure is genuinely offshore.  The US requires a protective return with a form 5472.  The UK requires a tax report of a dormant entity.
4. For me the tiebreaker is that the UK does not, and legally cannot probe once everything is genuinely offshore as I explain here – https://htj.tax/2024/11/an-american-llc-vs-a-uk-limited-company/
5. The US courts however have a very long reach – see details below

Pasquantino v. United States, 544 U.S. 349 (2005), is a United States Supreme Court case in which the Court held that a plot to defraud a foreign government of tax revenue violates the federal wire fraud statute.

On April 26, 2005, the United States Supreme Court held in Pasquantino v United States, that a “plot to defraud a foreign government of tax revenues” can, where the requisite nexus to the US exists, constitute a wire fraud violation under the US Criminal Code, which is a federal crime. Wire fraud is a predicate offence under the US criminal money laundering laws, and also under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), meaning that wire fraud charges can also expose defendants to concomitant charges under money laundering and RICO crimes, including where appropriate, forfeiture, treble damages, liability for adverse parties’ costs and attorneys’ fees, and severe criminal penalties and imprisonment.

Pasquantino may, potentially, have significant consequences for the private banking industry. Just how significant those ramifications are however, is debatable. At least there is the possibility that bankers who directly or indirectly assist clients to “hide” funds from non-US tax authorities using the facilities of US interstate or foreign commerce (something that can be as simple as a US dollar denominated wire transfer) may well be committing a US federal crime subject to substantial penalties, including imprisonment.

If you think the Pasquantinos case was an anomaly?  Just remember the FIFA case.  

In 2015, United States federal prosecutors disclosed cases of corruption by officials and associates connected with the Swiss based Fédération internationale de Football Association (FIFA), the governing body of association football, futsal and beach soccer.

Near the end of May 2015, fourteen people were indicted in connection with an investigation by the United States Federal Bureau of Investigation (FBI) and the Internal Revenue Service Criminal Investigation Division (IRS-CI) into wire fraud, racketeering, and money laundering. The United States Attorney General simultaneously announced the unsealing of the indictments and the prior guilty pleas by four football executives and two corporations.

So if a foreigner is guilty of a tax offense outside of the US?  They can be in trouble in the US as well.