Corporate Transparency Act Interim Final Rule Issued

In the latest development of the ongoing Corporate Transparency Act (CTA) saga, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) on March 21, 2025, issued an interim final rule that recalibrates the CTA. Among key changes:

• The requirement for U.S. reporting companies and U.S. persons to report beneficial ownership information (BOI) is removed, and the definition of a "reporting company" is revised to mean only those entities that are formed under foreign law and have registered to do business in any U.S. state or Tribal jurisdiction.
• BOI reporting also is excluded for U.S. persons who, as defined in the Internal Revenue Code, are beneficial owners of foreign reporting companies.
• New BOI reporting deadlines for foreign reporting companies are imposed.
• FinCEN requests comments on the interim final rule within 60 days and intends to finalize the rules in 2025.
• The overall goal of the revised rule is to alleviate unnecessary regulatory burdens placed on those affected by the CTA.

As those of you who have followed the CTA know, there has been an unceasing parade of developments, judicial orders and announcements in the closing months of 2024 and early months of 2025 as a result of decisions and orders issued by the federal courts and various announcements by FinCEN, all of which have been documented in previous Holland & Knight alerts.

As anticipated after a Feb. 27, 2025, FinCEN notice and a March 2, 2025, Treasury Department press release, both of which were addressed in Holland & Knight alerts on Feb. 28 and March 4, FinCEN has adopted an interim final rule that dramatically limits the scope and application of the CTA BOI reporting rules.

The interim final rule reflects a reevaluation by FinCEN of CTA benefits to the government in obtaining national BOI versus the costs to the public of complying with the CTA's BOI reporting rules.

In initially crafting the CTA reporting regulations, which were finalized in 2022, FinCEN was acutely sensitive to the challenge of balancing the need to obtain information to combat anonymous shell companies that facilitate illicit money into the U.S. with the burdens and costs imposed on reporting companies and their beneficial owners to comply with the BOI reporting rules. These contradictory objectives were not easily reconcilable.

Now, with the change in administrations and strong emphasis by the new administration on easing regulatory burdens and, particularly, costs imposed on American businesses associated with compliance, there was a reassessment by FinCEN of the previous cost versus benefit balance struck by FinCEN in 2022, resulting in the changes reflected in the interim final rule. This is discussed in further detail below.

What Changes Did the Interim Final Rule Make to the BOI Reporting Rule?

First, the interim final rule revises the definition of "reporting company" to exempt all entities that previously were defined as a "domestic reporting company,"¹ including all corporations, limited liability companies (LLC), limited partnerships and other entities formed under the laws of a U.S. state or Indian Tribe.

• The exemption is implemented by excluding entities and companies formed under state, tribal or federal law from the scope of the term "reporting company."
• As a consequence, an entity that formerly was a domestic reporting company and required to make BOI reports – initial, updated and corrected – no longer is required to do so, regardless of whether its owners and control persons are U.S. persons² or foreign persons.

Second, the interim final rule 1) retains the BOI reporting rules for a foreign entity that is a "foreign reporting company," unless an exemption applies and 2) exempts U.S. persons who are beneficial owners of the foreign reporting company from having to be reported on a foreign reporting company's BOI report.

• A foreign entity is a foreign reporting company if it is 1) a corporation, an LLC or other entity, 2) formed under the law of a foreign country and 3) registered to do business in any state or Tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of that state or Indian Tribe.
• The rule does not address the requirements applicable to a foreign company that should but does not register to do business in the state or Tribal jurisdiction. Such companies do not appear to have reporting requirements under the CTA.
• Although many of the former 23 exemptions from reporting do not apply to foreign companies, a foreign reporting company may still qualify for exemption as a large operating company, provided it meets the applicable criteria.
• Under a special exemption introduced by the interim final rule, a foreign reporting company no longer reports information about any of its beneficial owners who are U.S. persons.³
• Thus, a foreign reporting company that has beneficial owners, some of whom are U.S. persons and some on whom are non-U.S. persons, has to report only the non-U.S. beneficial owners.
• A foreign reporting company that has only beneficial owners who are U.S. persons will still need to file a report indicating company information (e.g., name, address, jurisdiction of organization, etc.) but will not be required to report any information about its beneficial owners.
• The interim final rule also revises the special rule associated with foreign pooled investment vehicles to exempt such vehicles from having to report the BOI of a U.S. person who exercise substantial control over the entity.⁴

Third, the interim final rule extends the deadline for foreign reporting companies to file initial BOI reports or update or correct previously field BOI reports. The new deadline is 30 days after the date of publication of the interim final rule in the Federal Register or 30 days after the foreign reporting company’s registration to do business in the U.S., whichever comes later.

At the time this alert was published, the interim final rule was not published in the Federal Register.

What Is an Interim Final Rule?

• An interim final rule under the Administrative Procedure Act (APA) is a rule adopted by a federal agency that becomes effective without prior notice and public comment and that invites post-effective public comment.
• Often, the agency relies on the APA provision for excusing prior notice and comment on the basis that there is "good cause" to believe that such procedures would be "impracticable, unnecessary or contrary to the public's interest."
• The adopting agency, here FinCEN, declares that it will consider post-effective public comments, modify the rule in light of those comments and then adopt a final rule.

Why Did FinCEN Adopt an Interim Final Rule in This Case?

• FinCEN determined that an interim final rule was the appropriate mechanism to exempt domestic reporting companies and U.S. persons who are beneficial owners of foreign reporting from BOI reporting pending the receipt of comments and issuance of a final rule because of the then-impending March 21, 2025, reporting deadline. This is to avoid imposing immediate compliance costs on domestic reporting companies and U.S. persons in contradiction to the purpose of the BOI reporting rule and minimize and expeditiously resolve public confusion about reporting dates, while still allowing for public participation.
• FinCEN will invites interested parties to submit comments on the issues raised in the interim final rule within 60 days of its publication.

What Is the Basis for Exempting Domestic Companies from BOI Reporting?

The rationale for exempting domestic companies from BOI reporting essentially was threefold:

• A reassessment of the balance between the usefulness of collecting BOI and the regulatory burdens imposed by the scope of the BOI reporting rules, particularly in view of the new administration's strong focus on alleviating unnecessary regulatory burdens and costs in complying with federal regulations.
• Concurrence by the U.S. Attorney General and U.S. Department of Homeland Security Secretary under a CTA provision that authorizes the Treasury Department Secretary (Treasury Secretary) to exempt from the reporting requirements "any entity or class of entities" if the secretary, with the written concurrence of the Attorney General and the Homeland Security Secretary, determines that "requiring beneficial ownership information from the entity or class of entities … would not serve the public interest" and "would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, and prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes." Furthermore, the Treasury Secretary's determination was also found to be consistent with the direction of the president, including as set forth in Executive Order (EO) 14192, "Unleashing Prosperity Through Deregulation" (to reduce the private expenditures required to comply with federal regulations).
• A conclusion that the preexisting Customer Due Diligence (CDD) Rule, which requires banks to collect a legal entity's BOI at the time of opening an account, could mitigate illicit finance risks.

FinCEN will solicit comments on the foregoing exemption, which FinCEN will assess prior to issuing a final rule later this year.

What Is the Basis to Require Disclosure of Information About Non-U.S. Beneficial Owners Only?

In assessing foreign reporting companies, the Treasury Department Secretary acknowledged that 1) foreign reporting companies present heightened national security and illicit finance risks, 2) have limited ability to claim CTA reporting exemptions and 3) present fewer concerns about regulatory burdens that would serve the public interest.

The Treasury Secretary, based on the policy announced in EO 14192 "to alleviate unnecessary regulatory burdens placed on the American people," used that rationale to exempt foreign reporting companies from having to report the BOI of any U.S. persons who are beneficial owners of a foreign reporting company.

The legal authority for the Treasury Secretary to exempt U.S. persons was based on the Bank Secrecy Exemption contained in 31 U.S.C. § 5318(a)(7).

FinCEN will solicit comments on the foregoing exemption and assess them prior to issuing a final rule later this year.

FinCEN also decided to provide foreign companies an additional 30 days to comply with the reporting requirements. This extension is meant to provide foreign companies advance notice of the new deadline in view of the preceding court actions and extensions by FinCEN.

How Did FinCEN Assess Costs and Benefits?

FinCEN followed the dictates of two EOs:

• EOs 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental and public health and safety effects, as well as distributive impacts and equity).
• EO 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules and promoting flexibility.

In that regard, the interim final report emphasizes that FinCEN was mindful of the "delicate balance" that exists between the anticipated benefits and the costs imposed by requirements to report BOI. FinCEN's findings are summarized below.

Anticipated Changes to Expected Benefits

FinCEN has historically considered the benefits of BOI reporting to a variety of affected parties, including law enforcement, other users of BOI data and the general macroeconomy and has taken into consideration the extent to which benefits may change as a consequence of the interim final rule reduction in scope.

FinCEN acknowledges that though more intelligence might be collected in the absence of this deregulatory effort, it is unclear that the marginal benefits of the BOI that will no longer be reported would be comparable to the value of similar entities to which the reporting requirements still apply. Since FinCEN has not yet been able to conduct the kinds of robust quantitative analysis necessary to estimate the incremental value of such intelligence, it recognizes that its estimated values to date have been partially speculative, albeit informed by feedback from both domestic and international partners in law enforcement and national security.

FinCEN anticipates that other parties, such as financial institutions, may experience reduced benefits as a consequence of the change in scope.

Anticipated Changes to Expected Costs

FinCEN expects the primary value of the modification in scope provided by the interim final rule to be realized in the form of reduced costs – to prepare original reports and subsequent updates or updates, as well as costs with obtaining a FinCEN Identifier Number. It provides specifics about this in the interim final rule.

Taking these anticipated changes into account, FinCEN concluded that the cost savings resulting from adopting this new rule appear to outweigh the benefits.

Concluding Comments

As documented,⁵ prior to the enactment of transparency initiatives, particularly the CTA,  the lack of U.S. BOI reporting requirements made the U.S. an attractive jurisdiction⁶ to establish shell companies to hide ultimate beneficial owners, which weakened U.S. efforts to combat the flow of illicit money into the U.S. A central component of a BOI reporting system in the U.S. was the requirement that domestic entities within the scope of the reporting system identify their beneficial owners.

Now, with the addition of the 24th exemption excluding domestic entities from BOI reporting, that facet of the CTA has been eliminated. The consequence of that elimination is that, according to the interim final rule, there will be 11,667 foreign reporting companies per year in scope, based on a three-year average estimating that 20,000 previously existing companies would report in year one and approximately 5,000 new reporting companies would report in each of years one through three. These estimated numbers are drastically lower than the 32.6 million previously existing reporting companies and the annual addition of approximately 5 million new reporting companies estimated by FinCEN to have been within the scope of the original BOI reporting rule.

First, opponents of the CTA will be pleased that entities that prior to the interim final rule were domestic reporting companies and the beneficial owners of such entities will no longer be subject to BOI reporting. So, too, persons who were not opponents of the CTA but were subject to BOI reporting also will welcome this development since, for the time being – and permanently, if the final rule were to be implemented – no longer will have to deal with BOI reporting, either with filing initial reporting or updated/corrected reports.

Second, although a full discussion of the following is beyond the scope of this Holland & Knight alert, it is possible that transparency and watchdog groups will challenge the interim final rule as a violation of the APA, arguing that the interim final rule fails to implement the statutory dictates of the CTA and represents an impermissible exercise in agency discretion.⁷ Whether such a suit will be filed or whether it would succeed remains to be seen

Third, it is possible that Congress itself could act by either repealing or significantly curtailing the CTA, in line with the interim final rule.

Fourth, how will the Financial Action Task Force (FATF) react to this development, particularly since FATF will conduct a fifth round of mutual evaluation, which is expected in early 2026? FATF in March 2024 announced in a follow-up report that the U.S. has made progress to address the technical compliance deficiencies identified in relation to Recommendation 24, which pertains to transparency and beneficial ownership of legal persons and, because of that progress, the U.S. had been rerated on Recommendation 24 and upgraded from "Non-Compliant" to "Largely Compliant." The improved rerating was due in part to the implementation of the CTA, as well as the CDD Rule, which, as mentioned above, requires covered financial institutions to obtain BOI from designated entity customers opening up accounts.⁸

Fifth, what will be the impact of the interim final rule on the ongoing litigation in federal courts? The FinCEN announcement does not necessarily make the litigation relating to the constitutionality of the CTA moving through the courts moot, as has been asserted by both the plaintiffs and defendants in the Texas Top Cop Shop case. However, the plaintiffs presumably will no longer seek injunctions against enforcement of the CTA in light of the interim final rule. Further, in that regard, the U.S. Court of Appeals for the Fifth Circuit in the Texas Top Cop Shop case on March 22, 2025, sent a letter to the parties advising them that oral argument previously scheduled for April 1, 2025, has been postponed, and rescheduling information will be issued at a later date.

Sixth, what will happen to all of the information that has been reported to FinCEN, and will the access requirements be modified? There has been no indication from FinCEN in this regard.

Seventh, there are two technical issues that should not be overlooked in the final interim rule:

FinCEN Identifier Numbers. These are still available. For those individuals who have them, the final interim rule did not modify the requirement to update changes by the holder of the FinCEN Identifier Number within 30 days (Currently, this requirement continues even after the FinCEN holder has ceased to be a reportable beneficial owner.) Further, FinCEN has not provided any further guidance regarding deactivation of a FinCEN Identifier Number, even though requests for such guidance to do so were made in in early 2024.

Company Applicants. These rules continue but are applicable only to persons who assist a foreign company to register to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe.

The final word: Stay vigilant. This is not over yet!

March 25 Webinar

Holland & Knight will host a 90-minute webinar, "What You Need to Know About the Recalibrated Corporate Transparency Act," at noon ET/11 a.m. CT on March 25, 2025. View more information and register.

Notes

¹ A domestic reporting company means a corporation, an LLC or other similar entity that is created by the filing of a document with a secretary of state or a similar office or under the law of a state or an Indian Tribe.

² The term "U.S. person" has the meaning given that term under Section 7701(a) of the Internal Revenue Code of 1986. Under that section, a U.S. person is 1) a citizen a resident (either an alien who is a lawful permanent resident (a "green card holder")) or an alien who satisfies the "substantial presence" test, a domestic partnership., domestic corporation, any estate other than a foreign estate and a trust that satisfies the "court" and the "control" tests.

³ The determination of whether a person is a U.S. person (defined in note 2) is not straightforward in all circumstances, even for tax lawyers.

⁴ Under this provision, the interim final rule revised the foreign pooled investment vehicle substantial control reporting requirement such that foreign pooled investment vehicles must report the BOI of an individual who exercises substantial control over the entity if that individual is not a U.S. person. If more than one individual exercises substantial control over the entity and at least one of those individuals is not a U.S. person, the entity must report information with respect to the individual who is not a U.S. person who has the greatest authority over the strategic management of the entity. If there is no individual with substantial control who is not a U.S. person, the foreign pooled investment vehicle is not required to report any beneficial owners.

⁵ See Robert Wilson Downes, Scott E. Ludwig, Thomas E. Rutledge and Lorraine A. Smiley: "The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information, ABA Business Law Section," Business Law Today May 2021. This report provides a detailed, excellent summary of the history leading up to the enactment of the CTA.

⁶ See Tax Justice Network, Financial Secrecy Index 2022, which ranks jurisdictions most complicit in helping individuals to hide their finances from the rule of law. The use of shell companies is one of the indicators used by the index. The U.S. was ranked No. 1 on the Financial Secrecy Index. In the European Union Tax Observatory, titled "Mapping the global geography of shell companies" (December 2023), Delaware is listed as the second-leading jurisdiction for shell companies. Wyoming is also mentioned.

⁷ See Corporate Compliance Insights, "Treasury Halts Enforcement of US Companies in Sudden Policy Reversal," March 5, 2025.

⁸ Recollect, FATF in its Mutual Evaluation Reports for the U.S., issued in 2006 and 2016, had identified the U.S. as "deficient" and subject to enhanced follow-up in regard to Recommendation 24.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.