Israel

Most investment by Israeli persons and firms in United States real estate involve the implementation of customized ownership structures to minimize taxes and to ensure the investors’ goals relating to their doing business (or avoiding doing business) in the United States are met. Sometimes those structures involve the formation of a few specialized entities. New U.S. federal reporting requirements, described below, will apply to those entities, and investors and their advisors should be aware of, and sensitive to those requirements.

The Corporate Transparency Act requires any entity formed or registered to do business in the United States to disclose information about its ultimate beneficial ownership and control to the U.S. Department of the Treasury ("FinCEN"), unless the entity can qualify for one of many exemptions. CTA reporting obligations have no cut-off date, applying to any entity regardless of when formed.

Substantial civil and criminal penalties may be imposed for failure to comply with CTA reporting obligations, with potential personal liability for officers, directors and other control persons. Herrick has put together a “task force” to keep our clients and colleagues informed of these rules and to provide the advice needed to follow them. On March 1, 2024, the U.S. District Court for the Northern District of Alabama ruled that the Corporate Transparency Act is unconstitutional on narrow federalism grounds and permanently enjoined its enforcement against the plaintiffs in that action.

In response, The U.S. Department of the Treasury announced that the U.S. government is not currently enforcing the Corporate Transparency Act against the plaintiffs in the action, including the National Small Business Association and members of the National Small Business Association. Thus, in FinCEN’s view, the CTA remains fully in force for everyone other than a direct or indirect participant in the case.

This action, of course, puts the need to comply with these rules in doubt. Although at the moment many experts feel that there is no need to comply with the CTA, it is too early to assume that an appeal of this decision, or other actions (legislative or judicial), will not result in it continuing to apply in some form or another.

So, for the time being, we recommend that clients and colleagues continue to educate themselves about the rules of the CTA. This summary is intended to provide an overview of what you need to know.

IS AN ENTITY A REPORTING COMPANY?

Unless an entity qualifies for a CTA exemption, the entity is a “Reporting Company” and must file a beneficial ownership information report (a “BOI Report”) with FinCEN.

• Includes corporations, LLCs and partnerships.
• Applies to similar entities organized overseas if they register to do business in the US.

Exemptions include:

1. Entities that are otherwise subject to regulatory or other oversight, such as banks, broker/dealers, investment advisors.
2. Tax-exempt entities.
3. Large operating companies.
4. More than 20 full time employees employed in the U.S.
5. Has a physical presence in the U.S.
6. More than $5 million in gross receipts from within the U.S.
7. Some inactive entities.
8. Certain subsidiaries of some exempt entities.

A single transaction, such a large real estate development, can generate multiple Reporting Companies. All entities in a chain of ownership have to file even if disregarded for tax purposes.

WHO ARE THE BENEFICIAL OWNERS?

To complete a BOI Report, a Reporting Company must report personal identifying information (e.g., name, DOB, residential address and passport/driver’s license) of all individuals (natural persons only):

1. Who directly or indirectly own 25 percent or more of the company.
   a. The rules for calculating ownership percentages and determining “substantial control” are complex and must be applied through a multi-tier ownership structure up to the ultimate individual “heart beats.”
2. Or who exercise “substantial control” over the Reporting Company.
   a. Persons who have substantial control are included even if they do not own any economic interest in the entity, but the category generally does not include employees who are not “senior officers.”
   b. The rules for determining “substantial control” implicate parties with consent rights or major decision rights, or rights under loan documents or other transactional documents that are external to the entity’s governance documents.

In the context of a complex organizational and transactional structure, this is where the most substantive legal advice will be needed.

WHEN DOES A REPORTING COMPANY HAVE TO FILE A BOI REPORT?

• Every Reporting Company in existence prior to 2024 must file an initial BOI Report before the end of 2024.
• Every Reporting Company formed in 2024 must file within 90 days of formation.
• Every Reporting Company formed after 2024 must file within 30 days of formation.
• Additional BOI Reports must be filed if and when any previously reported information changes.
• This can include hiring a new CEO or other senior officer who has substantial control.

Because ordinary business transactions (such as an equity raise) can trigger an obligation to file an updated BOI Report, Herrick can make sure you never miss a filing deadline.

WHAT ARE THE COMPANY APPLICANT RULES?

At formation of an entity after 2023, the initial BOI report must include personal information regarding the “Company Applicant,” that is, the person who directly files the document creating the entity and, if applicable, the person who is primarily responsible for directing or controlling the filing. This can include a person at the agency that files the document and an attorney who oversees that process. These persons must provide the Reporting Company with their individual information so that the company can include it on their BOI reports. Information regarding Company Applicants does not have to be updated for changes.

Many persons involved in this practice (including a group of attorneys at Herrick) have registered with FinCen and have been provided with an identification number that can be reported by the Reporting Company in lieu of the required personal information. This can help smooth the process of formation of entities for you.

DO I NEED TO DEVELOP CTA-RELATED RISK MANAGEMENT?

As everyday events (some as simple as hiring or firing a C-suite officer) may require the filing of an updated BOI Report, a Reporting Company must be able to monitor its entire ownership, management, and organizational structure on an ongoing basis.

Herrick’s CTA Team can assist you with all aspects of CTA compliance, both for new investments in U.S. real estate, and with respect to legacy structures used for past investments. Please reach out to us for more information and to explore how we can help.

This article originally appeared on April 19, 2024, in Israel Desk's 5th edition of The US-Israel Legal Review 2023.

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For more information on the Corporate Transparency Act or Israel related matters, please contact:

Louis Tuchman at +1 212 592 1490 or [email protected]
Yariv C. Ben-Ari at +1 212 592 1440 or [email protected]