15 November 2011

Mandatory Reporting Obligation for Non-US Direct Investments in US Business Enterprises

The following summarizes the reporting obligation under the International Investment and Trade in Services Survey Act (the “Act”) of a US business enterprise in which a non-US person has a direct investment.

The Act was enacted in 1975 to collect information on international investment in the United States. Since 2003, reporting under the Act has been mandatory, with certain exemptions and penalties for failure to report. Under current law, a US business enterprise in which a non-US person or entity directly or indirectly acquires 10% or more of the voting interest (or an equivalent interest in case of an unincorporated business) (a “Reporting Affiliate”) must file periodic reports with the Department of Commerce Bureau of Economic Analysis (“BEA”). This would include foreign ownership of real estate, except residential real estate held exclusively for personal use and not for profit making purposes. Given the broad scope of the reporting requirement, many US businesses with 10% or more non-US ownership would be subject to such obligation.

Failure to report may subject the Reporting Affiliate to civil penalties, including monetary fines between $2,500 and $25,000 and injunctive relief to comply. Willful failure to report may result in both monetary fines of over $10,000 and imprisonment for up to one year. In addition, any officer, director, employee, or agent of any corporation who knowingly participates in such violations may be punished by a like fine, imprisonment, or both. Despite the potential penalties, such reporting obligation is often overlooked by non-US persons with US business interests and by US businesses which qualify as Reporting Affiliates.

The mandatory filings include initial and quarterly survey (Form BE-605), annual survey (Form BE-15), and a benchmark survey (Form BE-12) filed every five years.

Initial and quarterly survey – Form BE-605. If a non-US person owns 10% or more of the voting stock (or the equivalent) at any time during a quarter, Form BE-605 must be filed, even if the US enterprise was established, acquired, liquidated, sold or inactive during the quarter. Certain exemptions exist, including (i) a non-US person did not have a voting ownership interest (or the equivalent) of 10% or more in the US business enterprise at any time during the quarter, (ii) the value of total assets, sales, or gross operating revenues and net income (loss) for the US affiliate are each equal to or less than $60 million (positive or negative) for the most recent financial reporting year, or (iii) the non-US ownership in US affiliate is held indirectly through another US affiliate owned by the non-US person and the indirectly held US affiliate has no direct transaction with the non-US parent(s) or non-US affiliates of the non-US parent(s). However, a US enterprise that meets one of the exemptions should still claim for the exemption through completing a specific section on Form BE-605 once a year.

Annual survey – Form BE-15. Form BE-15 is the annual survey that is required for reporting annual financial and operating data of Reporting Affiliates. The annual survey consists of several different report forms and a claim for filing exemption. The determination of the applicable report form depends on (i) the amounts of total assets, sales or gross operating revenues, or net income (loss) of the Reporting Affiliate, and (ii) whether the Reporting Affiliate is majority-owned or minority-owned by its non-US parents. If none of the foregoing amounts exceed $40 million for the reporting year, Form BE-15 Claim for Exemption can be filed and the Reporting Affiliate would be exempt from the annual reporting obligation unless BEA mails it a Form BE-15.

Benchmark survey – Form BE-12. A benchmark survey is conducted once every five years through Form BE-12. The most recent benchmark survey was conducted for the year 2007. If a US enterprise had 10% non-US ownership at the end of the enterprise’s fiscal year that ended in 2007, Form BE-12 was required to be filed. The 2007 benchmark consisted of a number of report forms and a claim for not filing. The amount and type of data required to be reported varied according to the size of the Reporting Affiliate, whether it was a bank or a nonbank, and whether it was majority-owned or minority-owned by foreign direct investors.

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