Effective as of May 13, 2019, the U.S. Internal Revue Service (IRS) made a change to the application process for U.S. Federal employer identification numbers (EIN), the Federal tax ID number for companies in the U.S., which is going to significantly delay the EIN application process for companies with no employees or officers having a U.S. social security number. This will pose significant challenges in particular to the process of opening bank accounts and accomplishing other corporate, labor or tax formalities in the U.S. for new companies coming to do business in the U.S. This will also pose timing challenges where those foreign companies acquire assets or companies in the U.S. and require, for example, the opening of a U.S. bank account for the transaction.
Since May 13, 2019, entities can no longer be listed as the "responsible party" on EIN applications. Under the revised EIN application process, the responsible party must be an individual who has either a Social Security number (SSN) or individual taxpayer identification number (ITIN). The IRS believes that this new requirement will provide greater security to the EIN application process and improve transparency. The revised process applies to both EIN applications submitted online, as well as applications submitted to the IRS via fax on Form SS-4. Furthermore, only government entities are exempt from this new rule at this time.
The IRS defines a "responsible party" as the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets.
Now, foreign entities will need to appoint as officer or otherwise an individual who fits this definition and who has a SSN or ITIN, which could prove to be difficult in a wide variety of contexts. Nonresidents that might otherwise qualify as a responsible party will need to obtain an ITIN before they can apply for an EIN on the foreign company's behalf. This requires filing a Form W-7 with the IRS, which takes a minimum of 7 weeks and could last as long as 11 weeks. These delays could substantially disrupt foreign clients in their efforts to set up bank accounts in the United States or file Form 8832 entity classification elections. Additionally, the revised process makes clear that third party designees such as attorneys may not be listed as responsible parties.
Despite these new obstacles, there are steps that foreign companies can take to navigate this new application regime. One possible solution is for the foreign company to appoint an officer (to serve in a junior capacity) who is a U.S. citizen with an SSN or an individual who has an ITIN in the authorizing resolutions approving the transaction. However, this method is only viable if the foreign company plans to retain that officer in the long-term. Another option could be to have someone that is a nonresident, senior officer with a long-term future at the foreign company apply for an ITIN. From a business planning perspective, once that individual obtains an ITIN, he or she will be available to serve as the responsible party for all entity formation needs that arise in the future.
For M&A transactions, foreign companies could consider the use of U.S. paying agent for the funding of the transaction at closing.
In all cases, advance planning will be required for foreign companies wanting to set up a subsidiary in the U.S or open a bank account in the U.S..
*Brett Uslaner is a summer associate in the firm’s New York office.
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