15. 11. 2021
The transitional period for the registration of beneficial owners under the new legislation will expire soon
In previous issues of our newsletter, we dealt in detail with Act No. 37/2021 Coll., on the beneficial owners register (hereinafter the “Act“), which entered into force on 1 June 2021. The Act introduced a number of new requirements regarding the obligations of business corporations, legal entities and legal arrangements (trust fund) to register their beneficial owners. The most fundamental changes are revision of beneficial owner definition, demand for the publicity for at least a certain scope of data on beneficial owners, the introduction of mechanisms for verifying and controlling the accuracy of the data kept in the register or establishing sanctions.
We present the basic news arising from the Act below and point out that on 1 December 2021, the deadline for bringing the status of registration in the register of beneficial owners into compliance with the Act will expire. If you have not already done so, we therefore recommend that you check the status of the entry in the register as soon as possible and, if necessary, update it. Otherwise, there is a risk of a fine for violation of the Act and serious sanctions of a non-financial nature, such as a ban on the exercise of voting rights and the payment of a share of profits.
Who is a beneficial owner?
The Act is based on a material definition, according to which the beneficial owner is every natural person who is the final beneficiary, i.e. the one who can have directly or through another significant benefit from the business or liquidation of a legal entity or the administration or extinction of a legal arrangement and who does not pass on that benefit to another person, or who exercises final control. This material conception of the given terms is further supplemented in the Act by formal definitions (irrebuttable presumptions), according to which it applies that:
– The final beneficiary is any person who directly or indirectly has the right to a share in the profit, other own resources or liquidation balance of the business corporation greater than 25 % and does not pass on this share of the benefit.
– A person with final control is any natural person who is a controlling person in accordance with the law governing the legal relations of business corporations. This is usually a person with at least 40 % of the voting rights, unless the same or a higher share is exercised by another person or other persons acting in concert. However, a person who has less than 40 % of the voting rights may also be considered a person with final control if their direct or indirect share of the voting rights significantly exceeds the shares of other persons, especially if it is greater than 25 %.
According to the new Act, the beneficial owner can be a natural person without necessarily fulfilling the general (material) definition of the beneficial owner, purely on the basis of the position they hold in a business corporation. If no beneficial owner can be identified in a business corporation (for example, if the shares of a joint stock company are traded on a stock exchange and the ownership structure is fragmented) or if the person with the final control in the corporation is a legal entity that does not have a beneficial owner, every person in the top management of the corporation is considered its beneficial owner. A person in top management is considered to be any natural person who ensures day-to-day or regular management of the legal person’s activities, such as business management, and is also a member of the statutory body, a person in a similar position or a person representing a legal person in this body.
In applying this fiction, it is also necessary to take into account whether the company is not ultimately controlled by a legal entity, the beneficial owner of which also cannot be determined. In such circumstances, any person in the top management of that legal entity with final control is also the beneficial owner of all corporations in its subordinate structure. In the case of companies belonging to large holding groups in particular, the correct identification of persons to be registered in accordance with the Act may require a more comprehensive assessment and communication within the group.
At the same time, the Act now requires data to be submitted for the purposes of registration clarifying what the position of the beneficial owner is based on, including data on the possible structure of relationships from which the position of beneficial owner arises.
Accessing data in the register
Another novelty that the Act will bring is the introduction of public access to some registered data, which is a significant change from the previously closed records. Access is not subject to any registration or fee, so the data is truly public.
The process of recording the data of the beneficial owner
The Act introduces the process of registration of the beneficial owner through court proceedings (similar to the current method of registration). The court decides on the registration without ordering a hearing. An appeal against the decision is not possible, but the petitioner may apply to the court again.
The second possibility is registration on request by a public notary. The Act aims to make this option a choice of the majority of petitioners, thus alleviating the burden on registry courts. This process should be less formal, faster, cheaper and more comfortable. There is no need to fill out the application form and no proceedings are conducted. Unlike the court, the notary is limited by a short period of 3 working days from the delivery of the application for registration.
Sanctions for breach of obligations related to the registration of beneficial owners
The sanctions for offenses relating to the registration of beneficial owners introduced by the new Act are a significant new development compared to the existing legislation. Administrative offenses will be decided within the general regime of the offense law on the level of municipalities with extended powers. The Act regulates three types of misdemeanours, two relating to the registrants and consisting of (i) the failure to ensure the registration of any information about the beneficial owner even after an additional period set by the court and (ii) the failure to ensure that the data about the beneficial owner corresponds to the actual situation, even after the resolution confirming irregularity becomes final.
A separate offense may be committed by the beneficial owner, the final beneficiary, the person with final control and the person through whom the final beneficiary may benefit or exercise their influence, if they do not provide the necessary cooperation in accordance with the Act. All the mentioned offenses can be punished by a fine of up to CZK 500,000 and may be punished repeatedly until the obligation to enter the data on the beneficial owner is fulfilled.
The Act also introduces non-financial sanctions, limiting the payment of shares and the right to vote. Directly by law there is unenforceability of rights and obligations from legal conduct, which conceals the beneficial owner’s identity, which arose during the absence of registration of the owner.
The effectiveness of the Act
The Act became effective on 1 June 2021 and according to the transitional provisions, business corporations that have complied with their obligation to register in time according to previous legislation (i.e. corporations that had been established on or before 31 December 2017 and fulfilled their obligations by 1 January 2019, or newer corporations that have fulfilled their obligation within 15 days of their incorporation) have 6 months from the effective date of the Act to ensure that their data meets the requirements of the Act, i.e. the deadline is 1 December 2021.
Other business corporations that have fulfilled the obligation late, or have not fulfilled it at all, are required to register their beneficial owners and ensure compliance with the Act without undue delay upon the entry into force of the new Act, i.e. 1 June 2021.
Registrants who are not a business corporation and have not filed any information about their beneficial owner under the existing regulations must fulfil this obligation within 6 months of the Act coming into effect, i.e. 1 December 2021. If they have filed the data, they are obliged to ensure that valid data comply with the requirements of the Act within one year of the effective date.
1 December 2021 is the deadline for bringing the status of the entry in the register of beneficial owners into line with the new Act No. 37/2021 Coll. on the beneficial owners register. We therefore provide a brief summary of the most important changes that this law brings and the risks in case of failure to ensure the necessary remedy.