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  • The Act on the Registration of Beneficial Owners brings about new obligations and sanctions

    29. 04. 2021

    On 1 June 2021, a new regulation on the registration of beneficial owners will enter into force and effect. The regulation regarding this particular area has in fact existed in the Czech Republic for several years, however, the new law brings with it a more detailed regulation as well as provides for considerable sanctions. in case of non-compliance.

    Act No. 37/2021 Coll., On the registration of beneficial owners (hereinafter referred to as the “Registration Act”) will fully replace the existing regulation contained particularly in the “Register Act” (Act No. 304/2013 Coll., On public registers of Legal and Natural Persons and on registers of Trust Funds) as well as in the “AML Act” (Act No. 253/2008 Coll., on Certain Measures against the Legalization of Proceeds from Crime and Terrorist Financing). As such, the Registration Act transposes Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (the so-called V. AML Directive), respectively, into Czech law.

    The main changes brought about by the new legislation concern the following areas:

    • a modified definition of what a beneficial owner is as well as the range of obligated entities connected therewith;

    • automatic transcription of data;

    • the introduction of severe sanctions for breaching the obligation to register; and

    • access to the data which are entered into the register of beneficial owners

    DEFINITION OF A BENEFICIAL OWNER

    The original regulation, which was contained in Sec. 4 para. 4 of the AML Act, has been replaced with a more detailed and explicit definition which is given in Sec. 2 para. e) of the Registration Act, wherein stipulating that a beneficial owner is any natural person who is a final beneficiary or a person with ultimate influence. In other words, the final beneficiary is simply a natural person who, either directly or indirectly, receives a property benefit that is at least 25% of the total property benefit of the business corporation. A person with ultimate influence (Sec. 4 of the Registration Act) in a business corporation is then understood to be any natural person who is a controlling entity according to the law which governs the legal relations of business corporations. However, if the final beneficiary or a person with ultimate influence in a business corporation cannot be identified, any person who is in its top management would then be considered as the beneficial owner. The Registration Act also contains other auxiliary criteria for determining such persons, and now also reflects cases where a branching of the corporate structure has occurred, or alternatively where there is a chaining effect of business corporations.

    EXCEPTIONS - ENTITIES WHICH ARE NOT SUBJECT TO REGISTRATION OF THE BENEFICIAL OWNER

    Entities which, according to the Registration Act, do not have an actual owner, and therefore are not obligated to register in the register of beneficial owners (hereinafter also referred to as the “Register” ) are listed in Sec. 7 of the Registration Act. Newly among them are, for example, unit owners in homeowner‘s associations, which is in contrast to, for example, housing cooperatives, which must make a record for every natural person who is a member of a statutory body in the Register. In general, one can summarize that state organizational units, contributory organizations, etc., or other legal entities, incl. business corporations in which the Czech Republic either directly or indirectly holds all interests and voting rights are not subject to registration in the Register.

    RECORDING AN ENTRY IN THE REGISTER

    The Register is a public administration information system which is administered by the Ministry of Justice, while the beneficial owners‘ records are kept by the relevant regional court in whose Commercial Register the business corporation is registered. However, an entry into the Register may be carried out by the competent regional court and/or a notary. According to the Registration Act, the registration process is initiated on the basis of an application that is submitted using the prescribed electronic form, which must include documents substantiating the facts to be entered into the Register (examples of these documents are given in Sec. 23 of the Registration Act). The obligation to register beneficial owners in the Register is imposed upon legal entities (these are then referred to by the law as registrants), while only a natural person can be a beneficial owner. If a registrant fails to submit an application for registration in the Register within 15 days from the day when such obligation arose, another person who is able to prove a legal interest may submit an application.

    In this context, it is necessary to point out the notable difference between the proceedings on applications for registering a beneficial owner in the Register and those applications which are submitted to the court in other matters pertaining to the Commercial Register – provided the application for registering a beneficial owner or the document(s) attached thereto show any defects or shortcomings, the application will be automatically rejected by the court. In such case, the amended application will then need to be resubmitted and the court fee paid again.

    AUTOMATIC TRANSCRIPTION OF THE BENEFICIAL OWNER’S DATA

    In order to reduce the administrative burden of entities who are obliged to register their beneficial owners in the Register, legislators have introduced a new institute which is called “automatic transcription” (Sec. 37 et seq. of the Registration Act). This means that the data which is kept in the public registers will be copied into the Register by means of an automatic transcript, even without submitting any application requesting the court to do so. With regard to business corporations, those partners of a limited liability company who have a share of greater than 25% or the beneficial owner of a legal entity who is a partner of a limited liability company with the right to a share of more than 25% are deemed as beneficial owners and will have their data automatically transcribed from the Commercial Register. Whereas for joint-stock companies, the data of the sole shareholder or beneficial owner of the legal entity who is the sole shareholder of the legal entity will be automatically transcribed. The entity who is recorded is then responsible for ensuring that the data which are kept in the Register are true and complete, both in the event the data were entered into the Register based on an application for registration and in the event they were automatically transcribed.

    Entries made in the Register which are carried out pursuant to the current legislation will be deemed to be in accordance with the Registration Act, and, as such, will not be automatically transcribed. However, this does not preclude the possibility of eventually submitting an application to the court or making a request to a notary that the data vis-a-vis the beneficial owner is automatically transcribed in the future.

    In any case, it is necessary for the data in the Register to be updated: In the case of business corporations, any updates should be made within 6 months from when the Registration Act enters into force, i.e., by 1 December 2021, and in the case of other legal entities, any updates must be made within 1 year from when the Registration Act enters into force, i.e., by 1 June 2022.

    SANCTIONS

    Of course, it is essential to introduce sanctions for any breaches committed of the obligation to register the beneficial owner; however, the Registration Act does not only introduce public law sanctions (fines) in this respect, but provides for rather severe private law sanctions as well.

    A fine of up to CZK 500,000 may be imposed for offenses committed on the basis of any irregularities or deficiencies ascertained by the court, and a fine may be imposed once the remedy period that has been provided for rectification expires in vain. An offense is committed, for example, by a registrant who fails to arrange for the entry of any data into the Register or who does not ensure the entry of new data into the Register after the court has deleted the incorrect data without any substitutions. A fine may also be imposed for an offense where the beneficial owner or other persons who are designated by law fail to provide the registrant with the necessary co-operation, once again, provided the breach is confirmed by the court. The statute of limitation for this is 1 year.

    A severe and appreciable sanction can be those private law sanctions which limit the specific rights of the shareholders of a legal entity, or more specifically the registrant as such.

    Firstly, it is the unenforceability of rights and obligations arising from legal acts concealing the identity of the beneficial owner which arose at a time when the beneficial owner had not yet been entered into the Register, regardless of the law governing such conduct. For example, this concerns the transfers of shares, stocks and individual rights arising out of them, etc. – i.e., any conduct which is aimed at obscuring the identity of the beneficial owner; such obligations are thus unenforceable.

    Another way of sanctioning the beneficial owner of a business corporation who has not been recorded in the Register is to render it impossible for them to exercise their voting rights or engage in decision-making while acting in the capacity of the sole shareholder during voting as part of the highest body of the company (usually as the General Meeting). Similarly, neither a legal entity nor trust fund manager would be able to vote or engage in any decision-making unless it has a registered beneficial owner listed in the Register. Thus, any resolutions adopted by the General Meeting or by the sole shareholder would be in direct violation of this legislation, and therefore be invalid. Moreover, such an unregistered beneficial owner (or the legal entity by means of which the beneficial owner holds a share) would not be permitted to be paid a share of profits, nor other own resources or the liquidation balance for that matter. The right to receive payment would expire at the end of the accounting period in which the resolution to pay out such benefit was adopted. Any statutory body that would proceed in executing a pay-out in such case would not be acting with due managerial care.

    DATA AVAILABILITY AND REMOTE ACCESS

    Other significant changes include accessibility to the data which are entered into the Register. Until now, only a limited number of entities, such as the courts, banks or law enforcement authorities, have been able to access the data which are entered into the Register. Newly, the Registration Act introduces the possibility for the general public to have a partial look at the Register regarding basic information on the beneficial owner via the Internet. The Ministry of Justice will allow anyone on its website (https://issm.justice.cz) to obtain a partial or full extract from the Register in electronic form, and authorized bodies and persons selected by law will then be given more extensive access to the data than before. The information that is to be made newly available to the general public includes the beneficial owner‘s name and surname; country; place of residence; year and month of birth; citizenship; or data on the status of the beneficial owner of the legal entity.

    SUMMARY

    In this legal update, we have summarized only the basic parameters of the new regulation. Of course, we would be pleased to present you with a more elaborate explanation of the regulation and assist you with the beneficial owner registration process, as well as setting up any necessary internal processes and by-laws that would ensure that the respective data are always duly and correctly updated.

    We remain at your disposal for any further information you may require.

    Legal update written by JUDr. Adam Felix, LL.M., Ph.D.

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