As of 1 June 2021, a new law regulating obligation of corporations with respect to registration of beneficial owners enters into force. We are going to focus on the changes that it implements and what to prepare for.
Absence of registration of a beneficial owner can have significant impacts on business of corporations. Apart from cash penalties, there is a risk of invalidation of decisions taken by General Meetings in the period when beneficial owners were not registered. Therefore, proper attention should be paid to this area. However, if you do not wish to read Act No. 37/2021 Coll. in its entirety, we provide a summary below.
Who is beneficial owner
Beneficial owner is every individual who is the final beneficiary or a person exercising the ultimate control. In every case it is a person entitled to at least 25% of benefits and 25% of voting rights (indirect participation or control is also considered).
You could be thinking that it is not always possible to determine who the beneficial owner is based on the above criteria. It is true that especially for corporations with fragmented ownership structure, it is sometimes not possible to properly define the beneficial owner. In such cases, based on the law, it is necessary to determine the member of the statutory body of the ultimate parent company.
There is a change insofar that, based on the current wording of the law, in cases above a member of the statutory body a Czech corporation (e.g. corporation obliged to make the relevant entry in the beneficial owner register) was previously registered.
Beneficial owner substantiation
The status of a beneficial owner cannot be newly substantiated through a simple affidavit, as has been the practice until now. Art. 23 Para. 3 provides for a list of corporate documents that can be used to substantiate the status of a beneficial owner. This list includes the said affidavit, but only as a complementary piece of evidence in cases where a beneficial owner cannot be substantiated through other means.
Entities without beneficial owners
The new law also takes into account that the Czech laws recognize legal entities which do not have beneficial owners by their very nature. This includes:
- State and municipalities,
- Voluntary village councils,
- Political parties and political movements,
- Homeowners associations (“SVJ” in Czech).
- Churches etc.
These legal entities listed exhaustively by the law are not registered in beneficial owner registers. Corporations and other legal entities directly owned by such entities shall therefore enter, as a beneficial owner, a member of the statutory body. If there are more such members, they should be registered in their entirety.
Until when should the registration be made?
If you have fulfilled the beneficial owner registration obligation as a corporation in a timely manner, you should comply with the new law within 6 months i.e. by 31 December 2021 at the latest.
If you are among corporations who have so far not registered any information about beneficial owners, or registered it after 1 January 2019, which was the latest registration date based on the current law, pay attention. Such corporations should register their beneficial owner without delay after legal effect of the new law.
Sanctions and penalties for missing information
The obligation to register a beneficial owner has applied to corporations based on the law on public registers since 2017. Until now, non-fulfillment of the obligation has not been subject to any penalties though. Based on the new law, absence of registration or failure to complete correct data can lead to a penalty of up to CZK 500 thousand.
The penalty can be levied to the relevant legal entity, as well as to beneficial owners, for failure to provide assistance with the registration process.
A new feature is also a potential private law sanction. Beneficial owner who has not been properly registered shall have no voting right during a General Meeting and loses the right to dividends. The same also applies to shareholders who have not been registered as beneficial owners.
Publicly available register
Until now a beneficial owner register could only be accessed by entities carrying out an identification of a beneficial owner based on the so-called AML law. However, this is now changing and the beneficial owner register will partly be made public. Anyone will thus have access to the basic identification details of registered beneficial owners (name, surname, state of residence, date of birth, nationality, reason for beneficial ownership status).
Automatic beneficial owner registration
If you are newly registered in a Commercial Register, the beneficial ownership registration is handled directly by a commercial court administering the relevant Commercial Register. This naturally applies only in cases where it is clear from the entry in the commercial register who the beneficial owner is (e.g. for limited liability companies, shareholders with participation of more than 25%).
However, the automatic registration only applies to newly created companies. Already existing companies and new companies, where the identity of a beneficial owner is not clear from the commercial register entry, have to go through the process of beneficial ownership registration individually.
You should check whether beneficial owners of your company are properly registered. This can save you complications or even penalties. The new law on registration of beneficial owners enters into force on 1 June 2021.