Czech Republic: New Regulation on Registration of Ultimate Beneficial Owners of Legal Entities

In brief

On 1 June 2021, Act No. 37/2021 Sb., on Registration of Ultimate Beneficial Owners (“Act”), will take effect, implementing Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 (AML Directive V) in Czech law and introducing new requirements regarding the publicity of selected data on beneficial owners, adopting mechanisms for the verification and checking of genuineness of data maintained in the register, as well as stipulating efficient sanctions for failure to meet certain duties.


Contents

We would like to draw your attention to the most significant changes introduced by the Act, so that you may review the existing entries in the Czech Register of Ultimate Beneficial Owners (“UBO Register”) as soon as possible to avoid negative effects on your Czech company (see section VI below) upon the Act taking effect in the event that the company fails to register its beneficial owner in the UBO Register within the deadline prescribed by the Act (see section VIII below), or in case of any discrepancies in the register.

I.  Effective date of act

The new regulation will take effect on 1 June 2021.

However, given the sanctions for failing to update entries in the UBO Register in a timely manner (see section VI), we recommend updating the respective entries as soon as possible.

II. Who is obligated to identify its beneficial owner

Any legal entity with its registered office in the Czech Republic is obligated to identify, maintain an evidence of and have its beneficial owner registered in the UBO Register, save for entities and subjects which do not have a beneficial owner as a matter of law (see Sec. 7 of the Act – the State, a state-owned enterprise, a legal entity established by law or by an international treaty, the church, etc.), hereinafter referred to as a “Registering Entity.

III. When the duty to make a registration occurs

A Registering Entity is obligated to file a petition for initiation of proceedings without any undue delay after the decisive fact has occurred.

If a Registering Entity fails to file a petition for registration within 15 days from the day on which the Registering Entity becomes obligated to do so, the petition for registration may be filed by any person/entity having established his/her/its legal interest and is to be accompanied by the requisite underlying documents proving the status of a beneficial owner or the structure of relationships.

IV. Definition of beneficial owner

The purpose of the concept of a beneficial owner is to identify a specific individual whose will and decisions are reflected in the actions of a legal entity, as well as an individual ultimately benefitting from the activities of the legal entity.

A beneficial owner means any individual being the “ultimate recipient” or the “person with an ultimate influence”. This distinction also makes it possible to specify the basis of a beneficial owner’s position, whether it is based on either of these factors, or on both of them. Thus, there may be more than one beneficial owner of one legal entity.

Who is an “ultimate recipient”

An ultimate recipient is a person who can, directly or indirectly through another person or through a legal arrangement (by this term the Act refers to domestic or foreign trust funds), obtain  a substantial part of the total property benefits resulting from the activities or liquidation of a legal entity, or from the management or termination of a legal arrangement, and does not further distribute (transfer) such benefits.

  • An ultimate recipient of a legal entity is any person/entity being able to directly or indirectly obtain more than 25% of the total property benefits resulting from activities or liquidation of the legal entity and not further distributing (transferring) such benefits.
  • An ultimate recipient of a business corporation is any person/entity having a direct or indirect right to more than a 25% share in profit, other own funds or liquidation proceeds of the business corporation and not further distributing (transferring) such benefits.

Who is a “person with an ultimate influence”

A person with an ultimate influence is a person being able, without any instruction from another person, to directly or indirectly exercise a decisive influence on a legal entity or on the management of a legal arrangement.

  • A person with an ultimate influence is any person being the controlling person as defined in the Act on Business Corporations.
  • A person with an ultimate influence is any individual having a direct or indirect share in voting rights, which substantially exceeds the shares in voting rights of other persons, particularly if exceeding 25%.

For purposes of calculating the size of an indirect share in benefits or an indirect share in voting rights (i.e. in the case of more complicated ownership structures), the Act newly introduces the terms of “chaining” and “branching”:

Chaining refers to the possibility of indirectly obtaining benefits or the possibility of indirectly exercising an ultimate influence through successively related persons (or legal arrangements) or successively related relationships.

Branching is defined as the possibility of obtaining benefits or exercising an ultimate influence through multiple individual chains.

For purposes of calculating the size of a share in benefits or an indirect share in voting rights, the Act provides that shares to which the related persons are entitled are multiplied in the case of chaining, and the products of shares in benefits or in voting rights from the individual chains are added in the case of branching.

Member of the top management of a corporation

If no beneficial owner can be identified despite all efforts as may be reasonably required of a Registering Entity, or if the person with an ultimate influence in a business corporation is a legal entity that has no beneficial owner under the Act (e.g. the State and territorial self-governing units, a state contributory organization, a state or national enterprise, a political party or political movement), any member of the top management of the corporation shall be considered a beneficial owner.

A member of the top management is any individual providing day-to-day or regular management of activities of a legal entity, such as its business management, while being either a member of its statutory body or a person in a similar position, representing the legal entity in that body, or reporting directly to a statutory body of the legal entity or a member thereof.

V. Duties of a Registering Entity and other persons/entities pursuant to the act

Pursuant to the Act, a Registering Entity is obligated to:

  1. Obtain and record complete, accurate and up-to-date information about its beneficial owner;
  2. Record any steps made to ascertain the beneficial owner where a top management member is the beneficial owner of a corporation;
  3. Store data under paras (i) and (ii) above for the period of time during which an individual is the beneficial owner, and for a further period of 10 years from the termination of his/her position;
  4. Upon request, disclose data under paras (i) and (ii) above to persons/entities being entitled to such disclosure pursuant to Sec. 253/2008 Sb., on Some Measures against Legalization of Proceeds from Criminal Activities and Financing of Terrorism (“AML Act”);
  5. Make sure that the valid data on its beneficial owner corresponds to the actual state of affairs;
  6. Eliminate, or refute, any discrepancies in the UBO Register within a reasonable deadline provided to the Registering Entity for that purpose by a court as part of a discrepancy procedure;

A beneficial owner, ultimate recipient, person with an ultimate influence and person through whom an ultimate recipient may obtain benefits or a person with an ultimate influence may exercise its influence, are obligated to provide the Registering Entity with assistance as required for compliance with its duties, including disclosure of their position being established.

VI. Sanctions for breach of duties by a Registering Entity and of duty to provide assistance by beneficial owner

Any absence or incorrect registration of a beneficial owner is subject to financial sanctions in the form of fines as well as operating and organizational sanctions in the form of invalidation of corporate decisions or suspension of exercise of voting rights by participants and shareholders, which may result in the impossibility or impaired possibility of decisions being adopted by General Meetings, or the possibility of the subsequent invalidation of a General Meeting’s decisions voted for by participants and shareholders the voting right of which was to be temporarily suspended due to the imposed sanctions.

The following is a summary of sanctions for a breach of duties under the Act:

Infringement by a Registering Entity

A penalty of up to CZK 500,000 may be imposed upon a Registering Entity which fails to procure the registration of data on its beneficial owner in the UBO Register despite having been provided with a reasonable deadline for remedy when requested to do so, or upon a Registering Entity which registers data that does not correspond to the actual state of affairs and subsequently fails to remedy the situation based on a decision in a discrepancy procedure.

Infringement by a beneficial owner, ultimate recipient, person with an ultimate influence and person through whom an ultimate recipient may obtain benefits or a person with an ultimate influence may exercise its influence

A penalty in the same amount may also be imposed upon a beneficial owner, ultimate recipient, person with an ultimate influence and person through whom an ultimate recipient may obtain benefits or a person with an ultimate influence may exercise its influence, in case they do not provide a Registering Entity with the necessary assistance.

Non-payment of a share in profit (benefit)

If a beneficial owner is not registered in the UBO Register, the business corporation is not allowed to pay a share in any benefit (including a share in profit or other funds of the company) to such beneficial owner or to a legal entity of which he/she is also a beneficial owner.

Similarly, a business corporation is not allowed to pay a share in any benefit to a legal entity or legal arrangement with no beneficial owner registered in the UBO Register.

The right to a share in profit or other funds of a company, which has not been paid for the above reasons by the end of the accounting period in which the decision on the distribution was made, ceases to exist. Such a share may only be paid provided the data registered in the UBO Register is corrected.

Members of a statutory body, which have approved the distribution of a share in any benefit despite the explicit prohibition, will be subject to a rebuttable presumption that they have acted in conflict with the duty of due care.

Temporary suspension of a voting right

If a beneficial owner is not registered in the UBO Register, there is also the sanction of the beneficial owner being precluded from exercising his/her voting rights in the decision-making of the supreme body of the respective business corporation, or the sanction of the impossibility of his/her making decisions as the sole participant (shareholder) of the business corporation.

Unenforceability of rights and duties

Last but not least, the Act also introduces the unenforceability of any rights and duties under a legal act hindering a beneficial owner, if such rights and duties arose at a time when the beneficial owner was not registered in the UBO Register, regardless of the laws governing such legal act.

VII. Publicity of registration in UBO Register

The new legal regulation introduces public access to data on beneficial owners within the scope as stipulated by the Act (including, without limitation, name of a beneficial owner, country of his/her residence, year and month of birth, citizenship, information about the nature of the beneficial owner’s position, information on the beneficial owner’s holding (participation interest) where such holding (participation interest) establishes his/her position, and others).

Under the Act, a complete excerpt of valid data in the UBO Register and data that has been deleted without any replacement, or substituted by other data, may only be obtained by a person registered in the UBO Register as a beneficial owner, the person having filed a petition for initiation of a registration procedure, and other persons being obligated parties under the AML Act.

VIII. Duty to make registration in UBO Register compliant with new regulation

A Registering Entity, being a business corporation, which registered data on its beneficial owner in the UBO Register under the previous legal regulation (i.e. Act No. 304/2013 Sb.)

(a) by 1 January 2019, if established on or before 31 December 2017, or

(b) within 15 days from its establishment, if established on or after 1 January 2018,

is obligated to procure compliance of the valid data in the UBO Register with the requirements of the Act within 6 months from the effective date of the Act, i.e. by 30 November 2021.

Any other Registering Entities being business corporations which have met their duty under the previous legal regulation, but not within the above deadline, or which have not met this duty at all, are obligated to procure compliance of the data in the UBO Register with the requirements of the Act without any undue delay after the effective date of the Act, but may also do so at any time before the effective date of the Act, which is recommended.

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With respect to the above, we recommend reviewing the registrations of your Czech entities in the UBO Register and making them compliant with the new legal regulation as soon as possible in order for your company to avoid any sanctions arising out of a missing or incorrect registration.

Please do not hesitate to contact us at any time if necessary.


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