Czech law defines the ultimate beneficial owner as the so-called beneficial owner. How does this differ from Slovak legislation, and what changes does the new amendment to the Act on the Registration of Beneficial Owners bring?
On February 3, 2021, Act No. 37/2021 Coll. on the Register of Beneficial Owners came into force in the Czech Republic, introducing several changes to the register of beneficial owners resulting not only from European legislation but also from the practical application of current legislation and its requirements. The purpose of this article is to provide a brief legal overview of the individual institutions and procedures arising from this legislation and, in conclusion, to offer a brief reflection on Slovak and Czech legislation governing beneficial owners or beneficial owner.
The Register of Beneficial Owners (Beneficial Owners Register) is a public administration information system operating in the Czech Republic, into which legally required data on beneficial owners are entered. The registry includes beneficial owners of legal entities entered in one of the public registers of legal and natural persons, as well as beneficial owners of trust funds entered in the trust fund registry. The register is maintained by Czech registry courts. Entry into the register of beneficial owners is performed by a court or a notary; see https://issm.justice.cz/.
In June 2020, a draft of a new law on the register of beneficial owners was submitted to the Czech legislature, which amends certain conceptual aspects of the register’s operation. The aim of the draft, which the Chamber of Deputies approved on November 19, 2020, was to incorporate the requirements introduced by the so-called 5th AML Directive of the European Parliament and the Council of the EU into Czech legislation and to administratively simplify the registration of beneficial owners in the register. Another reason for the bill was to eliminate loopholes resulting from the absence of direct penalties for failing to register a company’s beneficial owner in the registry. The need to adopt the new registration law was also justified by the often-neglected obligation of companies to register their beneficial owners in the registry. Under the new version of the law, companies may be subject to various sanctions in the event of failure to comply with registration obligations or the existence of discrepancies between the actual and registered status in the registry, such as financial fines, as well as operational and organizational sanctions such as the invalidity of corporate decisions or the suspension of shareholders’ voting rights. Not to mention that the accuracy and completeness of the recorded data is also in the interest of the beneficial owners themselves, as deficiencies may result in the restriction or denial of profit distributions.
The new Act No. 347/2021 Coll. on the Register of Beneficial Owners (hereinafter also referred to as the “Registration Act”) entered into force on February 3, 2021, and will take effect on June 1, 2021, i.e., after the deadline for registering the beneficial owners of legal entities. Currently, a legislative grace period is in effect, allowing those subject to the Act to familiarize themselves with the new legal framework. Pursuant to Section 1 of the Registration Act, this Act transposes the relevant European Union legislation and regulates the maintenance of a register of beneficial owners and certain rights and obligations arising in connection with the identification of the beneficial owner and the registration of data them in the beneficial ownership register.
A beneficial owner is defined in the Registration Act as any natural person who is the ultimate beneficiary or a person with ultimate influence.
For the purposes of the beneficial ownership registry, the ultimate beneficiary is understood to be a person who may hold, directly or indirectly through another person or legal arrangement, a substantial portion—specifically more than 25%— of the total financial benefit generated by the activities or liquidation of a legal entity, or generated by the administration or dissolution of a legal arrangement, and does not further transfer this benefit.
A person with ultimate influence is a person who, without instructions from another, may directly or indirectly exercise decisive influence over a legal entity or the administration of a legal arrangement.
Registering Entity and Registered Data
Pursuant to Section 26 of the Registration Act, the application for registration is filed by the registering entity. The registering entity is a legal entity that has a beneficial owner, or the administrator or a person in a similar position in the case of a foreign trust of a legal arrangement. The registrant is required to obtain and record complete, accurate, and up-to-date information regarding the beneficial owner or the beneficial owner of the legal arrangement. This includes, in particular, the following information:
a) name and address of residence, or place of residence if different from the address of residence, date of birth, social security number or similar unique identifier if assigned, and nationality of the beneficial owner,
b) information regarding the nature of the beneficial owner’s status,
c) information on the size of the beneficial owner’s direct or indirect interest, if such interest establishes their status,
d) information regarding the fact establishing the beneficial owner’s status, if it is not based on a shareholding,
e) a description of the relationship structure, if any, including information within the scope specified in subparagraphs h) and (i) regarding legal entities or legal arrangements within the relationship structure and the names of natural persons acting independently within the relationship structure,
f) the date from which the natural person has been the beneficial owner
g) the date until which the natural person was the beneficial owner,
The record-keeper is further required to document the steps taken to identify the beneficial owner in cases where the beneficial owner of the company is a designated member of senior management. The recorded data shall be retained for the period during which the natural person is the beneficial owner, and for 10 years following the termination of that status.
The record-keeper is also required to disclose the above-mentioned data, upon request, to the obligated entity under the law regulating certain measures against money laundering and terrorist financing, or to the Financial Analytical Office, a court, a law enforcement authority, the Financial Administration of the Czech Republic, or the Customs Administration of the Czech Republic.
The registering entity is required to ensure that the valid information regarding its beneficial owner or the beneficial owner of the legal entity corresponds to the actual situation. A registrant that is not a business corporation and has not ensured the entry of any information regarding its beneficial owner into the beneficial owner registry pursuant to Act No. 304/2013 Coll. as in force prior to the effective date of this Act, shall fulfill the obligation under § 9 within 6 months from the effective date of this Act. A motion to initiate proceedings for the registration of the beneficial owner by a court or notary must be filed without undue delay after the occurrence of the decisive fact (within 6 months of the Act’s entry into force if no data has been registered, and within 1 year in the case of updating already registered data). This obligation is also fulfilled if the data was automatically transferred.
The registering entity has a duty to provide the beneficial owner, the ultimate beneficiary, the person with ultimate influence, and the person through whom the ultimate beneficiary may derive benefit, or the person with ultimate influence, to provide the necessary cooperation, including notification of the establishment of their status to ensure compliance with their obligations.
Application for Registration
The Registration Act provides for the electronic submission of an application for registration using a prescribed form with an electronic or certified signature on the document, which will be converted. The application for registration must be accompanied by documentation regarding the facts to be entered in the register of beneficial owners, unless the information regarding the facts to be entered can be ascertained from a public administration information system accessible to the court. Documents shall be submitted in electronic form; documents submitted with an application for registration for an entity other than a business corporation or legal arrangement may also be submitted in paper form.
Documents confirming the identity of a foreign natural person include, in particular, an extract from a foreign registry analogous to a population registry, an extract from a foreign registry analogous to a commercial registry, and an identity document or passport.
Documentation confirming the status of the beneficial owner or the structure of relationships includes, in particular, an extract from the commercial register or a similar register in the case of a foreign legal entity, a list of partners, a decision by the statutory body regarding the payment of a share, a declaration by the partners regarding acting in concert, a declaration by the registered person or beneficial owner regarding the status of the beneficial owner or the structure of relationships, if based on legal facts that cannot be substantiated even with the utmost effort, a declaration by the registered person or beneficial owner regarding the status of the beneficial owner or the structure of relationships, unless they are based on legal facts. Copies of the documents required for the application for registration are sufficient. Documents in a foreign language must be submitted in their original version and simultaneously in Czech, unless the court notifies the applicant that a translation is not required.
The application for registration is filed by the registered entity, and in the case of a branch association, it may also be filed by the main association. A new provision is that if the registered entity fails to file the application for registration within 15 days from the date on which the obligation arose, anyone with a legal interest may file the application for registration and must attach documents proving the beneficial owner to the application. The parties to the proceedings on the application for registration are the registered person and the applicant, if the applicant is a person other than the registered person.
Registration by the Court
The regional court in whose jurisdiction the legal entity’s general court is located has jurisdiction over proceedings for the registration of the beneficial owner of a legal entity. Registration proceedings commence on the date of delivery of the application for registration to the competent court, filed electronically. If the applicant initiating the registration proceedings is a foreign person, they shall notify the court of a delivery address within the territory of the Czech Republic or of an authorized representative for receiving documents with a delivery address in the Czech Republic. Pursuant to Section 28 of the Registration Act, the court may reject the application for registration by a ruling; if the court does not reject the application, it shall examine whether the facts to be entered in the register of beneficial owners are derived from the documents attached to the application for registration or from data available in the public administration information system, which the court may access remotely. The court will then make the entry within 5 business days.
Registration by a Notary
The amendment to the law has involved notaries in the process of registration in the register of beneficial owners, with the aim of reducing the workload on the courts. Pursuant to Section 34 of the Registration Act, a notary shall make the entry at the request of a person authorized to file an application for registration. For the purposes of registration by a notary, the court will allow notaries to use remote access to registration applications and documents that are stored in electronic form. A notary will also have the right to reject an application for registration if it was filed by an unauthorized person, does not meet the prescribed requirements, etc., which, paradoxically, should lead to a reduction in the number of rejected applications, as direct cooperation with the notary is expected, who should alert the applicant to any deficiencies. If the notary does not refuse to make the entry, they will issue a certificate for entry and subsequently make the entry via remote access within 3 business days from the date of receipt of the application.
Automatic data transfer
The new method of registration is the so-called automatic data transfer, which is intended to reduce the administrative burden on registrants. In cases where the beneficial owner is already clearly identified from the data in the Commercial Register, the data from the Commercial Register will be automatically transferred to the beneficial owner registry via the public administration system, without the registrar having to submit a request to enter the beneficial owner into the registry. Pursuant to Section 38 of the Registration Act, in the case of a limited liability company, a partner holding a stake of more than 25% or the beneficial owner of a legal entity that is a partner with a share of more than 25%. In the case of a joint-stock company, the sole shareholder or the beneficial owner of a legal entity that is the sole shareholder shall be entered as the beneficial owner. The following are automatically registered as beneficial owners in the beneficial owner registry: the beneficial owner of an association, a branch association, a foreign association, foreign branch association, interest association of legal entities, international non-governmental organization, or housing or social cooperative, or as the beneficial owner of a legal entity registered in the public register that is a member of their statutory body.
Automatic transfer does not relieve the registering entity of the obligation to register all beneficial owners, and if additional persons falling under the definition of a beneficial owner appear in the given registering entity, that registrant will be required to file a request to register those persons in the registry. If such a case occurs, automatic transfer pursuant to Section 41 of the Registration Act shall not apply, and the registrant will therefore always have to propose subsequent changes to the beneficial owner on its own. However, it will be possible to resume the interrupted automatic transfer, provided that the registrant, when filing the application for registration, simultaneously requests the court or notary performing the registration to automatically register its beneficial owner in the future.
In practice, a problem may arise where the automatic transfer from the Commercial Register fails to transfer the correct data for technical or other reasons. As a result, the beneficial owner will not be registered in the records, or an incorrect person may be registered as the beneficial owner. For this reason, it is necessary to review the records and the persons listed therein. Not only the registrar but also the obligated person under the AML Act must be vigilant for any discrepancies in the register of beneficial owners. The amendment to the AML Act newly introduces an obligation for the obligated entity to report discrepancies during the identification or verification of a client if it believes that the data in the records do not correspond to the actual situation. In such a case, the obligated person must notify the client of the identified discrepancy, and if the discrepancy is not resolved or refuted even then, the obligated person shall report these discrepancies to the court competent for registration under the Registration Act. If the obligated person fails to fulfill this obligation toward their client or subsequently toward the court, they face a fine of up to one million Czech korunas for this offense.
The future and practical application will show in what respect the legal regulation of the registration of beneficial owners in the Czech Republic or beneficial owners in the Slovak Republic in the relevant registers is “better” or more advantageous, and in what direction. Since the group of natural persons who can be defined as beneficial owners in the Czech Republic and ultimate beneficial owners in the Slovak Republic differs, it is necessary to assess their status individually, even though both of these definitions are based on European legislation.
Slovak legislation appears stricter in this regard, and the defining characteristics of a beneficial owner can be applied to a broader group of natural persons. In the Czech Republic, the registering entity records (and identifies) the beneficial owners itself, just as in the case of registering beneficial owners in the Commercial Register (or other relevant registers) in the Slovak Republic.
In the Czech context, the concept of an authorized person is also not used for routine “registration” entries, and in the case of the Slovak Republic, when we refer to the registration of beneficial owners under Act No. 315/2016 Coll. on the Register of Public Sector Partners and on Amendments to Certain Acts, we must note that a similar concept and legal framework for the registration of beneficial owners for entities “doing business” with the public sector in the Czech Republic does not even exist, and therefore the administrative (and financial) burden on the registering entity is lower. In our legal opinion, it is thus easier in the Czech Republic to disclose the ownership structure and identify the natural persons who are the actual beneficial owners or ultimate beneficiaries, or to conceal them. Ultimately, the actual use of legislative tools that can be employed to combat shell companies, or to combat money laundering, or indirectly to combat corruption—which were certainly, one of the purposes of adopting the new Czech legislation, among others.
