Czech legislation defines the ultimate beneficiary as the actual owner. How does this differ from Slovak legislation, and what changes does the new law on the registration of actual owners bring?
On February 3, 2021, Act No. 37/2021 Coll. on the registration of beneficial owners, which introduces several changes to the registration of beneficial owners' data resulting not only from European legislation but also from the 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 resulting from this legislation and, in conclusion, to offer a brief reflection on Slovak and Czech legislation regulating beneficial owners or ultimate beneficial owners.
The register of data on beneficial owners (register of beneficial owners) is a public administration information system operating in the Czech Republic, in which data on beneficial owners specified by law are recorded. The register includes beneficial owners of legal entities entered in one of the public registers of legal entities and natural persons and beneficial owners of trust funds entered in the register of trust funds. The register is maintained by Czech registration courts. Entries in the register of beneficial owners are made by a court or notary, see https://issm.justice.cz/.
In June 2020, a draft new law on the register of beneficial owners was submitted to the Czech legislature, amending certain conceptual issues relating to the functioning of the register of beneficial owners. The aim of the draft, which was approved by the Chamber of Deputies on November 19, 2020, was to transpose the requirements of the so-called 5th AML Directive of the European Parliament and of the Council of the EU into Czech legislation and to simplify the administrative procedure for registering beneficial owners. Another reason for the bill was to remove gaps in the absence of direct penalties for failure to register the beneficial owner of a company in the register. The need to adopt a new registration law was also argued by the often neglected obligation of companies to register their beneficial owners in the register. Under the new wording of the law, companies may be subject to several sanctions for failure to comply with registration obligations or for discrepancies between the actual and registered status in the register, such as financial penalties, but also operational and organizational sanctions in the form of invalidity of corporate decisions or suspension of the voting rights of shareholders. This is regardless of the fact that the accuracy and completeness of the registered data is also in the interest of the beneficial owners themselves, as any deficiencies may result in the restriction or prevention of the payment of profit shares.
The new Act No. 347/2021 Coll. on the registration 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 the registration of beneficial owners of legal entities. A legislative grace period is currently in effect, allowing those affected by the Act to familiarize themselves with the new legal regulations. Pursuant to Section 1 of the Registration Act, this Act transposes the relevant European Union legislation and regulates the keeping of records of beneficial owners and certain rights and obligations arising in connection with the identification of beneficial owners and the registration of data on them in the register of beneficial owners.
Beneficial owner is defined in the Registration Act as any natural person who is the ultimate beneficiary or person with ultimate influence.
Ultimate beneficiary for the purposes of registering beneficial owners means a person who may, directly or indirectly through another person or legal arrangement, have a substantial interest, specifically more than 25%, of the total property benefit created in the course of the activities or liquidation of a legal entity or created in the course of the administration or termination of a legal arrangement, and does not pass on this benefit.
A person with ultimate influence is a person who, without instructions from another person, can directly or indirectly exercise decisive influence in a legal entity or on the management of a legal arrangement.
Registering entity and data to be recorded
Pursuant to Section 26 of the Registration Act, the application for registration shall be submitted by the registering entity. The registering entity is a legal entity that has a beneficial owner or administrator or a person in a similar position in a foreign trust legal arrangement. The registering entity is required to obtain and record complete, accurate, and up-to-date information about the beneficial owner or 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, birth number or similar unique identifier, if assigned, and nationality of the beneficial owner,
b) information on the nature of the beneficial owner's position,
c) information on the size of the beneficial owner's direct or indirect share, if this share establishes their status,
d) information on the fact establishing the status of the beneficial owner, if not based on a share,
e) a description of the structure of relationships, if any, including information within the scope of points h) and i) on legal entities or legal arrangements within the structure of relationships and the names of natural persons acting independently within the structure of relationships,
f) the date from which the natural person is the beneficial owner
g) the date until which the natural person was the beneficial owner,
The recording entity is also required to record the steps taken to identify the beneficial owner in cases where the beneficial owner of the company is a person in senior management. The recorded data shall be retained for as long as the natural person is the beneficial owner and for 10 years after the termination of their status.
The registering entity is also obliged to report the above data, upon request, to the person responsible under the law governing 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 obliged to ensure that the valid data on its beneficial owner or beneficial owner of the legal arrangement correspond to the actual state of affairs. A registering entity that is not a commercial corporation and has not ensured the registration of any data on its beneficial owner in the register of beneficial owners pursuant to Act No. 304/2013 Coll. as amended prior to the effective date of this Act, shall fulfill the obligation under Section 9 within six months of the effective date of this Act. The proposal to initiate proceedings for the registration of the actual owner by a court or notary must be submitted without undue delay after the decisive fact has occurred (within 6 months of the effective date of the Act, 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 has been automatically transferred.
The registrar has a right to request the beneficial owner, the ultimate beneficiary, the person with ultimate influence, and the person through whom the ultimate beneficiary may obtain benefits or the person with ultimate influence to provide the necessary cooperation, including notification of the establishment of their status, in order to comply with their obligations.
Application for registration
The Registration Act provides for the electronic submission of applications for registration using a prescribed form with an electronic or certified signature on a document that will be converted. The application for registration must be accompanied by documentation on the facts to be entered in the register of beneficial owners, unless the information on the facts to be entered can be obtained from a public administration information system accessible to the court. Documents shall be submitted in electronic form; documents submitted with an application for registration of a non-commercial company or legal arrangement may also be submitted in paper form.
Documents confirming the identity of a foreign natural person shall include, in particular, an extract from a foreign register similar to the population register, an extract from a foreign register similar to the commercial register, and an identity document or passport.
Documents confirming the status of the beneficial owner or the structure of relationships shall mean, 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 of the statutory body on the payment of shares, a declaration by the partners on acting in concert, a statement by the registering person or beneficial owner on the status of the beneficial owner or the structure of relationships, if based on legal facts that cannot be proven even with all due diligence, a statement by the registering person or beneficial owner on 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 shall be submitted in the original and in Czech, unless the court informs the applicant that a translation is not required.
The application for registration is submitted by the registering person and, in the case of a branch association, it may also be submitted by the main association. A new feature is that if the registering person does not submit the application for registration within 15 days of the date on which the obligation arose, the application for registration may be submitted by any person who has a legal interest and attaches documents proving the actual owner to the application for registration. The participants in the registration proceedings are the registering person and the applicant, if the applicant is a person other than the registering person.
Registration by the court
The regional court in whose jurisdiction the general court of the legal entity is located has jurisdiction over the proceedings for the registration of the actual owner of a legal entity. The registration proceedings shall commence on the date of delivery of the application for registration to the competent court, submitted electronically. If the applicant for the commencement of the registration proceedings is a foreign person, they shall notify the court of a delivery address in the Czech Republic or of an authorized representative for the receipt of 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 resolution; if it does not reject the application, it shall examine whether the information on the facts to be entered in the register of beneficial owners is derived from the documents accompanying the application for registration or from data available from the public administration information system, which the court can access remotely. The registration shall then be made within five working days.
Registration by a notary
The amendment to the Act involved notaries in the process of registration in the register of beneficial owners in order to reduce the workload of the courts. Pursuant to Section 34 of the Registration Act, the notary shall make the registration at the request of the person authorized to submit the application for registration. For the purposes of registration by a notary, the court shall allow notaries to use remote access to applications for registration and documents stored in electronic form. The notary will also have the right to refuse a proposal for registration if it has been submitted by an unauthorized person, does not meet the prescribed requirements, etc., which should paradoxically lead to a reduction in the number of rejected proposals, as direct cooperation with the notary is expected, who should point out any shortcomings on the part of the applicant. If the notary does not refuse to make the registration, he or she shall issue a certificate for registration and then make the registration by remote access within three working days of the date of receipt of the application for registration.
Automatic transfer of data
The new method of registration is the so-called automatic transfer of data, which is intended to reduce the administrative burden on the registering persons. In cases where the beneficial owner is already clear from the data in the commercial register, the data from the commercial register will be automatically transferred to the register of beneficial owners via the public administration system, without the registering person having to submit a proposal for the registration of the beneficial owner in the register. According to Section 38 of the Registration Act, in the case of a limited liability company, a partner with a share of more than 25% or the beneficial owner of a legal entity that is a partner with a share of more than 25% will be automatically transferred to the register of beneficial owners. In the case of a joint-stock company, the sole shareholder or the beneficial owner of the legal entity that is the sole shareholder shall be transferred as the beneficial owner. In the register of beneficial owners, the beneficial owner of an association, branch association, foreign association, foreign branch association, interest group of legal entities, international non-governmental organization, or housing or social cooperative shall be automatically transferred to the natural person who was registered in the public register as a member of their statutory body or as the beneficial owner of a legal entity registered in the public register who is a member of their statutory body.
Automatic transfer does not relieve the registering entity of its obligation to register all beneficial owners, and if other persons falling under the definition of beneficial owner appear in the given registering entity, that registering entity will be obliged to submit a proposal for the registration of those persons in the register. If this happens, the automatic transfer won't apply under Section 41 of the Registration Act, and the registering person will always have to propose the subsequent changes to the beneficial owner themselves. However, it will be possible to resume the interrupted automatic transfer if, when submitting the application for registration, the registering person also proposes to the court or notary performing the registration that the beneficial owner be automatically registered in future.
In practice, a problem may arise where the automatic transfer from the commercial register does not transfer the correct data for technical or other reasons. As a result, the actual owner will not be registered in the register, or the wrong person will be registered as the actual owner. For this reason, it is necessary to check the register and the persons entered therein. Any discrepancies in the register of beneficial owners must be noted not only by the registering person but also by the obliged person within the meaning of the AML Act. The amendment to the AML Act introduces a new obligation for the obligated person to report any discrepancies in the identification or verification of a client if they believe that the data in the register does not correspond to the actual situation. In such a case, the obligated person will have to notify the client of the discrepancy and, if the discrepancy is not removed or refuted, the obligated person will report the discrepancy to the court competent for registration under the Registration Act. If the obligated person fails to fulfill this obligation towards their client or subsequently towards the court, they may be fined up to one million Czech korunas for this offense.
The future and practical application will show in what way the legal regulation of the registration of beneficial owners in the Czech Republic and ultimate beneficial owners in the Slovak Republic in the relevant registers is “better” or more advantageous, and in what respect. 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 is different, their status must be assessed individually, even though both definitions are based on European legislation.
Slovak legislation appears to be stricter in this respect, and the defining characteristics of the ultimate beneficial owner can be applied to a wider range of natural persons. The registering entity records (and identifies) the beneficial owners in the Czech Republic itself, as is the case with the registration of ultimate beneficial owners in the commercial register (or other relevant registers) in the Slovak Republic.
In the Czech environment, the institution of an authorized person is also not used for ordinary “registration” entries, and in the Slovak Republic, when we talk about the registration of the ultimate beneficiary under Act No. 315/2016 Coll. on the register of public sector partners and on amendments to certain laws, we must state that a similar institution and legal regulation of the registration of beneficial owners of entities “trading” 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 therefore easier to disclose the ownership structure and identify the natural persons who are the actual beneficial owners or ultimate beneficiaries, or to conceal them, in the Czech Republic. Ultimately, the actual use of legislative tools that can be used to combat shell companies, money laundering, or indirectly combat corruption, which were certainly one of the purposes of adopting the new Czech legislation, remains questionable.
