A new Act on the Registration of Ultimate Beneficial Owners was published in the Collection of Laws in February 2021, which introduces a new definition of the ultimate owners (along with stiff sanctions).
Following a legislative process which drew much attention in the media, parliament has approved and the president signed into law a new Act on the Registration of Ultimate Beneficial Owners. The new law will enter into force on June 1, 2021 and completely replaces and supersedes the current rules contained in the Act on Public Registers, considerably expands and specifies the record-keeping duties, and introduces significant sanctions for those entities who do not state their ultimate beneficial owner in the records, or for those who do not state them correctly.
For the purposes of this article, we will focus on the rules that apply to corporations.
We wrote about the genesis of the new law already in November 2019, see our articles here and here.
What to expect from the new law?
The Act on the Registration of Ultimate Beneficial Owners, effective from 1 June 2021, introduces a new definition of the ultimate beneficial owner. The ultimate beneficial owner is defined in a material sense, and the aim of the new law is to reflect the actual situation on the ground, as opposed to entries which merely formally fulfil the requirements. The ultimate beneficial owner is the natural person (i.e. an individual –never just another corporation) who is the final beneficiary of profits or a person with ultimate influence.
The final beneficiary, in turn, is understood to be any person (meaning natural or legal persons, though the ultimate beneficial owner can only be a natural person), who has a direct or indirect right to a share in the profit, other own resources or the liquidation balance which is greater than 25% and does not pass on this share in the benefit to anyone else. When determining the final beneficiary, it is not sufficient to examine only the immediate partners or shareholders of the company – if these are legal entities, it is necessary to look for persons who have a share in the benefit of these partners and then add these persons up to see whether they, taken together, account for more than 25% of the benefit.
Any natural person who is a dominant entity within the meaning of the Corporations Act is considered to be a person with ultimate influence, i.e. a person who may directly or indirectly exercise a decisive influence in a business corporation. In the case of a company that belongs to a group, this will always be the controlling entity. Generally, the majority shareholder also falls in this category. For corporations, in addition to the rules set out in the Act on the Registration of Ultimate Beneficial Owners, the presumptions of dominance set out in the Corporations Act will also serve as a guide for determining the person with ultimate influence. The new law also stipulates that if a natural person has a direct or indirect share of voting rights which significantly exceeds the shares of other persons, especially if it is greater than 25%, then this indicates that that person has ultimate influence (and therefore is the ultimate beneficial owner).
If the ultimate beneficial owner cannot be determined, although the corporation has made every effort to do so, or if it becomes apparent that the ultimate influence is exercised by a legal person which does not have an ultimate beneficial owner, then the legal fiction applies whereby every person in the top management of the corporation is the ultimate beneficial owner. It is always necessary to examine both final recipients and persons with ultimate influence in a timely manner; in general, the individuals at which the person conducting such enquiry arrives through both routes will be those who are entered in the register.
The law newly gives a list of entities who do not have an ultimate beneficial owner at all and are therefore not subject to the obligation to register. These include, in particular, the state, territorial self-governing units, homeowners’ associations, companies owned by the state, political parties, schools established by the state or self-governing units, churches, trade unions, etc.
The new records also allow for the automatic transfer of data from the Commercial Register directly to the UBO register. This will apply in the case of joint-stock companies who have a single shareholder (natural person) registered in the Commercial Register. In the case of limited liability companies, shareholders will automatically be entered in the register if they hold a share of more than 25%.
The record of ultimate beneficial owners is not a public register. However, the law assumes that the records will to a certain extant become publicly available via the internet, and that it will be possible to obtain an extract from the register of ultimate beneficial owners or a confirmation to the effect that no entry exists with respect to a given individual.
Penalties for failure to register the ultimate beneficial owner
In contrast to the current regulation, as of June 1, 2021, the law introduces fines for companies that do not take arrange for the registration of their ultimate beneficial owners, as well as restrictions for real owners who are not registered.
If a company does not register its ultimate beneficial owner at the request of the court, then this will newly be considered an offense which carries a fine of up to CZK 500,000. An offense is also committed by the ultimate beneficial owner, the person with ultimate influence, or other persons along the chain between the ultimate beneficial owner and the company, if they fail to provide sufficient cooperation to the company, of the kind that is needed to comply with the Act on the Registration of Ultimate Beneficial Owners.
The courts will newly be able to initiate a procedure on irregularities, and will be able to do so ex officio, if they are informed that the data on the record does not correspond to the facts or if the company has not registered its real owner at all. The court shall enter the discrepancy in the records. As long as the discrepancy persists, the rights and obligations arising from transactions which obscured the identity of the ultimate beneficial owner at a time at which the ultimate beneficial owner was not registered are not enforceable.
If the ultimate beneficial owner is not registered in the register of ultimate beneficial owners, the company must not distribute profit to them and such ultimate beneficial owner may not exercise voting rights. The same applies to legal persons of which such a person is the ultimate beneficial owner. Furthermore, the company may not distribute any dividends in favor of those legal entities which do not have their ultimate beneficial owner entered in the register.
The right to a share in profits or other own resources which have not been paid in this way by the end of the accounting period in which the decision to pay out such resources was made, expires at the end of that accounting period. Unpaid funds will then be transferred to the account Retained earnings of previous years.
With a view to the significant sanctions, it is advisable not to underestimate the new Act on the Registration of Ultimate Beneficial Owners and to arrange for the entry of the relevant information in the register in due time.
Act No. 37/2021 Coll.