Legislative changes: how they will affect you, and what to watch out for?

Essentially, the new legislation introduces several changes, such as redefining the term “beneficial owner”, new methods of entering information in the register of beneficial owners (the “register”), through a notary, and publicity of registered data. Above all, the new legislation introduces severe penalties.

And not only do these new penalties impact entities financially, they may also present practical difficulties in terms of their functioning as corporations and the exercise of their rights, as well as the exercise of the rights of their shareholders (including the liability of statutory body of the corporation for any damage caused if it acts in contravention of the above regulations, e.g. if the board of directors pays a share of the profit to a shareholder who has not entered its beneficial owner in the register although is obliged to do so).

Who now qualifies as a beneficial owner?

The new regulation sets out detailed rules for determining a beneficial owner of legal entities. However, in principle, a beneficial owner shall be deemed a natural person who

• is the ultimate beneficiary of a significant part of the profit; or
• exercises an ultimate influence in the company (either directly or indirectly).

In practice, often one person meets both criteria (e.g. the shareholder exercises its influence in the company and simultaneously acquires the right to profit distribution). However, in many cases this may not be so (e.g. shareholders of preference shares have the right to a share of the profits, but their voting rights at the company general meeting are limited). In such cases, registration of both persons – both the ultimate beneficiary and the person with an ultimate influence – will be required.

Legal entities, including those with beneficial owners already registered under existing legal regulations, must amend such a registration entry in line with the new legislation. In addition, if necessary, they are obligated to amend the entry and provide relevant documents as evidence of having done so.

We can only recommend that this “revision” process be carried out as soon as possible, not least because of possible penalties, to ensure that legal entities can enter or amend the record of the beneficial owner in the register within the specified deadlines.

What sanctions can be imposed?

The law specifies two categories of sanctions for breaching the obligation to enter correct information in the register of beneficial owners, namely:

• offences in which a fine of up to CZK 500,000 may be imposed; and
• private law sanctions that may significantly affect the rights of shareholders and the functioning of corporations, such as, in particular:
  • prohibiting payment of a profit share, other own sources or the liquidation balance share to the actual owners of a corporation, unless they are indicated as the registered beneficial owners of this corporation in the register;
  • prohibiting payment of a profit share, other own sources or the liquidation balance share to any shareholder of a company who does not have any beneficial owner entered in the register;
  • terminating entitlement to the share of any profit or other own sources, which was not paid because the beneficial owner had not been entered in the register by the end of the accounting period when the decision on the payment was made (i.e. for the distribution of profits for 2020, the shareholder must meet the payment conditions by 31 December 2021 at the latest);
  • prohibiting the exercise of voting rights by the beneficial owner at the company’s general meeting or prohibiting a sole shareholder from taking decisions unless it is registered as the beneficial owner in the register;
  • prohibiting the exercise of voting rights at the company’s general meeting by any shareholder who does not have any beneficial owner entered in the register;
  • unenforceability of rights and obligations resulting from legal acts (e.g. agreements) in court, which were designed to conceal the identity of the beneficial owner and that arose during the time when the beneficial owner was not registered.

Entry in the register of beneficial owners via a notary?

The aim of the new legislation is, if possible, to transfer to notaries most of the administration concerning an entry in the register. This is also shown by the fact that the fee for registration by a notary should be lower than the fee for registration with the registration court. We will see how the practice of notarial registration will develop.

Unfortunately, at the moment, we do not know what the register records and electronic extracts under the new act will look like and how they can be obtained. We will need to wait a little bit longer for such information, too.

Is there a deadline for entering the beneficial owner in the register?

Complying with the established deadlines will be of crucial importance.

For all corporations fulfilling the obligation to enter the beneficial owner in the current register

• by 1 January 2019 (for corporations established before 31 December 2017), or 
• within 15 days of their establishment (for corporations established on or after 1 January 2018)

a six-month period shall apply. These corporations have until 30 November 2021 to review the accuracy of these entries, or to add to or correct them.

Corporations that have not yet fulfilled the obligation to enter their beneficial owner in the current register are not granted this additional period and are obligated to do so without undue delay after 1 June 2021.

Who will have access to the information regarding beneficial owner?

The biggest change under the act is that anyone with access to the internet can now obtain information about the beneficial owner. Therefore, anyone can check who really owns or controls a company entered in the commercial register. Publicly available data will also be crucial for compliance with the existing rules. An inspection of whether the beneficial owner is recorded beside a particular shareholder should therefore pose no problems. Corporations must therefore establish relevant control mechanisms so that they comply with the regulations. In companies with a lower number of shareholders, such an arrangement and inspection should not pose any problems. On the other hand, in joint-stock companies with a higher number of shareholders, inspection of a register entry showing a beneficial owner name beside individual shareholders, e.g. in payment of a profit share through a bank or in being allowed to vote at a large general meeting, could in particular instances cause logistical problems. All we can do is wait for practice (or technology) to resolve this.

Concerning the sanctions and potential liability, it is expected, however, that the companies, in particular their statutory bodies, will carefully monitor and adhere to such rules.

AUTHORS

Janka Brezániová

Partner

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Barbora Skolková

Senior associate

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Iva Gráczová

Senior associate

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This article is also available in Czech.