Amendment to the law on the registration of beneficial owners

Act No. 37/2021 Coll., on the registration of beneficial owners ("UBO Act") will have its first anniversary on 1 June 2022. However, changes to the Act are expected as early as this autumn. The Government's draft law responds to the ongoing proceedings brought by the European Commission (hereinafter referred to as the "Commission") against the Czech Republic for non-compliance with its obligations resulting from incorrect implementation of the so-called V. AML Directive[1] (hereinafter referred to as the "Directive"). By amending the UBO Act, the Commission made the amendment to the UBO Act a prerequisite for drawing funds under the National Recovery Plan. As the application under this programme must be submitted in the third quarter of this year at the latest, the Government proposes that the Chamber of Deputies give its consent to the draft law at the first reading.

The shortcomings in the transposition of the AML Directive can be considered as systemic failures. The amendment to the UBO Act is intended to prevent the Commission from proceeding to the next stage of the procedure, which is to send a reasoned opinion, which would jeopardise the disbursement of payments from the EU Structural and Investment Funds or necessitate their repayment.[2]

Substantively, the proposed amendment to the UBO Act consists of (1) reforming the definition of beneficial owner along the lines of the AML Directive[3] and (2) limiting the exemptions for entities that are deemed not to have a beneficial owner to public law legal entities only (Section 7 of the UBO Act). The Commission also originally criticised the Czech Republic for the absence of an exemption for listed companies (under the Directive, publicly traded companies do not have a beneficial owner, whereas under the UBO Act they do). Unfortunately, from the client's point of view, the Commission has backed down from this criticism and accepted the Czech Republic's argumentation on this point.

What major changes to the UBO Act can we expect in the autumn?

1) Change to the definition of beneficial owner

There will be no distinction between the terms "ultimate influencer" and "ultimate beneficiary", but the beneficial owner will be any natural person who ultimately owns or controls a legal person or legal arrangement.

It is precisely the redundancy of the element of the so-called ultimate beneficiary that the Commission has criticised the Czech Republic for.

Thus, the indication of the nature of the beneficial owner's status is narrowed down to whether it is direct or indirect, and whether the beneficial owner is a material (under Section 4 of the UBO Act as drafted), substitute (under Section 5 of the UBO Act) or formal (under Section 6 of the UBO Act) beneficial owner.

In relation to business corporations, the following criteria for determining the beneficial owner are proposed:

"The beneficial owner of a corporation is any natural person who owns or controls the corporation by

    (a) having a direct interest or stock or voting power, including bearer stock, of more than 25%,

    (b) directly or indirectly, having a right to a share of profits, other equity or liquidation proceeds (hereinafter referred to as an "ownership     interest") greater than 25%,

    (c) controlling a corporation or corporations which individually or collectively have an interest or shares, including bearer shares, in     the corporation greater than 25%; or

    (d) controlling the corporation by other means; control means, inter alia, the criteria set out in Article 22(1) to (5) of Directive 2013/34/EU of     the European Parliament and of the Council."

The above is more of a formal change, as the profit-share criterion will continue to be maintained. Even so, the entries in the register of beneficial owners will need to be adjusted to comply with the new terminology of the UBO Act. The beneficial owner will no longer be determined in accordance with Article 3(1) of the UBO Act, which provides that the ultimate beneficiary is any person who may directly or indirectly receive more than 25% of the total beneficial interest generated by the operation or liquidation of the legal person.

However, we believe that in practice the removal of this provision will not have any major impact on the position of beneficial owners.

2) Narrowing of exemptions under Section 7 of the UBO Act

District and regional chambers, political parties and political movements, churches and religious societies, trade unions and employers' organisations, associations of unit owners and hunting associations will also have to register data on their beneficial owners.

However, most of them should be subject to the so-called automatic transcription, which is also proposed in the draft act. This change should therefore not lead to any new administrative costs.

The new proposed wording of Section 7 of the UBO Act reads as follows:

(2) Furthermore, Czech legal entities established or set up for the specific purpose of satisfying needs of general interest,

    (a) which are established by the Czech Republic, a region or a municipality or established by law or by international treaty,

    (b) which are financed by the Czech Republic, a region or a municipality and

    (c) in which the Czech Republic, a region or a municipality can exercise its decisive influence; in the case of commercial corporations and     cooperatives, 100% participation is required; shall not have a beneficial owner.

(3) It shall be presumed that, pursuant to subsection (2), that the following entities have no beneficial owners:

    (a) a school legal entity established by the state, a local self-government unit or a voluntary association of municipalities,

    (b) a public research institution,

    (c) a legal person established by law or international treaty,

    (d) a state enterprise and a national enterprise,

    (e) a European grouping for territorial cooperation,

    (f) a legal person in which the Czech Republic, a region or a municipality holds, directly or indirectly, all the beneficial interests and voting rights; and

    (g) a public benefit corporation and an institute of which the Czech Republic, a region or a municipality is the founder.

Presumably, there will be no need to in any way confirm the rebuttable legal presumption in paragraph 3 is, according to the explanatory memorandum to the draft bill.

3) Extension of the period during which voting rights are not suspended

The bill also proposes to extend the period during which voting rights are not suspended from 15 to 30 days under Section 54(1) of the UBO Act. Thus, newly, if the status of a beneficial owner has arisen within the period of 30 days prior to the date of the decision of the supreme body or  sole shareholder, the prohibition on the exercise of voting rights will not apply.

This is certainly a positively perceived change, as the current 15-day period conflicts with the provision of Section 26(3) of the UBO Act, according to which anyone who certifies a legal interest may file a petition after 15 days if the registering person (business corporation) does not file a petition for registration of changes in the registration itself. Thus, as a result, a situation could arise where a new shareholder who has  become a beneficial owner within a short period of time prior to the supreme body meeting cannot exercise his voting rights due to the inaction of the company. This provision has thus been criticised by some experts as unconstitutional.[4]

What does that mean?

Business corporations will generally have to examine whether the entry in the register of beneficial owners corresponds to the applicable law. For those business corporations for which entries have been made in the register of beneficial owners by means of the so-called automatic transcription (according to the explanatory memorandum to the draft law, this is up to 95% of all entries), active intervention to update the data should not be necessary. However, even these corporations should at least check that the entry is complete.

However, the less fortunate business corporations, especially those with complicated ownership and management structures, will have to go through another administrative round of filing a new petition to amend their registered information. Those business corporations that have complied with the registration requirement under the existing rules will at least be exempt from the first proposal fee under the new regulations.