The Czech parliament is adopting a new regulation with respect to the registration of ultimate beneficial owners (i.e. persons with ultimate decisive influence on or with ultimate economic benefit from the company) (“UBO”). Although the obligation of companies to register their UBOs has already existed for some time under the Czech regulatory regime, it has shown to be insufficient in practice as the absence of any penalties or sanctions has led to the vast majority of business corporations still neglecting this obligation to register their UBOs.
The new regulation will maintain the obligation to evidence the UBO in the register, but it will also impose a variety of sanctions on companies not compliant with the new UBO regime. We expect such changes to be adopted in the next few months.
A proper UBO registration will be in the interest of (i) the shareholders who may be limited in profit-taking or in their voting rights, (ii) the members of statutory bodies due to their obligation to act with due care, (iii) companies which will be under the risk of financial penalties, and (iv) the obliged persons performing the “Know Your Customer” checks under the applicable anti-money laundering laws.
Suspended distribution of a profit share
Under the proposed rule, if the UBO is not registered, the company will not be authorized to distribute a profit share to it or to a legal person or entity of which it is also the UBO. Neither can the company distribute a profit share to a legal person that has no registered UBO.
In case the UBO will not be registered and a profit share will not be distributed due to this fact by the end of the relevant accounting period, the right to a profit share will expire and the concerned shareholder will not receive any profit from that accounting period.
Ability to exercise voting rights and an invalidity of the sole shareholder’s decisions
Similarly, if the UBO is not registered, it will not be able to exercise voting rights at the general meetings or as a sole shareholder acting within the powers of the general meeting.
Moreover, a resolution of a sole shareholder who is not registered as UBO will be invalid if it is challenged on the grounds of conflict with the law.
The statutory bodies should be vigilant about the new rules, as members of the statutory body who agree with distribution of a profit share to the shareholders in breach of the registration, will be deemed to have failed to act with due care unless they can prove their good faith. This may, for example, open pathways for new executives or directors to claim damages on behalf of the company from prior members of the statutory body which made such distribution to a shareholder with an improperly registered UBO.
Where appropriate, shareholders may also claim compensation from the statutory body for damage caused to the company by failing to register the UBO.
Unenforceability of contracts
Rights and obligations from legal acts obscuring a UBO are unenforceable as long as the UBO is not registered, irrespective of the governing law of such legal act. This may apply to shareholder’s agreements, mandate contracts where a third person instructs a shareholder on how to exercise the voting rights, or other similar arrangements. This should lead joint ventures, financing banks and other stakeholders to re-check the legal arrangements in place in view of potentially incorrect UBO registrations.
Financial penalty to the company
In the event of incorrect registration, the company may be affected not only operationally and organizationally as described above, but also financially in the form of fines which can go up to CZK 500,000.
Financial penalty due to “Know Your Customer” obligations
The proposed rules also impose certain duties on the obliged persons under the anti-money laundering law (e.g. banks and other financial institutions, but also real estate brokers and attorneys) which are performing their “Know Your Customer” identification or due diligence checks. The obliged persons must notify any irregularities in the UBO registration of their customers to the competent regional court maintaining evidence. Failure to perform this duty may be sanctioned by a fine of up to CZK 1,000,000.
Definition of UBO
Under the new regulation, the definition of UBO will be generally broader than under the current rules. A person will be considered as a UBO if they are either (i) a recipient of at least 25% of the company’s profit, or (ii) a person with a controlling interest in the company, particularly when exceeding 25% of voting rights. Both of these criteria must be checked in parallel.
The UBO may also be determined by identifying other persons or legal arrangements through which it can indirectly acquire profit or exercise control. For example, if a shareholder exercises their influence though several legal entities which are shareholders of the same company and of which they are the owner, their shares will add up and the shareholder may fall under the definition of UBO.
If no UBO is found, physical persons in the management of a company will be considered as UBOs. In such cases, a company must maintain evidence of their steps to identify UBOs to avoid potential fines and be able to prove fulfilment of a due care requirement.
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We will be happy to answer any questions you may have relating to the proposed new regime of UBO evidence as well as other related legal issues. Although this alert concerns the Czech register of UBOs, please feel free to contact us with questions relating to any other jurisdiction.
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Click here to read it in Czech.