The concept of the beneficial owner is of considerable importance in the fight against both money laundering and the financing of terrorism. The beneficial owner is also verified, for example, in connection with the provision of public procurements, grants, or licenses.
In general, it can be said that the purpose of identifying the beneficial owner is to strengthen the transparency of legal entities and legal arrangements and to reveal otherwise unclear or hidden structures.
Download our eBook providing an informative overview on beneficial owners in the Czech Republic, or read more below:
Who is a beneficial owner?
The beneficial owner is defined as every natural person who directly or indirectly:
- owns more than 25% of:
- participation in the capital; or
- voting rights (see Example No. 1 below) in the company; or
- is entitled to a share of profit exceeding 25%; or
- exercises actual control over the company on other grounds. Other grounds may refer to a partnership agreement, for example.
It is thus possible for a legal entity to have more than one beneficial owner, including persons who are important (in terms of having relatively significant participation in the legal entity), but do not have effective control in real terms.
What is the notion of ultimate control?
Ultimate control is exercised by a person who:
- based on their own discretion, acts so that the decision-making of the corporation corresponds to their will, i.e. makes strategic decisions fundamentally impacting the business activity;
- is able to appoint or remove the majority of persons who are members of the statutory body of the company;
- disposes of at least 40% of voting rights in a legal entity.
Example No. 1
Indirect capital shareholding in Beta s.r.o. equals 30%.
Indirect ultimate control over Beta s.r.o. equals 30%.
Indirect capital shareholding in Beta s.r.o. equals 20%.
Indirect ultimate control over Beta s.r.o. equals 0%.
Indirect capital shareholding in Beta s.r.o. equals 45%.
Indirect ultimate control over Beta s.r.o. equals 50%.
Ms. Anna and Ms. Catherine are the beneficial owners of Beta s.r.o.
Which entities have no beneficial owner?
The following entities do not have a beneficial owner:
- a state or municipality;
- a voluntary union of local municipalities;
- a state contributory organization and contributory organization of a municipality;
- a legal educational entity founded by a state, municipality or voluntary confederacy of local municipalities;
- a legal person established by law or international treaty;
- a public research institution;
- a state enterprise and national enterprise;
- a European grouping for territorial cooperation;
- a legal entity in which the Czech Republic, its region, or its municipality directly or indirectly holds all profit and voting rights shares; and
- a publicly beneficial association and institute founded by the Czech Republic or a regional or local municipality.
Substitute beneficial owner
If all possible means of identifying the beneficial owners within the statutory definitions have been exhausted, provided that there are no grounds for suspicion, top management of the ultimate parent company is then registered as a substitute solution.
A substitute beneficial owner can only be considered in relation to corporations.
Example No. 2
- owns more than 25% of:
How to register the beneficial owner
What documents are needed
The documents evidencing the beneficial owner’s position and the ownership structure are necessary for the registration. These may include the following:
- Extracts from a Commercial Register (or a similar public register) or from a Register of Beneficial Owners of all companies belonging to the corporate chains leading to the beneficial owner(s) (extracts from the Czech Commercial Register are not needed);
- Lists of shareholders of all companies defined in point a) (unless stated on the extract from the commercial register);
- Shareholder declaration of concerted action (if applicable);
- Declarations by the registrant or beneficial owner as per the beneficial owner’s status or the registering company’s ownership structure, if based on a legal fact that cannot be supported even if all reasonable efforts have been made;
- Constitutive legal acts (e.g. Articles of Association);
- Copies of the beneficial owners’ identification documents;
- Document proving the date the beneficial owner’s position started.
All these supporting documents:
- will not be publicly available;
- need to be less than three months old; and
- need not to be legalized, simple copies are sufficient.
Deadlines for the registration of the beneficial owner
The registration or any updates in the register must be initiated without undue delay (this is usually considered to be within 15 days) in the following situations:
- The existing company has not yet filed its beneficial owner details with the Register of Beneficial Owners.
- The details of the beneficial owners already registered have changed, or the details of the company’s ownership structure have changed.
- The registered beneficial owners are to be removed / new beneficial owners are to be registered.
- A new company has been registered.
Automatic data exchange
Automatic data exchange is a mechanism for transferring certain information from the Czech public registers into the Register of Beneficial Owners. Natural persons registered in the Commercial Register in specific positions are automatically registered as beneficial owners given that specific legal prerequisites are met.
Example No. 3
Mr. Dan, a natural person, is a new 100% shareholder of Kappa s.r.o. Mr. Dan is listed as the sole shareholder in the Commercial Register. On the basis of the automatic data exchange, he is immediately listed as the beneficial owner of Kappa s.r.o. in the Register of Beneficial Owners as well as in Omega s.r.o. which is 100 % owned by Kappa s.r.o.
Register of beneficial owners
The Register of Beneficial Owners is available on the website of the Ministry of Justice.
Who can access the Register of Beneficial Owners
The Register of Beneficial Owners is partially public. The information that is publicly available includes:
- Name, residency, and date of birth (month and year) of the beneficial owner
- Specification of the beneficial owner’s position
- Indication of the beneficial owner’s direct or indirect shareholding
- Date when the person became the beneficial owner
The ownership structure is not publicly available.
Full information about the beneficial owner, including the registration history, can be obtained by the following persons:
- beneficial owners themselves;
- authorised person who submitted the proposal for registration of the beneficial owner;
- subsidy providers;
- authorities and institutions for the purposes of AML control;
- tax office, bank, etc.
Consequences of incorrectly entering or missing information on the beneficial owners in the register
A. Irregularity Proceedings
- The irregularity proceedings are dealt with by the competent Registry Court.
- The aim is not to punish the legal entities who have failed to proceed with the registration (or registration updates) but, rather, to correct any factual inaccuracies in the Register of Beneficial Owners, thus maintaining the quality and reliability of its contents.
- They may be initiated by a public authority, or a person entitled under the AML Act, e.g. a bank or an auditor.
The court will publish a note on irregularity in the Register which may have a negative impact on the company by decreasing its credibility.
B. Public law consequences
- A fine of up to CZK 500,000 can be imposed for a failure to enter or update the information in the Register of Beneficial Owners following the irregularity proceedings.
C. Private law consequences
The private law consequences will occur independently of the irregularity proceedings; they are not tied to the court’s previous finding that there is an irregularity in the records.
These arise if:
- a correct person was not registered, or
- no information on the beneficial owners was registered.
Hence, these measures particularly target the unregistered beneficial owners. If the beneficial owner is registered, but some of their details are inaccurately registered or not entirely up to date, the private law consequences do not apply. However, we recommend paying attention to two different scenarios that may occur:
Example No. 4
Ms. Ela is registered in the Register of Beneficial Owners as the beneficial owner of Iota s.r.o., owning a 60% share in the company. Subsequently, Ms. Ela buys another share in Iota s.r.o., i.e. she now holds 80% of shares. If Ms. Ela does not update the information about her new share in the Register of Beneficial Owners, the private law consequences do not arise.
Although the private law measures did not apply in our Example No. 1, we strongly recommend updating any changes concerning the beneficial owner or the ownership structure in the Register of Beneficial Owners.
Example No. 5
Ms. Fay is registered in the Register of Beneficial Owners as the beneficial owner of Sigma s.r.o., owning a 90% share in the company. Mr. Gus owns a 10% share in Sigma s.r.o. Hence, he is not registered as the beneficial owner. Ms. Fay sells 20% of her share to Mr. Gus, so Mr. Gus now owns 30%. Thus, Mr. Gus should be registered in the Register of Beneficial Owners without undue delay. If he fails to do so, the private law consequences may arise.
What are the specific consequences?
1. Unenforceability of concealing contracts (e.g. command contracts)
- Rights and obligations under the contracts concealing the beneficial owner cannot be enforced.
- One purpose of such contracts is to manage a legal entity according to the instructions of a certain person who is not formally related to the structure of the legal entity and is not registered in any register. These contracts effectively incorporate a third party as a member of the corporation.
- Such contracts can also be used for legitimate purposes. However, if a position of the beneficial owner is established thereunder, this fact shall be registered without undue delay.
Example No. 6
Mr. Han formally transferred 100% of the shares of Gamma, a.s. to Mr. Ian but, at the same time, contractually obliged him to exercise all the rights of a sole shareholder according to his instructions for regular remuneration. Mr. Ian is formally registered in the public register as the only shareholder, but in reality, the rights of the shareholder are exercised indirectly by Mr. Han. If Mr. Han is not registered in the Register of Beneficial Owners, the contract between him and Mr. Ian is unenforceable.
2. Suspended distribution of dividends
The company that does not have a beneficial owner registered in the Register of Beneficial Owners is prohibited from paying out the dividends in the following situations:
Example No. 7
- Lambda s.r.o. shall not pay the dividends to the first shareholder, Mr. Joe, who has not been registered as a beneficial owner in the Register of Beneficial Owners;
- Lambda s.r.o. shall not pay the dividends to the second shareholder, Eta s.r.o., which is also owned by Mr. Joe;
- Lambda s.r.o. shall not pay the dividends to the third shareholder, Zeta s.r.o., which is owned by Ms. Kay, since Ms. Kay has also not been registered in the Register of Beneficial Owners.
3. Inability of shareholders to exercise their voting rights
Suspension of voting rights at the general meeting (inability to make decisions on the most important matters of the company, e.g. change of the Deed of Incorporation in a form of the Notarial Deed, approval of the financial statements, change of directors etc.).
Who may have the voting rights suspended?
Example No. 8 (please, refer to the diagram in Example No. 7)
- Joe, who is the first shareholder and the unregistered beneficial owner of Lambda s.r.o in our Example No. 7, will have his voting rights suspended.
- Eta s.r.o., the second shareholder of Lambda s.r.o., will have its voting rights suspended as it has also failed to register Mr. Joe as the beneficial owner.
- Zeta s.r.o., the third shareholder of Lambda s.r.o., will have its voting rights suspended as it has also failed to register its beneficial owner – Ms. Kay (although it concerns a different person than Mr. Joe).
What are the consequences if the voting rights are nevertheless exercised and decisions are adopted?
Such decisions are deemed invalid. The invalidity of these legal actions can be claimed within a subjective period of 3 months and an objective period of 1 year.
D. Other consequences
There are other consequences the companies may face in the course of their business should they fail to proceed with the registration of beneficial owners (the list is not comprehensive):
- inability to enter into certain business relations, to conclude business contracts;
- banks will not provide loans;
- bank account blocking;
- impossibility to participate in public procurement contracts;
- the company loses its credibility in general, especially if a note on irregularity has been published in the Register of Beneficial Owners.
Frequently asked questions
Which legal entities are obliged to register their beneficial owners?
The obligation to register the beneficial owners is imposed on legal entities who have their registered office in the Czech Republic. This includes all types of corporations (unlimited partnerships, limited partnerships, limited liability companies, joint stock companies, European companies) and some cooperatives. Foundations, endowed institutions, and public benefit corporations must also register their beneficial owners.
The trusts are also obliged to register beneficial owners. However, trusts do not have a status of the legal entity, and therefore, the registration obligations fall on a trustee. If the trusts have the trustee with its registered office or residence in the Czech Republic (which can be found in the public part of the Trust Fund Register), it should have, as a rule, its beneficial owner entered in the Register of Beneficial Owners.
Legal entities which are not obliged to register a beneficial owner are listed in the section “Who is a beneficial owner?”.
Does a branch of a foreign company have to submit the data of the beneficial owner?
No, it does not. A branch is not a legal arrangement within the meaning of the Act on Registration of the Beneficial Owners.
Who is the beneficial owner in the case in which a parent company is a company listed on a regulated market?
The companies listed on a regulated market are not exempt from the registration obligation. We either look for the beneficial owner (natural person) with ultimate ownership or control, or apply the alternative solution of registering the substitute beneficial owner.
What if the parent company / beneficial owner does not provide necessary cooperation?
If the parent company is from outside the EU, it is necessary for the registrant to explain the importance of the supporting documentation and, additionally, document that they have made reasonable efforts to obtain such information from the parent company / beneficial owner. If the parent company / beneficial owner does not provide the necessary cooperation, the registrant shall register top management of the parent company or top management of a company, which is one level under the parent company.
It should be noted that failure to provide the necessary cooperation, on the part of the beneficial owner / parent company / other companies within the corporate chain, can result in the court initiating the irregularity proceedings (for the reason of the irregularity on the part of the person obliged to cooperate), which in turn may affect other sanctioning mechanisms.
Will I receive any decision on the registration?
There is no decision on the registration. If the registration is successful, the registrant shall receive a full extract of the registering entity from the Register of Beneficial Owners (including non-public information) It is provided either by a notary or the court.