Changes in ultimate beneficial owners recording legislation – a modified definition of the ultimate owner and broader reporting duties

On 1 October 2022, an amendment to Act No. 37/2021 Coll., on keeping record of ultimate beneficial owners (the "UBO Act"), ¹ came into force which, in order to ensure compliance with the pertinent European Directive,² introduces a number of changes to the previous rules, in particular as regards the very definition of the ultimate beneficial owner, as well as the scope of exemptions from the general record-keeping duty.

Thus, certain natural persons may newly qualify as ultimate beneficial owners even if the UBO Act had not assigned this role to them prior to the amendment, due to the fact that – upon the fulfillment of certain formal criteria – certain persons are automatically considered ultimate beneficial owners under the amendment, irrespective of whether they have the actual power to control the given legal entity or derive material benefits from it.

Although most of the required changes will find their way into the record by themselves via automated transcripts, obliged entities must ensure that the official entry on their ultimate beneficial owner complies with the demands of the amended UBO Act, and must do so within six months of the date on which the amendment entered into force (or, in the case of entities newly affected by the record-keeping duty and in the case of entities who were previously in default with their existing record-keeping duty, without undue delay).

In what follows, we summarize selected key changes that have been introduced by the amendment:

A changed definition of the ultimate beneficial owner

The amendment does away with the two-tier determination of ultimate beneficial owners that relied on the concepts of "person with ultimate control" and "ultimate beneficiary" and at the same time significantly expands the range of natural persons with the status of ultimate beneficial owner by introducing a uniform definition of the ultimate beneficial owner which newly is understood to be "any natural person who ultimately ("in the last consequence") owns or controls a legal person or other legal arrangement", whereas these facts are in turn determined straightforwardly by the fulfillment of formal criteria. In Section 4, the amendment defines what it means for someone to ultimately own or control an entity. This is someone who, directly or indirectly:

• a: holds an equity share or a voting share in a corporation of more than 25% (whereas such a person would formerly have been designated as a person with ultimate control before the amendment, though passing the aforementioned threshold now automatically confers the status of UBO without any further criteria); 
• b: is entitled to a share in the profits, other equity funds, or liquidation balance of more than 25% (i.e., the former ultimate beneficiary, in the pre-amendment terminology);
• c: exercises decisive influence in the corporation (or in corporations which jointly or individually have a share of more than 25% in a given corporation) (whereas this represents a fundamental broadening of the concept of the actual – as opposed to formal – ultimate beneficial owner, in the sense that the factual ultimate beneficial owner, post-amendment, is also anyone who, even while exercising no decisive influence in the record-keeping person, has decisive influence over a shareholder of the record-keeping person with an equity share of more than 25%); or 
• d: exercises decisive influence in the corporation by other means (e.g. through a shareholders’ agreement or a veto right, in particular with respect to cash flow, the allocation of profit, or the composition of corporate bodies).

Section 4 goes on to newly provide a special interpretation of what it means to "exercise decisive influence", which is required to determine the ultimate beneficial owner pursuant to subsections c) and d) above, as regards:

• commercial companies and partnerships => the term covers persons who are in a position to successfully align the decision-making practice of the supreme body of such entities with their own will, as well as persons who have the authority to appoint or recall a majority of the members of the executive body, but also persons who are the controlling persons within the meaning of the Corporations Act;
• other corporations; housing or social (charitable) cooperatives; SICAV investment vehicles => decisive influence is exercised by persons who are a member of the executive body, or a person of comparable status, or a person who represents them in the executive body.

If the statutory definition is fulfilled, the ultimate beneficial owners determined thereby will automatically be entered in the UBO records (by way of a one-time relabeling of the existing entries). Where references to a "person with ultimate control" or "ultimate beneficiary" were made in pre-defined form fields, the system will remove them automatically. However, if these terms were used in full-text descriptions of a given corporate structure, the record-keeping entity will have to update these descriptions manually.

Fewer exemptions from the UBO record-keeping duty

District and regional vocational and industry associations ("chambers"), political parties and movements, churches and religious communities, trade union organizations and employers’ organizations, apartment unit HOAs, and hunting clubs will all newly have to report information on their ultimate beneficial owners. For most of them, this will be a matter of automated data transcripts (in that the system will assume that the ultimate beneficial owner in their case is the registered member of the executive body, or a natural person of comparable status or, as the case may be, the natural person authorized to act on behalf of a legal entity who is member of the executive body).

Automated data transcripts

For certain types of entities, the amendment refines the criteria for the automated transcript process whereby existing data is taken from public registers and duplicated in the UBO record. To some extent, this had been provided for by the pre-amendment UBO Act, but in practice, the process, known as "carbon copy process" (průpis), did not always work as intended. 

Limited liability companies – By default, the automated system will register any natural person who has been registered (a) as part of the entry in the Commercial Register, as shareholder holding a share greater than 25%, or (b) as the ultimate beneficial owner of a publicly registered corporation which holds a share of more than 25% in the limited liability company in question, if the following conditions (as regards (b)) are also met:

• a: a share of 40% or more in companies on another level within the multi-layer corporate structure (subsidiaries), unless someone else has a share of the same or bigger size, 
• b: an indirect share in a limited liability company, joint-stock company, or general partnership of more than 25%, or 
• c: a share of 40% or more in a limited liability company, joint-stock company, or general partnership and in linked subsidiaries, unless someone else has a share of the same or bigger size, in the case of an ultimate beneficial owner identified pursuant to Section 5 (i.e., as a substitute UBO);

Joint-stock companies – By default, the automated system will register any natural person who has been registered (a) as part of the entry in the Commercial Register, as sole shareholder, or (b) as the ultimate beneficial owner of a publicly registered corporation which is the sole shareholder of the joint-stock company in question (again subject to the fulfillment of additional conditions, see above).

The amendment also introduces a mechanism whereby the automatic transcript is triggered as at the dates on which a given company is entered for the first time into, or deleted from, a public register or register of persons; it further envisions that entities which are not covered by the automatic transcript functionality but wish to benefit from it may sign up for it. 

Other changes introduced by the amendment

Broader range of entities with remote access to the UBO records

Remote access to both current and historical (deleted) data in the UBO records will newly be available e.g. to grantors of subsidies (who thus no longer need the applicant’s cooperation: they may simply procure an extract from the UBO records themselves).

Extended grace period during which voting rights are not suspended – from 15 to 30 days

Ultimate beneficial owners who are not duly registered will see their voting rights at the company suspended, but not if a relevant vote of the supreme body of the company or decision by the sole shareholder is to be taken shortly after they attained UBO status. This grace period during which voting rights will not be suspended has been extended from 15 days to 30 days.

Introduction of an exemption whereby failure to duly enter a substitute UBO in the records does not result in a ban on payouts of benefits or in suspension of voting rights

The amendment remedies one uncertainty of interpretation in the pre-amendment UBO Act surrounding situations in which the identification, and entry in the UBO records, of the substitute UBO (i.e., pursuant to Section 5, someone who is part of the top management of the corporation, if the actual ultimate beneficial owner cannot be determined) was not entirely proper. In this respect, the amendment confirms that the ban on payouts and the suspension of voting rights do not apply to an incorrect identification and entry of the substitute UBO, as long as some (substitute) UBO is on the records. In practice, this typically concerns situations in which the substitute UBOs are individuals who participate in the top management of a corporation in another country and who categorically refuse to be registered in a public register in the Czech Republic, or situations in which the composition of the top management is potentially highly volatile and the Czech entity that is obliged to keep records has only limited leverage to ensure that it keeps track of the changes and will be able to properly reflect them in its UBO reporting.

Introduction of a substantive test to determine whether certain subjects may be exempt from the UBO record-keeping duty

Certain legal entities (public-law subjects) are exempt from the duty to keep UBO records; they are identified by applying a substantive test which is inspired by the definition of the contracting authority pursuant to the Public Procurement Act. 

Finally, we note that motions filed between 1 October and 31 October 2022 will only be processed in November 2022, as the system is being taken offline for all of October in order to update existing entries and add new features. 

The above summary should be understood as a brief descriptive overview of the amendment to the UBO Act and the related obligations. If you have questions concerning the practical aspects of the new legislation, please do not hesitate to reach out to Ivo Janda or Jan Jakoubek.

^{1 Act No. 245/2022 Coll. 
2 The amendment was enacted in response to criticism by the European Commission which had found fault with the previous wording of the UBO Act, supposedly being in conflict with the 5th AML Directive, and made the further appropriation of European funds under the National Recovery Plan conditional upon the passage of such amendment.}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

_{© 2022 White & Case LLP}