Editorial: The actual beneficial owner?
Last July, I chose the topic of beneficial ownership registration for my editorial and conceived it as an expression of support for corporate lawyers in their struggle to identify the beneficial owner within the branching corporate structures of their companies. If I return now to the topic of this still relatively new registration obligation, I risk giving readers the impression that with the passing years, I’m coming to show a tell-tale sign of aging, i.e. the inability to give up an idea.
So, in my defence, I’d like to start by explaining that I’m returning to the subject of beneficial ownership registration after almost a year for two good reasons. The first is that even after almost 12 months of the new law coming into effect, this topic still resonates strongly among our clients, raising a lot of questions. At least once a week, we find ourselves explaining, especially to our numerous foreign clients, how the Czech legislator actually meant the definition of beneficial owner and whether it’s really necessary to provide copies of several personal ID cards of the highest owner for registration purposes, or whether Jeff Bezos should really have his address registered in the Czech register of beneficial owners. The second reason is the planned amendment to the Act on the Registration of Beneficial Owners, in which the Czech legislator plans to respond to the European Commission’s criticism of poor European AML Directive implementation.
In the case of large international groups, with our clients we most often deal with the registration of a so-called substitute beneficial owner, i.e. a situation where a specific natural person at the top of the corporate pyramid who would meet the definition of a beneficial owner under Czech regulations cannot be identified, i.e. was either the final beneficiary of profits generated by the group or directly or indirectly controlled the group. As we said last July, a significant change brought about by the new Czech Act on the Registration of Beneficial Owners in the case of a substitute owner was that the substitute beneficial owner of a Czech company can no longer be considered its statutory body. Under the new definition of a substitute UBO (ultimate beneficial owner), members of the statutory body of a legal entity that is the highest ranking entity in the group pyramid should be registered in the Czech register.
This change has raised and continues to raise a lot of practical questions from clients. Should all members of the “board” controlling US joint-stock companies, but who have no idea about the functioning of their Czech LLC, be registered as substitute beneficial owners of the Czech LLC? Or would the definition of indirect control be better suited to the registration of only one specific director (even in a B-1 position) who also oversees the activities of the Czech subsidiary? If there is indeed a “Director for Europe” who can exercise influence over a Czech company through a chain of controlling companies, then the definition of a substitute UBO is met. What is important, of course, is the actual performance of, or the real possibility of exercising, actual influence; it should not be an artificial selection of a single member of the board of the parent company who was persuaded by colleagues to be entered in a special register somewhere in the Czech Republic.
From these few practical observations, it’s clear the current Czech regulation of the registration of beneficial owners is far from perfect. The European Commission has also noticed this, criticizing the Czech legislator in its comments, in particular for defining beneficial owner too broadly. There’s some truth in this remark, especially if we remember that the Czech regulation actually distinguishes two independent characteristics of the beneficial owner. The beneficial owner may be recorded as either the ultimate recipient of a property benefit from the group (e.g. profit or liquidation surplus) or an individual exercising, directly or indirectly, decisive influence over a group of companies.
According to the explanatory memorandum, the forthcoming amendment to the Act on the Registration of Beneficial Owners responds to the comments of the European Commission and one of its objectives should be to narrow or refine the content of the definition of a beneficial owner. The amendment thus deletes the aforementioned categories of “final recipient of benefit” and “person with ultimate influence” and will now examine whether the individual meets any of the criteria defining a beneficial owner. If the answer is yes, the basis for the registration will be given and it will therefore be unnecessary to distinguish whether a beneficial or an influential UBO is being registered.
However, the amendment also modifies the shareholding thresholds for the assessment of indirect control, which effectively expands the number of persons who can be considered beneficial owners and thus compulsorily registered in the Czech register of beneficial owners. Under the amendment, in order to meet the definition of a UBO, it is sufficient for an individual to control a corporation that has a shareholding in the registrant in excess of 25%, and there is no need to further examine whether such a shareholding actually enables the exercise of decisive influence, as is the case under current law. Therefore, if the amendment were passed as currently worded, many business groups would realistically be at risk of having to register additional persons who originally failed the indirect influence test.
The amendment is currently being widely commented on and we can therefore expect the legal text to be subject to further changes during the legislative process. However, if the proposed amended definition of beneficial owner were to remain in the amendment, it would be necessary to review the group structure and possibly add additional persons to the register who would meet the newly defined concept of beneficial owner in order for companies to avoid the risk of sanctions (e.g. a ban on voting at the general meeting or a ban on dividend payments). In conclusion, I regret to say that in the Czech legal environment, we still can't be sure if someone is an actual beneficial owner.
