THE ACT ON THE REGISTER OF BENEFICIAL OWNERS – SANCTIONS FOR BREACH OF OBLIGATIONS

In the last article we covered the main changes that the Act on the Register of Beneficial Owners brings. In this article we will provide you with information on the sanctions implemented by this Act and inform you by when it is necessary to ensure the registration in the Register of Beneficial Owners.

Until now, the legislation has not stated any sanctions for failure to comply with the obligation to register a beneficial owner. Thus, neither companies nor beneficial owners risked any sanction if they did not register the beneficial owner.

The new Act on the Register of Beneficial Owners introduces sanctions for breach of the obligations set out in this Act. Not only individuals who should have been registered as beneficial owners, but also legal entities who will fail to have a registered beneficial owner can be penalized.

What if there is a discrepancy in the Register of Beneficial Owners?

The Act implements a new court proceedings on discrepancy in the Register of Beneficial Owner. In case that a court finds out that there is a discrepancy in the Register of Beneficial Owners (upon notification or on its own initiative), the relevant legal entity will be appealed to remedy the discrepancy or to rebut it within a specified period of time. If the company does not remedy the discrepancy, the court will initiate the proceedings on discrepancy in the Register of Beneficial Owners. The court shall issue an order initiating the proceedings and enter a note on the discrepancy in the Register of Beneficial Owners.

What sanctions are implemented by the Act?

Unenforceability of contracts

This is a brand-new sanction in Czech law. In the context of the Act, the unenforceability of contracts means that contracts that in any way obscure the beneficial owner of a legal entity will not be enforceable. Therefore, the contract will not be enforceable in court as from the court’s point of view it will only be in the nature of a promise. In practice, it is mainly mandate and commission contracts that will be affected.

Prohibition on payment of profit shares

This sanction shall be applied if a beneficial owner, registrant or legal entity, who does not have a registered beneficial owner, does not enter his beneficial owner in the Register.

In case that the general meeting of a company decides to pay out profit shares and the absence of the inscription in the Register of Beneficial Owners is found out at the same time, the profit shares cannot be paid out.

Suspension of voting rights

The sanction of suspension of voting rights means that a beneficial owner of a legal entity which has not registered his beneficial owner in the Register will be banned from voting. This ban applies to unregistered beneficial owner and to a legal entity that has no beneficial owner registered in the Register. If the right to vote is exercised despite the ban, the decision taken may be declared invalid.

Fine

The registering legal entity and the beneficial owner may be fined up to CZK 500.000 if they provide incorrect data in the Register or fail to provide the necessary cooperation.

By when it is necessary to register the beneficial owner?

There are two different deadlines for registering beneficial owners.

If a legal entity has fulfilled the obligation to register its beneficial owner under the current legislation, the inscription in the Register of Beneficial Owners must be adapted to the Act by 1 December 2021.

If the legal entity has not yet registered its beneficial owner so far, or  has done so belatedly, it is obliged to register its beneficial owner promptly after the Act becomes effective, or more precisely by 15 June 2021.

Summary and recommendations

The sanctions introduced by the Act on the Register of Beneficial Owners may significantly affect a company´s operations. If a company fails to register its beneficial owner in the Register of Beneficial Owners, the company’s operations may be paralyzed. Do not hesitate to contact us, we will be happy to help you with the registration of beneficial owners.

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