Watch your step! Transparency register

The transparency register was created in Germany in 2017, when the law on identifying the profits of criminal activities came into force (Money Laundering Act – GWG) in Germany. Since then, companies, partnerships and foundations have been required to identify their “beneficial owners” to the transparency register.

Beneficial owners

A  beneficial owner is a natural person who directly or indirectly holds more than 25 percent by value of the shares in a company, or who controls more than 25 percent of the voting rights. This can also apply to trustors or silent partners. There is no requirement to notify the register if this information is already available in public records, such as a trade register. In the case of companies where no natural person exceeds this 25 percent threshold, the legal representative, such as the Managing Director or the chairman of the board are regarded as the "fictitious beneficial owner". There is no simple answer to the question of whether there is a duty of notification and exactly what information needs to be communicated to the transparency register. However, the following example should serve to clarify the reporting obligations:

X is a beneficial owner of B and A. Due to its 70% stake in B, and consequently its possibility to exercise control over B, B’s holding in A is also attributed to X. Any holding above 50 percent implies the possibility to exercise control. Both A and B therefore need to provide information about beneficial owner X to the transparency register, if this is not already available from public records. Whether or not X is resident abroad is irrelevant to the duty of notification.

Y is also a beneficial owner of B, but not of A. The direct 70-percent holding of B in A exceeds the threshold of more than 25 percent, but because its stake in B is only 30%, Y has no possibility to exercise control over A and so no trigger to add in the indirect holding.

Z is a beneficial owner of A and needs to be notified to the transparency register because of his 30% stake. This notification requirement would disappear if, for example, A were a private limited company (GmbH), and Z were registered in the list of shareholders held on the public trade register. If, on the other hand, A were a Gmbh & Co. KG (company controlled by a registered partnership) and if Z were registered as the limited partner with 30 percent of the liability in the trade register, then the requirement to notify the transparency register would still apply. It should be noted, that in the case of limited partnerships, the beneficial owner is visible from the trade register only in exceptional cases. The declaration of liability through the capital structure is not sufficient for this on its own.

New tighter rules at the beginning of 2020

At the beginning of 2020, the transparency rules were redrafted and tightened up even more. Important innovations include:

• The transparency register is now entitled to review the information provided and to request, for example, copies of shareholder agreements and trust agreements.
• "All members of the public" have access to the information in the transparency register - worldwide and without having to prove an interest.
• The "reporting parties" under GWG law, which include notaries and lawyers, are required in every case to compare the information they have about their clients with that held on the transparency register and report any discrepancies to the transparency register.

Stricter regulations in the real estate sector 

Another more stringent requirement since the start of 2020 lies in the fact that notaries must, before recording the purchase of a property, verify the identity of the beneficial owners, if necessary for both parties, using written documentation to confirm the correctness of the ownership and control structure, and must refuse to notarise the transaction if they are unable to successfully validate them.

In addition, companies whose headquarters are abroad must also notify the identity of the beneficial owner, "if they commit to acquiring a property in Germany". Furthermore, under a newly introduced notarisation ban a German notary may not complete a real estate transaction unless the foreign company can provide proof of an entry in a transparency register. This further ban on notarisation only covers asset deals concluded after 1 January 2020 involving the purchase of real estate by a foreign company. The sale of real estate by a foreign company, for example, or the acquisition of shares in a company whose assets include land, are not covered. 

Conclusion

Companies should immediately check whether they are compliant with all their duties of notification relating to the transparency register.

In the event of violations of their legal duty of notification, they risk high fines of up to 1 million Euro, and reputational damage, as the decision on fines will be published on the Internet. In addition, the notarisation of a planned real estate transaction may fail or be delayed because the notary involved refuses to authenticate the documentation due to a notarisation ban under the GWG.