Report on relationships – or is your company fulfilling this recurring obligation?

We would like to use this edition of News to remind you of an obligation that the law imposes on most companies. This is the obligation of the statutory body to prepare a written report on relationships.

Such a report should describe the relationships between the given company (controlled entity) and its controlling entity, as well as the relationships with other connected entities (companies) that form part of the same business group.

This obligation is often neglected for various reasons, even though in principle the law does not allow for any exceptions for controlled entities from the obligation to prepare and publish the report on relationships.

Purpose of the report on relationships

The report on relationships ensures that relationships within business groups are transparent. Its purpose is to provide information to shareholders outside the business group, to creditors and, consequently, to the general public about contracts and transactions between related entities and about any measures taken at their instigation or in their interest. At the same time, the report aims to reveal whether any harm has been caused to the company by this.

Content of the report on relationships

The report must be sufficiently specific and clear. It should have informative (descriptive) and analytical sections. The information section should include:

• a description of the structure of the relationships in the business group, while here it is usually appropriate to attach an organigram (diagram) of the group;
• a description of the role of the controlled entity in the relationship structure, which is typically unique to each company;
• the method and means of control, which depend on the settings within the group;
• an overview of actions taken at the instigation or in the interest of entities within the relationship structure, the value of which exceeds the limit set by law, while the term ‘action’ is relatively broad in this context;
• a summary of contracts (e.g. loans, lease agreements, supplier relationships) with entities in the relationship structure.

The analytical section should then include an assessment of the advantages and disadvantages of the incorporation of the company in the business group, and what risks arise from it. It also includes an assessment of potential harm and its compensation.

Deadline for preparation and filing in the collection of documents

The report is prepared by the statutory body annually for the past accounting period within three months of its conclusion. Shareholders have the right to access the report in the same way as the financial statements. The report on relationships is published in the collection of documents of the Commercial Register along with the financial statements, or as part of the annual report.

In typical cases, where the accounting period coincides with the calendar year, the report on relationships must be prepared by 31 March of the following year. It should subsequently be stored in the collection of documents within 30 days of the approval of the financial statements (but no later than 31 December).

If, for any reason, the report for 2024 has not been prepared or published, it is highly recommended to correct this at least by the end of this calendar year.

Review of the report on relationships

The report is subject to review by the supervisory board or other control bodies of the company, if established. Such a review is not required in certain cases (e.g. if the company has a single shareholder who is the controlling entity).

If a company produces an annual report, the report on relationships must be part of it and is therefore subject to verification by an auditor.

Qualified shareholders (e.g. in a limited liability company, shareholders with at least a 10% interest) may propose to a court that it appoint an expert for the purpose of reviewing the report. The law thus gives shareholders the opportunity to gain an independent review of the report on relationships.

Practical tip

We recommend that the statutory bodies continuously maintain a list of contracts, negotiations, or transactions conducted with related entities, at their instigation or in their interest, throughout the year. This will make the preparation of the report significantly easier and faster, and eliminate the risk of any contract or negotiation being overlooked in the report.

The necessity to prepare a report on relationships may be perceived in practice as merely an administrative obligation. However, the law sets strict requirements for its content and also consequences for not preparing it.

We are of course ready to provide the statutory bodies with all legal and accounting support for the fulfilment of this regularly recurring obligation.

With friendly regards,

Team WTS Alfery, Alfery Hrdina Advokáti