How to Start Doing Business in the Czech Republic as a Dutch Company:

Are you a Dutch business expanding into Central Europe? This report provides specific answers and practical guidance on the critical legal and tax risks facing Dutch companies entering the Czech Republic. As a leading Czech law firm based in Prague, European Union, our English-speaking lawyer team specializes in bridging the gap between Dutch business practices and strict Czech legal compliance.

Need advice on this topic? Contact the ARROWS law firm by email office@arws.cz or phone +420 245 007 740. Your question will be answered by "Mgr. Vojtěch Sucharda", an expert on the subject.

1. Strategic Market Entry: Choosing the Right Corporate Vehicle

Navigating the initial legal framework is crucial for a secure European market entry.

What corporate vehicle is right for your expansion?

Choosing the optimal entry vehicle is the foundational decision for foreign investors entering the Czech market. Dutch businesses frequently choose between establishing a Czech subsidiary, most commonly the Limited Liability Company (Společnost s ručením omezeným or s.r.o.), or registering a Branch Office (odštěpný závod).

Foreign individuals or legal entities are generally permitted to undertake business activities under the same conditions as Czech persons, without limitations on ownership.

The s.r.o. is the preferred vehicle, offering shareholders limited liability and relatively high management flexibility under the Business Corporations Act. The statutory minimum registered capital for an s.r.o. is legally set at just 1 CZK, presenting an extremely low financial barrier to entry. Conversely, registering an A.S. (Joint-Stock Company) requires a minimum authorized capital of 2,000,000 CZK.

The low financial threshold (1 CZK capital) is often deceptive, masking a complex administrative pathway. Foreign companies must meticulously complete multiple mandatory steps to gain legal status. These include verifying the company name, securing a registered legal address, obtaining a criminal record extract, and acquiring the trade license certificate from the Trade License Office.

Registration must then be completed in the Commercial Register (maintained by the courts). It is only upon this formal registration that the entity achieves legal status and is entitled to commence business activity in the Czech Republic.

This sequence demands precise preparation and translation of constituent documents, adherence to the specific requirements of the Business Corporations Act, which can easily frustrate clients accustomed to simpler Dutch or international online procedures. ARROWS offers preparation of legally required documentation, ensuring all steps are processed quickly and reliably. For immediate assistance, write to us at office@arws.cz.

Understanding the Branch Office (Odštěpný Závod)

Dutch companies may alternatively establish a branch office (odštěpný závod). While this vehicle is registered in the Commercial Register, it does not possess separate legal personality. Its commercial activities are immediately subject to Czech law.

Crucially, the branch is generally viewed as a Permanent Establishment (PE) for tax purposes, meaning any profits derived from its activities in the Czech Republic are subject to local Corporate Income Tax (CIT).

For foreign legal entities outside the EU/EEA, registering the branch office or part thereof is mandatory. Choosing a branch over an s.r.o. subsidiary requires careful upfront legal analysis and tax modeling. We provide detailed legal opinions to help clients determine the most advantageous operational and tax structure.

2. Navigating Cross-Border Taxation: Avoiding Permanent Establishment (PE) Risk

Understanding the Czech tax landscape, particularly regarding the concept of Permanent Establishment, is vital for managing corporate risk.

What tax risks arise from cross-border service provision?

For Dutch firms providing services or temporarily conducting operations in the Czech Republic, the concept of Permanent Establishment (PE) represents the single most significant tax hazard. Should a foreign company's activities cross the PE threshold, that Dutch entity is immediately deemed to have a taxable presence and becomes subject to Czech Corporate Income Tax (CIT) on profits attributed to the PE.

Under Czech domestic law, a PE is created by maintaining a fixed place of business or through the long-term provision of services (for more than six months in any 12 consecutive months). Furthermore, the presence of a dependent agent can also trigger PE status. Given the complexity and frequent changes in tax legislation, tax compliance is often a challenging and time-consuming matter for non-resident entities.

The Czech Republic generally asserts its taxing rights over foreign service providers through the aggressive application of the Service PE concept. The Czech Republic tends to include this clause (which stipulates that a PE is created by providing services for a substantial period, often 6 or 9 months) in many of its Double Taxation Treaties (DTTs). This policy signals a strong governmental intention to tax non-resident enterprises that maintain a continuous, substantial presence.

A Dutch consulting or engineering firm dispatching personnel to Prague for projects lasting seven to ten months risks inadvertently creating a PE, which necessitates immediate CIT registration, compliance with local filing obligations, and transfer pricing documentation for internal charges. Compounding this, Czech tax authorities generally do not issue individual, legally binding tax rulings, thereby increasing inherent tax uncertainty for foreign operations.

Proactive structuring and continuous monitoring are essential to prevent significant unanticipated tax liabilities. We offer specific country advice on the application and interpretation of domestic and treaty provisions, alongside transfer pricing assessments to quantify and mitigate future tax exposure. Get tailored legal solutions by writing to office@arws.cz.

How does the Czech-Netherlands DTT affect your payments?

Because both countries are part of the European Union and maintain a comprehensive Double Taxation Treaty (DTT), foreign investors are generally protected against being subjected to double taxation on the same income. The DTT, however, is critical because it determines how taxing rights are allocated and significantly impacts Withholding Tax (WHT) rates on cross-border payments.

In the absence of the DTT or applicable EU Directives (such as the Parent-Subsidiary Directive), dividends paid from a Czech subsidiary to a Dutch parent could face the standard 15% WHT (or a punitive 35% if the recipient lacks an EU/EEA connection and no DTT applies).

The DTT and EU regulations typically eliminate or substantially reduce this WHT, provided the Dutch parent company satisfies specific minimum ownership criteria, usually defined as holding at least 10% of the subsidiary for a minimum of 12 months. These rules are highly complex, incorporating anti-abuse provisions, meaning expert legal review of payment structures and corporate documents is mandatory before any distribution is made.

MicroFAQ – Legal tips about Tax Residency and PE

1. What is the standard corporate tax rate in the Czech Republic?

The standard Corporate Income Tax (CIT) rate currently stands at 21%. Our tax experts can provide legal consultations on tax optimization and prevention of inspections or penalties related to incorrect calculations. Need legal help? Contact us at office@arws.cz.

2. How do I register for taxes as a foreign company?

Foreign companies that establish a PE or earn Czech-sourced income are required to register for relevant taxes, including CIT and often VAT (if the statutory turnover threshold is exceeded). ARROWS provides full tax compliance services, including mandatory taxpayer registration. For immediate assistance, write to us at office@arws.cz.

3. What happens if I file a tax return late?

If a tax return is submitted more than five days after the statutory deadline, penalties are imposed daily (0.05% of the assessed tax per day). The maximum penalty is 5% of the assessed tax, capped at CZK 300,000. We ensure timely preparation and filing of documentation to eliminate costly late filing penalties. Our lawyers are ready to assist you – email us at office@arws.cz.

Risk Table 1: Tax and Registration Non-Compliance

Risks and Penalties	How ARROWS Helps
Unintentional creation of a Permanent Establishment (PE) through service provision, leading to unanticipated Corporate Income Tax (CIT) liability and back taxes.	Legal opinions and tax structuring advice to define your PE threshold clearly and avoid unintended tax registration. Want to understand your legal options? Email us at office@arws.cz.
Penalties for late tax return submission (up to 5% of assessed tax, capped at CZK 300,000) or procedural fines (up to CZK 500,000) for obstructing inspection.	Comprehensive tax compliance services, including preparation and timely filing of all required documentation. Need legal help? Contact us at office@arws.cz.
Withholding Tax (WHT) applied incorrectly on cross-border payments (dividends, royalties) due to misinterpretation of the DTT or failure to meet anti-abuse tests.	Contract drafting and review of shareholder or licensing agreements to ensure full compliance with EU Directives and the Double Taxation Treaty. Get tailored legal solutions by writing to office@arws.cz.

4. The Crucial Difference in Labour Law: Personnel and Compliance

The protective nature of the Czech Labour Code creates significant differences from Dutch employment practices that require careful management.

What are the critical differences in employment termination rules?

The Czech Labour Code establishes a highly protective framework for employees, reflecting a strong statutory stance towards safeguarding their position. This approach differs significantly from Dutch employment law concerning termination procedures.

In the Netherlands, an employer requires statutory dismissal grounds, which can include combining multiple minor issues into a permissible reason, often referred to as the 'i-ground' or cumulative dismissal grounds. Termination usually requires prior approval from the Employee Insurance Agency (UWV) or a decision from the Court.

In contrast, the Czech Republic restricts employers to terminating an employment relationship solely for one of the specific, explicitly stated reasons codified in the Labour Code. These permitted reasons include organizational changes (such as redundancy or relocation), specific health reasons, or severe employee misconduct (a gross or repeated breach of duty). Crucially, termination without cause has not been adopted under Czech law.

Because the Czech system operates on a binary basis—requiring proof of one specific, serious cause—foreign employers often underestimate the stringent burden of proof required, especially for complex or behavioral misconduct. If an employee successfully challenges their termination in a Czech court, the financial consequences are severe.

The employer is obliged to compensate the employee for loss of salary for the entire duration of the court proceedings, in addition to compensating for accrued annual leave.

Given that Czech litigation can be lengthy, this procedural non-compliance poses a substantial, but preventable, financial risk that can easily lead to hundreds of thousands of CZK in unexpected costs. ARROWS offers representation in court or before public authorities to expertly manage disputes, as well as drafting compliant employment documentation. Do not hesitate to contact our firm – office@arws.cz.

How can you avoid fines for labour law violations?

Beyond termination procedures, foreign employers must meticulously adhere to mandatory compliance obligations enforced by the State Labour Inspection Office, which has the authority to impose significant administrative fines.

The prohibition of disguised employment (known locally as the Švarc systém) represents a core risk area. This practice involves incorrectly classifying individuals as independent contractors or freelancers when, in reality, they fulfill all the criteria of a dependent employment relationship, thereby bypassing social security and tax obligations.

Violations of this prohibition, or engaging in illegal labour intermediation, can result in punitive fines up to CZK 10,000,000 (approximately €400,000) for the company.

Furthermore, strict rules govern documentation. All essential employment documents, including the employment contract itself and the written confirmation of the employment relationship, must be provided in the legally required written form (písemná forma) and executed in the Czech language.

Failure to comply with these formal requirements, even if the underlying terms are valid, can lead to fines up to CZK 500,000. We help prepare internal company policies and legally required documentation, ensuring full adherence to the Employment Act and the Labour Code.

Risk Table 2: Employment and HR Exposure

Risks and Penalties	How ARROWS Helps
Costly litigation and salary compensation for invalid employment termination due to failure to establish one of the strict statutory grounds.	Drafting robust, compliant employment contracts and internal policies that adhere strictly to Czech Labour Code rules. Our lawyers are ready to assist you – email us at office@arws.cz.
Fines up to CZK 10,000,000 (€400,000) for Disguised Employment or illegal labour intermediation.15	Legal consultations to prevent inspections or penalties, ensuring correct classification of all workers (employee vs. contractor). For immediate assistance, write to us at office@arws.cz.
Administrative fines (up to CZK 500,000) for failing to ensure mandatory employment documents are provided in the required written form and Czech language.	Preparation of legally required documentation and professional training for HR employees on documentation compliance requirements. Do not hesitate to contact our firm – office@arws.cz.

4. Corporate Governance and Liability: The Role of the Jednatel

Foreign company directors (Jednatelé) must adhere to strict Czech fiduciary duties to avoid personal financial risk.

What fiduciary duties must your Jednatel fulfill?

The director of a Czech s.r.o. is designated as the Jednatel (Managing Director). This individual acts as the company’s statutory body, responsible for both external representation and internal day-to-day management under the Business Corporations Act. The Jednatel is bound by stringent fiduciary obligations.

These core duties include the fundamental Duty of Loyalty (requiring action solely in the company’s best interest and disclosure of conflicts of interest) and the duty of Due Managerial Care. Fulfillment of the latter demands that the director acts diligently, competently, and with the necessary knowledge and prudence expected of a responsible manager.

Key operational obligations also fall to the Jednatel, including ensuring proper accounting and accurate financial records are maintained, tax returns are filed correctly, and shareholder meetings are convened at least annually. Failure to satisfactorily execute these duties can directly result in the Jednatel being exposed to personal liability for damages sustained by the company.

How does Czech director liability compare to Dutch BV standards?

Director liability is stringent in both jurisdictions but differs in application. In the Netherlands, internal director liability requires demonstrating ernstig verwijt (serious culpability) for improper performance.

In Dutch bankruptcy proceedings, the failure to timely file annual accounts or maintain proper books automatically creates a presumption of improper duties, shifting the burden of proof onto the director of the Dutch BV to disprove causation.

Czech law presents similar but potentially broader personal risk. A breach of the duty of Due Managerial Care can lead the company to pursue a personal claim for damages against the Jednatel. Should the company become insolvent due to demonstrable mismanagement, the Jednatel can be held jointly and severally liable.

Foreign companies often appoint a local Jednatel while maintaining strategic control from headquarters, for instance, in Amsterdam. A Dutch director accepting this role cannot rely on remote delegation alone. Czech courts emphasize that the director must exercise active, informed care in relation to the local subsidiary.

If the Jednatel delegates critical functions like accounting or compliance without adequate oversight, particularly given the frequency of legislative changes in the Czech Republic, they risk breaching the duty of Due Managerial Care. This puts the individual director at significant personal financial risk if mismanagement leads to insolvency. ARROWS provides regular legal opinions and compliance checks tailored to the Jednatel role, mitigating this specific personal risk exposure.

MicroFAQ – Legal tips about Jednatel Liability

1. Can a foreign resident be a Jednatel?

Yes, foreigners can fully own and manage an s.r.o.. However, in cases where a trade license requires a Responsible Person (odpovědný zástupce), that individual might need a long-term residence permit and proven knowledge of Czech. Our lawyers offer legal consultations regarding the appointment of statutory bodies and compliance. Need legal help? Contact us at office@arws.cz.

2. What happens if there is a conflict of interest for the Jednatel?

The Jednatel must disclose any conflicts of interest and refrain from seizing business opportunities for personal gain, adhering strictly to the Duty of Loyalty. We help draft and review internal company policies and corporate governance documents to define conflicts of interest and protocol clearly. Get tailored legal solutions by writing to office@arws.cz.

Risk Table 3: Governance and Commercial Risk

Risks and Penalties	How ARROWS Helps
Personal liability exposure for the Jednatel for breaching the duty of due managerial care, especially concerning financial record-keeping or insolvency.	Legal consultations and legal opinions on directors' fiduciary duties, designing mitigation strategies for personal risk exposure. Get tailored legal solutions by writing to office@arws.cz.
Delays, modifications, or outright restrictions on key mergers or acquisitions if the foreign investment falls under mandatory screening by the Czech FDI Act.	Legal analysis, pre-transaction screening consultations, and representation in regulatory approval processes with the Ministry of Industry and Trade. Need legal help? Contact us at office@arws.cz.
Inadvertent contractual nullity due to neglecting the mandatory písemná forma (written form) for critical contracts, invalidating exclusivity or penalty rights.	Contract drafting or review services to ensure formal validity and compliance with the Czech Civil and Business Corporations Act. Our lawyers are ready to assist you – email us at office@arws.cz.

5. Contracts and Disputes: Protecting Your Commercial Interests

Protecting your commercial position requires anticipating the formal requirements and procedural differences in Czech contract and litigation law.

What do you need to comply with regarding contract formalities?

Dutch commercial law often operates on the principle of freedom of contract form, meaning verbal agreements or informal exchanges are often legally sufficient if intent is clear.³⁷ Relying on this assumption of flexibility is a frequent and substantial pitfall for foreign companies operating in the Czech Republic.

Czech law mandates a strict písemná forma (written form) for several critical categories of agreements. For example, the Commercial Agency Agreement (an agreement central to international trade relationships) is void ab initio (legally invalid from the start) if it is not executed in writing, as stipulated by Section 2483 of the Czech Civil Code.

If the mandatory written form is neglected, the Dutch company loses all legal recourse to enforce key provisions like exclusivity, confidentiality, or performance against the Czech agent, resulting in severe and preventable financial losses. This strict insistence on precision and formal requirements reflects a Czech legal and business culture that is practical and often mistrusts vague or overly general arrangements.

Furthermore, foreign clients often accept overly punitive or one-sided penalty clauses, assuming that Czech courts will automatically reduce them later if they are "unreasonably high".

While Czech courts do have the discretion to mitigate excessive penalties, relying on post-breach litigation to adjust punitive terms means forfeiting crucial negotiation leverage and incurring expensive legal costs. Proactive, expert contract drafting is essential to negotiate fair, balanced, and fully enforceable penalty regimes from the initial stage, protecting commercial stability.

How can you mitigate litigation risks in the Czech Republic?

Should commercial conflicts arise, foreign enterprises must be aware of Czech procedural rules. Disputes pertaining to rights in immovable property (real estate) located in the CR, or conflicts concerning the validity or dissolution of a company registered in the Czech Republic, are subject to the exclusive jurisdiction of Czech courts.

For resolving business-to-business disagreements, arbitration is a prevalent and sophisticated alternative dispute resolution (ADR) mechanism in the Czech Republic. A major advantage of institutional arbitration is that the procedure generally takes significantly less time than conventional court proceedings.

Finally, for Dutch companies planning significant market entry via corporate transformation, mergers, or acquisitions, compliance with the Foreign Investment Screening Act (FDI Act) is mandatory.

Although Dutch firms are within the EU/EEA, transactions are subject to screening if a foreign investor meets specific criteria, such as gaining 10% or more of the voting rights or securing the right to appoint a member to the corporate body. This necessitates careful pre-transaction legal analysis and representation.

6. What’s the Next Step? Partnering with ARROWS

For Dutch businesses, achieving long-term success in the Czech Republic requires a dedicated legal strategy that anticipates and manages the contrasts between the Dutch, common-law influenced business culture and the strict Central European civil law tradition. ARROWS law firm is a leading international law firm operating from Prague, European Union, specializing in exactly this complex cross-border environment.

Our decade-long dedication to building the ARROWS International network allows us to deliver cohesive, locally informed advice across over 90 countries. This capability ensures that your Czech operational compliance is always aligned with your broader strategic goals and Dutch headquarters requirements.

We provide comprehensive corporate support, regularly assisting over 150 joint-stock companies and 250 limited liability companies, demonstrating deep expertise in the Business Corporations Act and corporate compliance. We champion innovative business ideas and provide reliable legal service defined by speed and high quality.

Actionable Legal Services ARROWS Provides:

We offer a full spectrum of preventative legal services designed to minimize financial risk and ensure robust operational compliance:

• Corporate & Tax: Legal analysis to prevent unintentional Permanent Establishment (PE) creation, complex CIT and VAT compliance, and drafting legal opinions on the optimal corporate structure.
• Employment: Preparation of legally required documentation, professional training for management on the Labour Code, and representation against administrative fines imposed by labour inspection authorities.
• Contracts: Expert contract drafting and review, focusing on mandatory písemná forma compliance and protecting clients from punitive, one-sided penalty clauses.
• Governance: Ongoing legal consultations and legal opinions for Jednatelé (managing directors) on fulfilling the duty of Due Managerial Care and mitigating personal liability exposure.

We also facilitate synergistic growth by connecting clients with each other in case of mutual business or investment interests. Do not allow differences in local jurisdiction to compromise your investment or growth trajectory.

Take the next step toward secure expansion: Get tailored legal solutions by writing to office@arws.cz.

VII. FAQ – Most common legal questions about Doing Business in the Czech Republic

1. Is it easy for foreigners to own real estate in the Czech Republic?

Foreign legal entities are generally permitted to acquire and hold real estate under the same conditions as Czech companies. However, specific legal counsel is vital, as any disputes concerning rights in immovable property are under exclusive Czech jurisdiction. For immediate assistance with real estate transactions, write to us at office@arws.cz.

2. Are there specific requirements for opening a bank account for my new Czech company?

Yes, establishing a corporate bank account is a necessary procedural step that must be completed after the company’s incorporation but prior to its full registration in the Commercial Register. We assist clients in navigating the administrative steps required for successful account opening. Our lawyers are ready to assist you – email us at office@arws.cz.

3. What is the deadline for filing a VAT return in the Czech Republic?

A Czech VAT payer is generally obligated to submit the VAT return within 25 days following the end of the tax period. Note that non-Czech entities are restricted to filing VAT quarterly, as the monthly period is not permitted. We handle VAT return preparation and review to ensure timely compliance. Need legal help? Contact us at office@arws.cz.

4. Can my foreign employees work in the Czech Republic without restrictions?

While EU/EEA citizens enjoy largely unrestricted movement and work rights, non-EU nationals hired by your Czech entity require specific long-term residence and work permits, governed by the Act on Residence of Foreign Citizens. We can provide legal opinions on employment contracts for foreign citizens and manage the permit application process. Do not hesitate to contact our firm – office@arws.cz.

5. How are business disputes usually resolved in the Czech Republic?

Commercial disputes are resolved either through official civil court proceedings or, increasingly for business-to-business matters, through domestic or international arbitration. Arbitration is often preferred as it typically offers a faster resolution than ordinary court proceedings. We offer both robust representation in court and expertise in international arbitration. Get tailored legal solutions by writing to office@arws.cz.

Don't want to deal with this problem yourself? More than 2,000 clients trust us, and we have been named Law Firm of the Year 2024. Take a look HERE at our references.