Navigating the legal landscape of the Czech Republic requires a firm grasp of local Civil and Labour Codes, which often differ significantly from Western standards. Whether you are managing Czech suppliers or hiring local staff, understanding the risks of "švarcsystém" and strict managerial liability is essential. This guide provides concrete answers to help your foreign parent company remain compliant and commercially secure. We help international companies on day to day basis.

Quick summary for managers

• Structure Matters: Choosing a branch office over a subsidiary exposes the parent company to unlimited liability for all Czech debts and legal penalties.

• Employment Risks: Using B2B contractors for regular work roles (švarcsystém) can result in fines up to CZK 10 million and retroactive tax payments.

• Contractual Traps: Negotiations in bad faith or terminating advanced talks without just cause can lead to pre-contractual liability and damage claims.

• Managerial Duty: Managing directors (jednatelé) face personal liability for the company's losses if they fail to act with due managerial care.

How should a foreign parent company structure its Czech presence?

The decision between establishing a branch office (organizační složka) or a subsidiary (s.r.o.) is the most critical first step for any foreign investor. While a branch might appear simpler from an administrative perspective, it is merely an extension of the parent company and lacks separate legal personality. This means that the foreign parent remains fully and directly liable for every obligation, lawsuit, or fine incurred on Czech soil.

A subsidiary, typically a limited liability company (společnost s ručením omezeným), provides a vital liability shield. In this structure, the parent company's risk is generally limited to its capital contribution. Lawyers at ARROWS law firm handle this agenda routinely and can guide you through the incorporation process to ensure your global assets are protected from local operational risks. Our Corporate & Holding services in the Czech Republic team provides end-to-end support for setting up your business structure.

One common pitfall for foreign managers is the "one-koruna" company. Under Czech law, an s.r.o. can be established with a minimum share capital of just CZK 1. While legally valid, this is often a commercial mistake. Czech banks, landlords, and suppliers view such entities as unstable, which can prevent you from securing necessary credit or leases.

Is there a risk of foreign investment screening?

The Czech Republic has implemented a screening mechanism for foreign direct investment (FDI) under Act No. 34/2021 Coll. This act introduces mandatory screening for investments from non-EU countries in sensitive sectors. These sectors include military equipment, critical infrastructure like energy or transport, and certain media outlets.

Even for investments outside these high-risk sectors, the Ministry of Industry and Trade has the power to review transactions retrospectively for up to five years. To mitigate this, many investors opt for a voluntary consultation to obtain legal certainty before closing a deal. Failing to submit a mandatory application can result in fines of up to 1% of total turnover.

What are the immediate post-incorporation tasks?

Once a Czech entity is registered in the Commercial Register, several compliance tasks must be addressed promptly. Every legal entity must register its Ultimate Beneficial Owner (UBO) in the specialized Register of Beneficial Owners. Failure to do so can lead to financial penalties and may prevent the distribution of dividends. You can find a complete compliance checklist in our article on holding structures and beneficial ownership in the Czech Republic.

Additionally, the company must register with the Czech Tax Authority for corporate income tax (CIT) and set up a bank account. For ongoing compliance, ARROWS offers professional Tax consultancy to navigate local fiscal obligations. While a bank account is not a formal legal requirement for the registration itself, it is a practical necessity for paying suppliers and fulfilling payroll obligations. Banks will typically require an extract from the Commercial Register and proof of beneficial ownership.

What are the legal requirements for Czech supplier contracts?

Contracts with Czech suppliers are governed by the Civil Code and, in cross-border situations, by the EU Rome I Regulation. This regulation allows parties to choose the law that will govern their contract. In the absence of a choice, the law of the country where the supplier or service provider has their habitual residence typically applies. Our experts have also detailed how Irish companies should handle commercial contracts with Czech partners to avoid common cross-border mistakes.

Czech law places a heavy emphasis on "good morals" (dobré mravy). This is a broad legal concept that allows courts to invalidate contractual clauses—or entire agreements—if they are fundamentally unfair. For a foreign company, this means that even if a contract is signed, its terms must remain within the bounds of local ethical and legal standards.

Another unique aspect is the mandatory "Data Box" (datová schránka) system. Every Czech legal entity is assigned this secure electronic mailbox for official communication. Under the "fiction of delivery," a document is considered legally delivered 10 days after it reaches the box, regardless of whether it was opened. Missing a court summons or tax notice through this system can lead to default judgments.

Understanding Pre-contractual Liability (Culpa in Contrahendo)

The Czech Civil Code includes strict rules regarding how negotiations must be conducted. Under Section 1728, parties are expected to negotiate with a genuine intention to conclude a contract. If a company engages in talks without a real intent to finish the deal, it can be held liable for the other party's losses.

Furthermore, if negotiations reach a stage where the conclusion of a contract seems highly probable, terminating them without a "just cause" is considered bad faith. The injured party may then claim compensation for costs incurred during the process, though not necessarily for lost profits from the unclosed deal. Real-life is more complex, and it is safer to entrust these negotiations to professionals who understand local case law.

How do Czech courts handle contractual penalties?

Czech law allows for substantial contractual penalties for breaches such as payment delays or missed deadlines. These penalties are due regardless of whether the creditor suffered any actual damage. However, if a penalty is drafted without regard to Czech case law, it may be declared unenforceable or judicially reduced.

It is common for Czech partners to include clauses that impose daily penalties for simple delays. To protect your interests, it is crucial to ensure that such clauses are balanced and proportional. Lawyers at ARROWS law firm routinely handle the review of contracts and internal policies to prevent such imbalances from affecting your business operations.

Practical Q&A: Managing Supplier Disputes

1. Can we choose a foreign law for a contract with a Czech supplier? Yes, under the Rome I Regulation, parties have the freedom to choose the governing law. However, mandatory overriding provisions of Czech law may still apply to certain sectors like franchising or agency agreements.
2. What happens if we don't have a written contract? Under the Czech Civil Code, many business contracts must be executed in writing to be valid. Relying on a handshake or email chain can leave you without an enforceable agreement, making litigation difficult or impossible.
3. Is arbitration a viable option for supplier disputes? For international B2B relationships, arbitration often offers a faster and more specialized forum than state courts. The Arbitration Court attached to the Czech Chamber of Commerce in Prague is a common choice for resolving these matters.

How does the Czech Republic regulate employment and "švarcsystém"?

The most significant risk for foreign companies in the Czech Republic is the prohibition of disguised employment, known locally as "švarcsystém". This refers to a situation where a worker is officially a self-employed contractor (B2B) but in practice performs work under the same conditions as an employee.

Czech authorities are increasingly vigilant in monitoring these relationships. The State Labour Inspection Office looks for indicators of dependency, such as a contractor having only one client, working under direct supervision, or being integrated into the company’s organizational structure. Real-life cases involve exceptions and dependencies, and it is safer to entrust the assessment of these setups to professionals.

The penalties for enabling illegal work are severe. Fines can reach up to CZK 10 million (approximately EUR 400,000) for the company. Additionally, the company may be forced to pay all back-taxes and social security contributions, which can be financially devastating. In some cases, a business may even face a ban on activities for up to two years.

Key differences between employment contracts

There are three primary ways to hire people in the Czech Republic, each with specific rules:

• Employment Contract: The standard for regular work, providing the highest level of employee protection and benefits.
• Agreement to Complete a Task (DPP): Limited to 300 hours per calendar year with one employer.
• Agreement on Work Activity (DPČ): Intended for more regular part-time work, limited to an average of 20 hours per week.

Understanding the indicator of "dependent work"

To identify "švarcsystém," inspection authorities evaluate several factors beyond the formal contract. One major indicator is whether the contractor works under the client's direct supervision and according to their instructions. Using the client's tools, systems, or branding also suggests a dependent relationship rather than independent entrepreneurship. Exclusivity is another critical factor. If a self-employed person receives most of their income from a single client over a long period, it raises doubts about their independence. Czech courts, particularly the Supreme Administrative Court, emphasize the actual substance of the relationship over its formal description in contracts.

Table: Labor Law Compliance and Compensation

What are the rules for posting workers from a foreign parent company?

When a foreign parent company sends its employees to work at its Czech subsidiary or a client site, it is "posting" those workers under the Transnational Provision of Services. This process involves strict reporting requirements to the State Labour Inspection Authority. Effective October 1, 2025, new legislation introduces changes, including a requirement to report the posting at least one day before work begins.

Posted workers are entitled to the same core working conditions as local Czech employees if those conditions are more advantageous. This includes rules on minimum wage, mandatory overtime pay, maximum working hours, and health and safety standards. For example, employees are entitled to a supplementary payment of at least 25% for overtime work.

Failure to comply with these reporting requirements can lead to fines of up to CZK 3 million. Furthermore, a company using a posted worker can be held liable for that worker's unpaid wages if the posting employer fails to pay them. Because real-life cases involve various procedural details, it is essential to have these cross-border matters reviewed by the ARROWS International network.

Managing long-term postings and social security

If the posting of a worker exceeds 12 months (known as long-term posting), they become subject to further regulations of the Czech Labour Code. This 12-month period can be extended to 18 months if the employer notifies the Labour Office before the initial period expires. When replacing a posted worker with another for the same task, the periods of secondment are added together for this calculation.

Regarding social security, the posting company must apply for an A1 Certificate for each worker. This document confirms that the worker remains under the social security system of their home country while working in the Czech Republic. Without this certificate, there is a risk of double contributions or penalties for non-payment into the Czech system.

Practical Q&A: Hiring Foreign Nationals

1. Do EU citizens need work permits in the Czech Republic? No, EU citizens have free access to the labor market. However, the employer must still notify the Labour Office on their first day of employment.
2. How long does it take to obtain an Employee Card for non-EU staff? The processing time varies but often takes several months. It is a common mistake to promise a start date that is too early, as the candidate cannot legally begin work until the permit is issued.
3. Must employment contracts with foreigners be in Czech? The law does not mandate the language, but it is crucial that the employee understands the content. We strongly recommend drafting contracts bilingually to prevent future disputes regarding the validity of provisions.

What is "due managerial care" and why does it matter?

The role of a managing director (jednatel) in a Czech company carries significant personal responsibility. Under Section 159 of the Civil Code, every director must act with "due managerial care" (péče řádného hospodáře). This technical term means performing the function with necessary loyalty, knowledge, and diligence.

Directors are protected by the "Business Judgment Rule" if they can prove they acted in good faith, on an informed basis, and in the interest of the company. However, if a director makes a decision that harms the company—such as ignoring a Data Box notice or entering a clearly disadvantageous contract—they can be held personally liable to compensate for the entire loss from their personal assets.

This liability also extends to insolvency. If a director fails to file an insolvency petition "without undue delay" once they realize the company is bankrupt, they become personally liable to all creditors for the resulting losses. Lawyers at ARROWS law firm handle this agenda routinely and can shorten timelines while reducing the risk of mistakes through professional training for management.

The scope of managerial responsibility

Managerial care includes a wide range of decisions, from operational matters like sales and financing to personnel issues and signing contracts. Directors are also responsible for proper bookkeeping and the management of company records. Even if a director does not possess all necessary expertise, they are obliged to seek advice from a qualified person to ensure an informed decision.

A key principle is that the director is responsible for the process of decision-making, not necessarily the financial outcome. If a director acts in good faith and follows the Business Judgment Rule, they are not obliged to pay damages even if the company suffers a loss. However, the burden of proof in these cases usually lies with the director.

Risk of disqualification and criminal liability

If a director seriously or repeatedly breaches their duties, a court may decide they are disqualified from holding a corporate office for up to three years. In extreme cases involving non-payment of taxes or social contributions, breaches of duty can even lead to criminal liability for the management.

Furthermore, directors are jointly and severally liable if multiple individuals share the statutory body role. This means that one director could be held responsible for the entire loss caused by the group. Because real-life cases involve these complex dependencies, professional legal oversight is strongly recommended for all major corporate decisions.

Table: Practical Risks and Managerial Liability

Risks and sanctions	How ARROWS helps (office@arws.cz)
Unlimited Parent Liability: Using a branch office exposes the foreign parent's entire global balance sheet to Czech legal actions.	Structural Optimization: We provide legal opinions on the safest, liability-shielding structures for your entry.
Švarcsystém Fines: Fines up to CZK 10 million for misclassifying employees as independent B2B contractors.	Compliance Review: We review your contracts and internal policies to ensure they meet strict Labour Code standards.
Data Box Negligence: Losing court cases by default due to unread electronic notices from state authorities.	Administrative Training: We provide certified training on management duties to ensure no critical notices are missed.
Personal Asset Loss: Directors being held personally liable for company damages if they fail to act with due care.	Executive Protection: We draft service contracts for directors that define boundaries of responsibility and risk.
FDI Screening Penalties: Fines up to 1% of turnover for failing to notify the Ministry of sensitive investments.	Regulatory Guidance: We guide you through the entire FDI screening process and handle negotiations with regulators.

Conclusion: Ensuring long-term stability in the Czech market

Entering the Czech market as a foreign parent company offers significant opportunities but requires a nuanced approach to legal compliance. From choosing a liability-shielding subsidiary structure to navigating the complexities of the Labour Code and avoiding the "švarcsystém" trap, the risks are real and often carry multi-million koruna consequences. Real-life situations are frequently more complex than they appear, involving specific procedural deadlines and evolving court interpretations.

Lawyers at ARROWS law firm handle this agenda routinely and can significantly shorten your timelines while reducing the risk of expensive mistakes. We offer a wide range of services, including representation in inspections and disputes, review of contracts, and negotiations with local regulators. For your peace of mind, ARROWS law firm is insured up to CZK 400,000,000, providing a level of security that is essential for large-scale investment projects.

FAQ – Most common legal questions about the topic

1. Can we pay our Czech employees in Euros? Czech labor law generally requires wages to be paid in Czech koruna (CZK). While some exceptions exist for international workers, paying in local currency is the most standard and compliant method for fulfilling tax and social insurance deductions.
2. Is a written employment contract mandatory? Yes. Under the Czech Labour Code, an employment contract must be in writing and include the type of work, place of work, and start date. Without these basic elements, the contract may be considered invalid.
3. What happens if we ignore a message in the Data Box? Under the "fiction of delivery," the message is considered delivered after 10 days even if you never log in. This can lead to missed deadlines for tax appeals or the loss of court cases by default.
4. Does the Czech Republic have a "work for hire" concept? No. Unlike many common law systems, Czech law does not automatically grant IP ownership to the employer. You must have specific, well-drafted clauses in your contracts to ensure the company owns the intellectual property created by staff.
5. How long does it take to get an Employee Card for a non-EU worker? The process often takes several months, depending on the applicant's country and the workload of the embassy. Government programs like the "Qualified Employee Program" can sometimes speed up this timeline.
6.  Can a shareholder give direct instructions to a managing director? While shareholders set the strategic direction, the law prohibits anyone from giving the managing director specific instructions regarding the day-to-day business management. The director must always act with due managerial care in the interest of the company.

Notice: The information contained in this article is of a general informational nature only and serves for basic orientation in the topic. Although we take maximum care to ensure the accuracy of the content, legal regulations and their interpretation evolve over time. To verify the current wording of regulations and their application to your specific situation, it is therefore necessary to contact ARROWS law firm directly (office@arws.cz). We accept no liability for any damages or complications arising from the independent use of the information in this article without our prior individual legal consultation and professional assessment. Each case requires a tailor-made solution, so please do not hesitate to contact us.