Expansion of a UK company into the Czech Republic

Are you a UK business leader planning your expansion into the European Union? This article provides clear, practical answers for navigating the Czech legal system post-Brexit. As an English-speaking lawyer in Prague can confirm, understanding the key differences between UK common law and Czech civil law is critical for success. This guide from ARROWS, a leading Czech law firm based in Prague, European Union, will equip you with the essential knowledge to establish a branch, form strategic partnerships, and manage compliance risks for a secure market entry.

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.

The Post-Brexit Landscape: Your Strategic Gateway to the EU

The UK's departure from the EU single market ended the automatic freedom of establishment for British companies and introduced new trade barriers.1 The UK-EU Trade and Cooperation Agreement (TCA) now governs this relationship, creating new costs, customs formalities, and regulatory hurdles that can disrupt supply chains and reduce competitiveness. For many UK businesses, establishing a physical presence within the EU is no longer just an option for growth; it is a strategic necessity to regain frictionless access to the European market.

The Czech Republic presents a uniquely advantageous solution. As a stable EU member state with a strong, open economy, it offers a secure and predictable environment for foreign investment. Czech commercial and accounting laws are harmonized with Western standards, and the law treats foreign and domestic entities identically. For UK companies, the Czech market offers a low-friction entry point due to a business culture that is remarkably similar to the UK's and the widespread use of English in business circles.

This strategic alignment is reinforced by strong existing trade links. The UK is one of the Czech Republic's largest export partners, particularly for machinery, transport equipment, and passenger cars, indicating a robust and integrated supply chain that UK businesses can tap into. By establishing a base in the Czech Republic, a UK company is not merely entering a new market; it is creating a strategic "Brexit hedge" to protect its broader European operations from ongoing uncertainty and cost increases.

Direct Presence: Establishing a Czech Branch Office (odštěpný závod)

One of the most direct ways for a UK company to establish a presence in the Czech Republic is by setting up a branch office, known in Czech as an odštěpný závod. However, what may seem like a simple administrative step carries profound legal implications that are often misunderstood by executives accustomed to the UK's common law system.

What is a Czech Branch Office?

Under Czech law, a branch office is not a separate legal entity. It is considered a direct organizational extension of the foreign parent company. This means it has no independent legal personality; all of its actions, contracts, debts, and liabilities are legally those of the UK parent company. The scope of business the branch can conduct is strictly limited to the activities already permitted within the UK parent company's articles of association.

The most critical consequence of this structure is unlimited liability. The UK parent company is fully and directly responsible for all obligations incurred by its Czech branch. If the branch fails to pay a supplier, is sued for damages, or is fined by a regulator, Czech creditors and authorities can legally pursue the assets of the parent company located in the United Kingdom. This direct exposure of the parent company's entire balance sheet is the single most significant risk associated with the branch structure.

FAQ – Legal tips about Branch Liability

1. Are the UK parent company's assets truly at risk if the Czech branch incurs debt? Yes, absolutely. Because a branch is not a separate legal entity, any debt or liability of the branch is legally the debt of the parent company. Creditors can seek enforcement against the UK company's assets. To understand how to structure your expansion to avoid this risk, contact us at office@arws.cz.

2. Does having comprehensive business insurance in the UK protect our parent company from Czech liabilities? Not necessarily. While insurance may cover certain claims, it does not alter the fundamental legal principle of unlimited liability. Furthermore, your UK policy may not cover liabilities arising from specific breaches of Czech law. Our lawyers can review your risk profile; email us at office@arws.cz.

How to Establish a Czech Branch: A Step-by-Step Guide

The process of establishing a branch involves several key administrative and legal steps, which must be followed meticulously to ensure legal compliance.

1. Obtain a Trade License: The first step is to apply for a trade license from the relevant Trade Licensing Office in the district where the branch will be located. The type of license depends on the nature of the business activities.
2. Appoint a Head of Branch: The UK parent company must appoint an individual to act as the Head of the Branch. This person is authorized to act on behalf of the parent company in all matters concerning the branch and must be registered in the Commercial Register. This representative must have residency in the Czech Republic.
3. Register in the Commercial Register: The branch must be registered in the Czech Commercial Register. This requires submitting a formal application along with several key documents, including the UK parent company's certificate of incorporation and articles of association, a corporate resolution to establish the branch, and the trade license. All foreign documents must be accompanied by a certified Czech translation. The court has a statutory deadline of five working days to complete the registration.
4. Fulfill Post-Registration Obligations: Once registered, the branch will be assigned a Data Box (datová schránka), which is a mandatory electronic mailbox for all official communications with public authorities. The branch must also register with the Financial Authority for tax purposes.

While the process appears straightforward, the perception of simplicity is a dangerous illusion. For a UK company accustomed to the strong "corporate veil" that separates a parent from its subsidiary, the unlimited liability of a branch introduces a catastrophic level of risk. A minor operational issue in Prague could escalate into a major financial threat to the entire UK-based organization. For this reason, the branch structure is rarely the recommended path for foreign investors.

Risks in Establishing a Czech Branch Office

Risks and penalties	How ARROWS helps
Unlimited Liability of UK Parent Company: Full exposure of all UK corporate assets to Czech debts, lawsuits, and regulatory fines. This can lead to severe financial distress for the parent company.	Legal Structuring Advice: We analyze your business goals and recommend safer corporate structures, like an s.r.o., to shield parent assets and limit liability. Contact us to discuss safer alternatives at office@arws.cz.
Errors in Commercial Register Application: Incorrect or incomplete documentation can lead to the rejection of your application, causing significant delays and preventing you from starting operations legally.	Drafting and Filing Documentation: Our lawyers prepare and file all required documentation with the Czech authorities, ensuring a smooth and fast registration process. Need help with registration? Email us at office@arws.cz.
Misunderstanding the Head of Branch's Authority: The actions of the appointed Head of Branch legally bind the UK parent company, potentially creating unforeseen contracts and financial obligations without direct oversight from the UK board.	Legal Consultations: We provide legal consultations on defining and contractually limiting the powers of the Head of Branch to mitigate unauthorized actions. For immediate assistance, write to us at office@arws.cz.

The Superior Alternative for UK Companies: Branch vs. Limited Liability Company (s.r.o.)

Given the significant risks of a branch office, the far superior and more professional choice for a UK company expanding into the Czech Republic is to establish a new, independent Czech legal entity. The most common and flexible form is the limited liability company, or společnost s ručením omezeným (s.r.o.).

An s.r.o. functions similarly to a UK private limited company (Ltd). It is a separate legal person, fully capable of entering into contracts, owning assets, and incurring liabilities in its own name. This legal separation is the key to protecting the UK parent company.

Here is a direct comparison of the two structures:

Feature	Branch Office (odštěpný závod)	Limited Liability Company (s.r.o.)
Legal Status	An organizational part of the UK parent company. Not a separate legal entity.	A separate and independent Czech legal entity with its own legal personality.
Liability	The UK parent company has full and unlimited liability for all debts and obligations of the branch.	Liability is limited to the s.r.o.'s own assets. The UK parent company's assets are protected.
Management	Managed by a Head of Branch who acts on behalf of the UK parent company.	Has its own independent management (one or more Executive Directors) responsible for its operations.
Capital Requirement	No share capital required for formation.	A symbolic minimum share capital of just CZK 1 (approximately £0.03) is required.
Market Perception	Often seen as a temporary foreign outpost, which may signal less long-term commitment to local partners and customers.	Perceived as a fully committed, permanent local company, which builds greater trust with Czech customers, suppliers, and banks.

By advising clients against the high-risk branch structure and championing the s.r.o., we move beyond simply filing documents and act as strategic business advisors. A client might request a branch for its perceived simplicity, but our duty is to protect their long-term financial health by guiding them toward the structure that provides robust legal protection. This client-centric approach is the foundation of the trust we build. The s.r.o. is unequivocally the best choice for any UK company seeking a secure and sustainable presence in the Czech market.

Building Success Through Partnerships: Joint Ventures and Distribution Agreements

For UK companies that prefer to enter the market with a local partner, Czech law offers flexible frameworks for collaboration. The two most common forms are corporate joint ventures and distribution agreements. However, both require careful legal structuring to avoid common pitfalls rooted in the differences between UK and Czech law.

Our specialists for you

Structuring a Czech Joint Venture (JV)

Czech law does not recognize a "joint venture" as a distinct legal form. Instead, a JV is typically structured by creating a new corporate entity, most often a limited liability company (s.r.o.), which is jointly owned by the UK company and its Czech partner.

While the s.r.o.'s articles of association are a public document filed with the Commercial Register, the most critical document governing the JV is the private Shareholders' Agreement (SHA). This is where the partners define their relationship, including:

• Control and management rights (e.g., board appointments).
• Profit distribution policies.
• Deadlock resolution mechanisms.
• Restrictions on transferring shares (e.g., tag-along and drag-along rights).
• Exit strategies and buyout provisions (e.g., put and call options).

A crucial warning for UK partners: under Czech law, a breach of the SHA does not automatically invalidate a corporate action taken by the JV company. For example, if the SHA requires both partners' consent for a major transaction, but the Czech partner proceeds without it, the transaction may still be legally valid. The UK partner's recourse would be a claim for damages for breach of contract. Therefore, it is essential to include strong, enforceable contractual penalties (smluvní pokuta) in the SHA to deter such breaches.

Navigating Distribution Agreements

Distribution agreements are a popular way to get products into the Czech market quickly. Under Czech law, these are considered "innominate contracts," meaning there is no specific "distribution agreement" type in the Civil Code. They are flexible agreements governed by general contract law, with elements of a purchase agreement.

The single greatest legal risk in this area is competition law. Both EU and Czech competition laws heavily regulate vertical agreements between suppliers and distributors. Any clause that has the object or effect of preventing, restricting, or distorting competition is prohibited and legally void unless it qualifies for a specific exemption. This includes common practices like resale price maintenance or absolute territorial restrictions. A UK company using its standard distribution template without review by a Czech lawyer risks signing an agreement that is partially or wholly unenforceable.

FAQ – Legal tips on Structuring Partnerships

1. Can we rely on a handshake deal or an email exchange for a partnership in the Czech Republic? Absolutely not. While UK law can be flexible, Czech law requires written form for many agreements to be valid. For a joint venture or a serious distribution relationship, a comprehensive, professionally drafted written contract is essential for enforceability. Need your agreement drafted? Contact us at office@arws.cz.

2. What is the single most important document in a Czech joint venture? The Shareholders' Agreement (SHA). This private contract governs the real relationship, rights, and obligations between the partners. It is your primary tool for protecting your investment and ensuring control. Get tailored legal solutions by writing to office@arws.cz.

Legal Risks in Czech Business Partnerships

Risks and penalties	How ARROWS helps
Unenforceable Shareholders' Agreement (SHA) in a JV: Vague or poorly drafted clauses can lead to a loss of control over the business, disputes over profits, and costly, protracted litigation to resolve partner deadlocks.	Drafting Robust SHAs: We draft comprehensive Shareholders' Agreements with clear, enforceable mechanisms like put/call options, deadlock resolution procedures, and effective penalty clauses. Get tailored legal solutions by writing to office@arws.cz.
Void Distribution Agreement due to Competition Law Breach: Including clauses on resale price maintenance or other anti-competitive restrictions can render the entire agreement legally void and expose your company to large fines from competition authorities.	Contract Drafting and Review: Our lawyers draft and review distribution agreements to ensure full compliance with complex Czech and EU competition laws, protecting you from fines and ensuring your contract is enforceable. Do not hesitate to contact our firm – office@arws.cz.
Ambiguous Intellectual Property (IP) Ownership in a JV: Failure to clearly define who owns the IP developed by the joint venture can lead to the loss of valuable trademarks, patents, or trade secrets upon termination of the partnership.	IP Protection Strategies: We implement clear contractual clauses and IP protection strategies to define the ownership, licensing, and usage rights of all intellectual property created within the partnership. Need legal help? Contact us at office@arws.cz.

Essential Post-Brexit Compliance for UK Companies

Operating successfully in the Czech Republic requires more than just setting up the right corporate structure. UK companies must adapt to a civil law system and a post-Brexit regulatory environment that contains several hidden traps. Relying on UK-based legal "common sense" is not just ineffective; it can be actively dangerous and lead to severe financial penalties.

Civil Law vs. Common Law: Critical Differences in Contract Law

The most profound risks often arise from a failure to appreciate the fundamental differences between the UK's common law system and the Czech Republic's continental civil law system.

• Smluvní pokuta (Contractual Penalties): This is arguably the most dangerous pitfall. In English law, a "penalty clause" designed to punish a breach is generally unenforceable. In Czech law, contractual penalties are a powerful and fully enforceable tool. A Czech partner can legally include a clause imposing a substantial daily penalty for a simple delay in payment, and this penalty is due regardless of whether any actual damage was suffered. A UK manager might dismiss such a clause as invalid, a mistake that could cost their company dearly.
• Dobré mravy (Good Faith and Fair Dealing): In the UK, "good faith" is an emerging concept but not a universal, overriding principle. In the Czech Republic, it is an enforceable legal standard that permeates all transactions. Czech courts can and do invalidate contractual clauses or even entire agreements they find to be contrary to "good morals," a concept far broader than English doctrines like unconscionability.
• Culpa in contrahendo (Pre-contractual Liability): Under English law, walking away from negotiations before a contract is signed rarely creates liability. Czech law is different. If one party engages in negotiations without a real intention to conclude a contract, or terminates advanced negotiations without a just cause, they can be held liable for the other party's wasted costs and losses.

Strict Employment Law Requirements

A recent amendment to the Czech Employment Act has created a major compliance trap for foreign employers. It is now an offense of "undeclared work" for an employee to begin working even one day before their employment is officially registered with the Labor Office. This rule applies to all foreign workers, including UK citizens. An HR manager following standard UK practice—letting someone start on Monday and filing the paperwork on Tuesday—would be breaking the law. Non-compliance can lead to fines of up to CZK 3 million (approx. £100,000).

GDPR and Anti-Money Laundering (AML) Obligations

As a UK company operating in the Czech Republic, you are subject to the full force of EU regulations.

• GDPR: The General Data Protection Regulation (GDPR) applies to any organization that processes the personal data of individuals in the EU, regardless of where the company is based. You must have a legal basis for all data processing, respect data subject rights, and implement robust security measures. Fines for non-compliance can reach up to 4% of your annual global turnover.
• AML: The Czech AML Act imposes strict obligations on businesses to prevent money laundering. This includes performing client identification and due diligence, determining the ultimate beneficial owner, reviewing the source of funds, and reporting any suspicious transactions to the Czech Financial Analytical Office (FAO). Failure to comply can result in severe fines, with the highest penalties reaching CZK 130,000,000 (approx. £4.4 million).

Post-Brexit Compliance Risks for UK Companies

Risks and penalties	How ARROWS helps
Enforcing a UK Court Judgment in the Czech Republic: Since Brexit, UK judgments are no longer automatically recognized under EU regulations. Enforcement now depends on older, more complex international conventions, making the process uncertain and costly.	International Arbitration Clauses: We advise on and draft international arbitration clauses in your contracts. Arbitral awards are readily enforceable in the Czech Republic and globally under the New York Convention, bypassing these post-Brexit complexities. Our lawyers are ready to assist you – email us at office@arws.cz.
Illegal Employment of Foreign Staff: Allowing a UK employee to start work before their official registration with the Labor Office constitutes "undeclared work," leading to potential fines of up to CZK 3 million.	Compliant Employment Contracts and Registration: We prepare fully compliant Czech employment contracts and manage the entire pre-employment registration process with the Labor Office to ensure you are legally protected. For immediate assistance, write to us at office@arws.cz.
Non-Compliance with GDPR and AML Regulations: Failure to implement required GDPR and AML procedures can lead to massive fines (up to 4% of global turnover for GDPR), reputational damage, and potential criminal liability for management.	Internal Policies and Professional Training: We draft bespoke internal compliance policies for GDPR and AML and provide certified professional training for your management and staff to ensure your operations are fully compliant. Get tailored legal solutions by writing to office@arws.cz.

Your Partner for a Secure Czech Expansion: ARROWS Law Firm

Expanding into the Czech Republic offers UK businesses immense opportunities, but success depends on navigating a legal landscape that is fundamentally different from that of the UK. The shift from EU-harmonized rules to a system of international treaties and local civil law requires specialized guidance to manage the new procedural and jurisdictional uncertainties.

ARROWS is a leading international law firm operating from Prague, European Union, with over 15 years of market experience. Our team of over 60 legal and tax advisors has a proven track record of assisting foreign clients, supporting over 150 joint-stock companies and 250 limited liability companies with their Czech operations. We understand the challenges you face because we solve them for international clients every day.

Through the ARROWS International network, built over more than a decade, we provide seamless legal solutions in over 70 countries, combining deep local knowledge with a global perspective. Whether you need the preparation of internal company policies for GDPR compliance, drafting documentation for your new s.r.o., or representation before public authorities like the Trade Licensing Office, our team provides fast, high-quality service.

Don't let legal complexity become a barrier to your European growth. Let our expertise be your advantage.

To ensure your expansion is built on a solid legal foundation, contact our expert team today for a consultation. Get tailored legal solutions by writing to office@arws.cz.

FAQ – Most common legal questions about UK Business Expansion to the Czech Republic

1. After Brexit, is it better for a UK company to set up a branch or a new limited liability company (s.r.o.) in the Czech Republic? The limited liability company (s.r.o.) is overwhelmingly the better choice. A branch exposes your entire UK parent company to unlimited liability for the branch's debts and obligations. An s.r.o. is a separate legal entity, which shields your UK assets and is perceived as a more permanent and trustworthy local partner. For a detailed analysis of your specific situation, write to us at office@arws.cz.

2.What is the biggest legal mistake UK companies make when signing contracts with Czech partners? The most dangerous mistake is underestimating contractual penalties (smluvní pokuta). Unlike in the UK, these clauses are fully enforceable in the Czech Republic even if they are punitive and no actual damage has occurred. A UK manager might wrongly assume such a clause is invalid, exposing the company to significant financial risk. To have your contracts reviewed by our experts, contact us at office@arws.cz.

3. Are UK court judgments automatically enforced in the Czech Republic now? No. Since Brexit, the automatic recognition and enforcement of judgments under EU regulations no longer applies. Enforcement now relies on older Hague Conventions or Czech national law, which is a more complex, costly, and uncertain process. A far better strategy is to use an international arbitration clause in your contracts. Our lawyers can help you draft one – email us at office@arws.cz.

4. How quickly can we hire a UK citizen to work in our new Prague office? The process is streamlined by the Employee Card, but there is a critical legal requirement: the employee cannot start work until they are officially registered with the Labor Office. Doing so constitutes "undeclared work" and carries heavy fines. We can manage the entire visa and registration process for you. For immediate assistance, write to us at office@arws.cz.

5. Do we need a Czech bank account to set up a company, and is it difficult for a foreign-owned entity to open one? Yes, a special bank account is required to deposit the share capital for an s.r.o. Opening a corporate account for a foreign-owned entity has become more challenging due to strict AML and KYC regulations. With our established relationships with Czech banks, we can facilitate and expedite this process for you. Get tailored legal solutions by writing to office@arws.cz.

6. As a director of the UK parent company, can I be held personally liable for the actions of our Czech branch? While the primary liability falls on the UK parent company as a whole, the legal landscape for director duties is complex. In situations of insolvency or serious breaches of care, the actions of a branch could theoretically create scenarios that lead to scrutiny of the parent company's directors' conduct under UK law. The safest approach is to avoid this risk entirely by establishing an s.r.o. To discuss your risk management strategy, do not hesitate to contact our firm – office@arws.cz.