How to resolve legal issues in the Czech Republic as a Hong Kong company: What you need to know

This article provides specific answers for Hong Kong-based companies and investors facing legal challenges in the Czech Republic, including entity structuring, compliance, tax obligations, and dispute resolution. ARROWS combines deep knowledge of both Hong Kong and Czech legal systems, helping foreign companies navigate complex cross-border issues.

Understanding your legal position: Why Hong Kong companies face unique challenges

When a Hong Kong company begins operations in the Czech Republic, it enters a fundamentally different legal environment governed by EU directives, Czech national law, and international double taxation agreements. Unlike Hong Kong's streamlined company registration and minimal substance requirements, the Czech Republic imposes strict regulatory frameworks.

The Czech Republic imposes mandatory compliance reporting and ongoing corporate governance obligations that catch many foreign investors unprepared.

The challenge is not merely administrative—it involves multiple overlapping legal systems, language barriers, and procedural requirements that do not exist in Hong Kong. Hong Kong companies often underestimate the complexity of Czech corporate law because they assume that EU membership implies simplified business procedures comparable to Hong Kong's efficiency.

This assumption creates serious legal exposure, as a Hong Kong company operating a branch office in Prague faces unlimited liability for all Czech operations, meaning creditors can pursue the parent company's assets.

A limited liability company (s.r.o.) established by a Hong Kong owner limits liability, but only if the company complies with Czech statutory duties regarding financial reporting, director responsibilities, and insolvency procedures. Non-compliance with even seemingly minor requirements can trigger personal director liability.

The fundamental legal difference is that Czech law imposes extremely strict personal liability on company directors and managers, especially those who lack sufficient knowledge of Czech corporate requirements.

Choosing the right legal structure: Branch office versus limited liability company

The first critical decision a Hong Kong company must make is whether to establish a branch office (odštěpný závod) or a separate limited liability company (s.r.o.). This choice has profound implications for your financial liability, tax treatment, administrative burden, and how Czech courts will treat your company in disputes.

The branch office: A simple but dangerous option

A branch office appears attractive on the surface because it requires no separate share capital and relatively simple registration procedures. The branch operates as a mere extension of your Hong Kong parent company, managed by a head of branch who may be a Czech national or a foreign resident.

The critical danger of a branch office is that it is not a separate legal entity, which means your Hong Kong parent company bears direct, unlimited liability for all debts, obligations, and legal judgments against the Czech branch.

If your Czech branch incurs significant debts, breaches a major supply contract, or causes personal injury, creditors do not pursue only the branch's assets. They pursue your entire parent company's assets, including accounts, real estate, and intellectual property.

Moreover, a branch office provides no legal distinction between the parent company's operations and Czech operations, which creates serious tax complications and regulatory exposure.

Czech authorities treat the branch as a permanent establishment (PE) of the foreign company, subjecting it to Czech corporate income tax on all Czech-sourced profits. The branch must file annual financial statements in Czech and submit to tax audits.

The limited liability company (s.r.o.): The superior choice

A Czech limited liability company (s.r.o) is a separate legal entity that limits your Hong Kong parent company's liability to the capital contribution made to the Czech company. If the Czech s.r.o. incurs debts or faces litigation, creditors pursue only the assets of the Czech company.

However, establishing and managing a Czech s.r.o. is substantially more complex than establishing a branch office.

The s.r.o. must be established through a notarized founding document, drafted according to Czech Business Corporations Act requirements and executed by a licensed Czech notary. This requires precise legal language and compliance with statutory provisions.

While Czech law allows capital up to CZK 20,000 to be paid to a custodian, in practice, obtaining a functional corporate bank account is essential for operations and VAT registration.

Once the s.r.o. is registered, it must maintain a valid registered office (sídlo) in Czech territory. This is not merely a mailbox address—it must be a location where the company can be contacted and where legal documents can be received.

Corporate compliance and annual obligations

Once a Hong Kong company establishes a Czech s.r.o. or branch office, the real complexity begins with the ongoing annual compliance obligations. Czech corporate compliance is strict, and the consequences of non-compliance include financial penalties and director personal liability.

Annual financial statements and accounting requirements

All Czech companies and branches must prepare annual financial statements in the Czech language, following Czech Accounting Standards (CAS). These must be filed with the Collection of Deeds of the Commercial Register and the Czech tax authority within specified deadlines.

The key compliance trap is that all accounting records must be maintained in the Czech language, and documents submitted to courts or tax authorities must be in Czech.

Hong Kong companies operating through Czech subsidiaries cannot simply maintain accounting records in English. They must maintain Czech-language records from the outset or ensure professional translation. This requirement creates substantial administrative burden and increases the risk of errors.

Audit obligations based on company size

Whether a company must conduct a statutory audit depends on whether the company exceeds certain financial thresholds defined by the Czech Accounting Act. Effective from January 1, 2024, the thresholds for mandatory audits were adjusted.

The audit requirement is not optional—failure to conduct a required audit or failure to submit audit reports to the Commercial Register can result in penalties and director personal liability.

Audits must be conducted by auditors registered with the Chamber of Auditors of the Czech Republic and must follow International Standards on Auditing. For Hong Kong companies, this means selecting a Czech audit firm, which adds costs.

Tax filings and deadlines

Czech companies and branches must file a corporate income tax return annually, generally within three months of the accounting year-end. The deadline extends to six months if filed by a registered tax advisor or if the company is subject to mandatory audit.

Non-resident companies are subject to Czech CIT only on income sourced in the Czech Republic, but a branch office of a Hong Kong parent company is subject to CIT on all income attributed to the branch's activities.

For Hong Kong companies, this distinction is critical: a Czech s.r.o. subsidiary is a resident entity subject to worldwide income taxation in Czech territory. A branch office triggers CIT on all Czech operations without the full legal separation of a subsidiary.

VAT registration and obligations

If a Czech company or branch exceeds the turnover threshold of CZK 2 million over 12 consecutive calendar months, it must register for Value Added Tax (VAT). Registration is mandatory once this threshold is exceeded, with a 15-day deadline.

Non-compliance with VAT registration requirements results in penalties and tax authority enforcement action.

For Hong Kong companies, VAT compliance adds a layer of complexity because VAT is calculated and reported on a monthly basis. There are strict deadlines for filing VAT returns, Control Reports, and paying VAT liabilities.

Ultimate beneficial owner (UBO) registration

Czech law requires all business corporations to identify and register their ultimate beneficial owners (UBOs) in the Register of Beneficial Owners. An UBO is generally any natural person who directly or indirectly owns more than 25% of the company's capital or voting rights.

Failure to register a UBO or providing incorrect information results in severe sanctions: fines up to CZK 500,000, suspension of voting rights, and prohibition on distributing profits.

Data box obligations and electronic communication

All Czech companies registered in the Commercial Register are required to maintain a Data Box (datová schránka), which is a mandatory state-guaranteed electronic communication system. Czech public authorities use this system to serve legal documents and deliver tax assessments.

Many foreign companies hire Czech legal representatives specifically to monitor their Data Box and ensure timely responses.

The challenge for Hong Kong companies is that the Data Box interface is primarily in the Czech language. Operating it requires an understanding of Czech administrative procedures to avoid missing critical legal deadlines.

Report on relations

If a Hong Kong company owns a Czech subsidiary, the subsidiary's statutory body must prepare an annual Report on Relations ( zpráva o vztazích ). This report describes the relationship between the parent company and the subsidiary, including any contracts or loans between the entities.

Common compliance violations and their consequences

Compliance Violation	Consequences for Hong Kong Company
Failure to file annual financial statements within deadline	Fine up to 3% of total assets; company cannot distribute profits; potential court-ordered dissolution.
Failure to register or correctly identify Ultimate Beneficial Owner	Fine up to CZK 500,000; voting rights suspended; profits cannot be distributed.
Non-compliance with Data Box obligations	Default court judgments; tax assessment defaults; loss of ability to defend company's position in legal proceedings.
Failure to conduct required audit	Director personal liability; inability to file accurate tax returns; potential criminal consequences.
Late or incorrect VAT registration or reporting	Penalties and interest on unpaid tax; fines for failure to file Control Report; potential unreliable payer status designation.
Failure to maintain Czech-language accounting records	Tax authority denial of deductions; assessment of arbitrary income; director personal liability; loss of credibility in disputes.

Tax obligations for Hong Kong companies operating in the Czech Republic

Hong Kong companies operating through Czech subsidiaries or branches face a complex tax landscape. This environment is created by the interaction of Czech national tax law, EU directives, and the Double Taxation Agreement (DTA) between the Czech Republic and Hong Kong.

Czech corporate income tax and the territorial system

The Czech Republic applies a worldwide taxation system for residents, meaning Czech resident companies (s.r.o.) are subject to CIT on worldwide income. Non-resident companies are subject to CIT only on income sourced in the Czech Republic.

For Hong Kong companies, this represents a higher tax burden than Hong Kong's standard corporate profits tax rate.

The Czech-Hong Kong double taxation agreement

The Czech Republic and Hong Kong have concluded a Double Taxation Agreement (DTA) that provides relief for the same income being taxed in both jurisdictions. The DTA allocates taxing rights and provides mechanisms for eliminating double taxation.

However, the DTA does not apply automatically—the company must file proper elections, maintain tax domicile certificates, and meet beneficial ownership requirements to claim DTA benefits.

Profit repatriation and dividend taxation

When a Czech s.r.o. subsidiary earns profits, a Hong Kong parent company may repatriate those profits as dividends. Czech law imposes a 15% withholding tax on dividends paid by Czech companies to foreign shareholders, unless a tax treaty provides a reduced rate.

VAT treatment and input tax recovery

For Hong Kong companies, the challenge arises when services or goods are provided across borders. The VAT treatment depends on whether the supply is a service or goods, where the customer is located, and whether the customer is a taxable person.

Permanent establishment and tax residency issues

A critical tax concern is whether Czech operations create a permanent establishment (PE) that triggers Czech taxation. Under the DTA and Czech law, a PE is created by a fixed place of business or a construction project lasting more than 12 months.

The challenge is that activities not formally registered as a "branch" may still create a PE for tax purposes.

If a Hong Kong company's employees work in the Czech Republic for extended periods, they may trigger Czech tax residency and CIT obligations for the Hong Kong entity.

Employment law complications: Hiring, managing, and terminating Czech employees

Czech employment law is substantially stricter than Hong Kong's employment framework. Non-compliance can result in significant penalties and director personal liability.

Hiring employees: Documentation and permits

Hiring employees requires a written employment contract in the Czech language or dual language. The contract must specify the type of work, place of work, and commencement date.

The employer must also notify the Labour Office of the commencement of employment of any foreign national.

For non-EU foreign employees, including Hong Kong citizens, the employer must ensure the employee holds a valid Employee Card or work permit and residence permit.

Employment contract formalities and trap avoidance

Many foreign employers fail to understand the strict procedural requirements of Czech employment law. For example, an employment contract for a fixed term is subject to strict limitations.

If not written in the contract before the first day, the probationary period is invalid, and the employee is hired on a standard protected basis immediately.

Termination of employment and notice requirements

Czech employment law protects employees against termination. An indefinite-term employment contract may be terminated by the employer only for specific statutory grounds, usually with a two-month notice period.

"At-will" employment does not exist in the Czech Republic.

Termination without valid grounds is invalid, and courts can order reinstatement and payment of back wages. This is a fundamental difference from Hong Kong's more flexible employment framework.

Mandatory social and health insurance contributions

Czech law requires employers to contribute mandatory social security and health insurance. The employer pays 33.8% on top of gross wages, and the employee pays 11.6% deducted from gross wages.

Failure to pay results in penalties and potential criminal prosecution.

Independent contractor versus employment relationship

Many companies attempt to hire workers as independent contractors to avoid these costs. However, the "Švarcsystém" (disguised employment) is illegal.

If a contractor works under the direction of the employer, uses employer equipment, and works set hours, authorities may reclassify the relationship as employment.

Dispute resolution and litigation in Czech courts

Czech civil and commercial litigation carries substantial risk for foreign companies unfamiliar with local procedure.

Court jurisdiction and the mandatory data box

Czech courts generally have jurisdiction over disputes involving Czech entities or activities. Critical to understanding Czech litigation is the mandatory Data Box system. When a lawsuit is filed, the court serves the notice via the Data Box.

Default judgments in Czech courts are enforceable throughout the EU, allowing creditors to seize assets in other member states.

Under the fiction of delivery, a document is deemed delivered 10 days after it is available in the Data Box, even if not opened. Failure to respond within the court-mandated deadline leads to a default judgment (rozsudek pro zmeškání).

Mandatory legal representation

While self-representation is permitted in district courts, it is practically risky due to procedural complexity. However, for an extraordinary appeal to the Supreme Court (dovolání), representation by a licensed Czech attorney (advokát) is mandatory.

Burden of proof and language requirements

Czech courts recognize only Czech-language evidence. Documents in English must be submitted with an officially certified translation (soudní překlad). The cost of certified translation can significantly increase litigation costs.

Migration of operations: Cross-border restructuring

For Hong Kong companies with substantial investments, restructuring by relocating the seat or merging entities is an option under recent legislative updates.

Hong Kong's upcoming company re-domiciliation regime

Hong Kong has proposed a new company re-domiciliation regime to allow non-Hong Kong companies to transfer their domicile to Hong Kong. This aims to facilitate corporate mobility and signals Hong Kong's intent to allow seamless corporate migration.

Czech cross-border company transformations

Effective July 2024, the amendment to the Czech Act on Transformations clarified rules for cross-border conversions, mergers, and divisions. This legislation allows companies to move their registered office to or from the Czech Republic.

Restructuring decisions must be coordinated with both Czech and Hong Kong tax advisors to avoid exit taxes or unintended permanent establishment triggers.

FAQ – Most common legal questions

1. If my Hong Kong company has a branch office in Prague, what is my personal liability as a director?
As a director, you bear liability for breaches of the duty of care. If the branch incurs debts, the Hong Kong parent company is liable without limitation. Unlike a subsidiary, the branch offers no shield for the parent company's assets.

2. How much will it cost to maintain a Czech limited liability company (s.r.o.)?
Annual ongoing costs include accounting, registered office fees, and potential audit fees if thresholds are met. Tax compliance and Data Box monitoring also add to the budget.

3. What are the most common tax mistakes Hong Kong companies make?
Common mistakes include creating an unintended Permanent Establishment through long-term service contracts, failing to secure a certificate of residence to claim DTA benefits, and misunderstanding VAT reverse-charge rules for B2B services.

4. What happens if my Czech company does not respond to a Data Box message?
If the message is a lawsuit or payment order, failure to respond within the deadline results in a default judgment. The court rules against you automatically. This judgment is final and enforceable.

5. What are the key differences in hiring Czech employees?
Czech law forbids "employment at will." You need a valid reason for termination. You must pay social/health insurance (33.8% on top of gross wage). Written contracts are mandatory.

6. Can I use my Hong Kong lawyer in Czech court?
No. Only a Czech-qualified attorney (or an EU attorney registered in Czechia) can effectively represent you. Procedural acts must be in Czech.

Strategic recommendations and risk mitigation: How ARROWS protects Hong Kong companies

ARROWS is a leading Czech law firm based in Prague, European Union, specializing in supporting foreign companies. We bridge the gap between Hong Kong business practices and Czech regulation.

Why Hong Kong companies choose ARROWS

We advise on entity structuring, ensuring you choose the right vehicle. We handle the entire registration process, assist with bank account opening challenges, and provide registered office services.

For ongoing operations, we act as your compliance shield—monitoring Data Boxes, ensuring tax filings are timely, and drafting bilingual employment contracts that comply with Czech law while protecting employer interests.

Cross-border dispute resolution

ARROWS operates as part of an international network, enabling us to coordinate cross-border enforcement. If you face litigation, our litigation team ensures you never miss a deadline and that your evidence is properly presented to Czech courts.

Key takeaways

1. Structure Wisely: A branch exposes the parent company to unlimited liability. An s.r.o. provides protection but requires strict compliance.
2. Directors are Liable: Czech law imposes personal liability on directors for breaches of duty.
3. Deadlines are Fatal: Data Box notifications create binding deadlines. Monitor them daily.
4. Tax is Territorial but Strict: Watch out for Permanent Establishment risks and VAT traps.
5. Get Local Help: Czech law is formalistic. Do not rely on "common sense" or Hong Kong practices.

Conclusion: When to trust ARROWS with your legal challenges

The Czech regulatory framework contains numerous traps for the unwary. ARROWS is a leading Czech law firm based in Prague that handles these challenges daily. We are insured for damages up to substantial multimillion-euro amounts, providing peace of mind for our clients.

Whether you are establishing a Czech operation, resolving a dispute, or planning a restructuring, ARROWS can handle the legal work professionally.

Contact our team today—email us at office@arws.cz—and let our experienced Czech lawyers provide the legal foundation your Czech operations need.