If you are looking to expand your company into foreign markets, one of the most important questions you have to ask yourself is whether you want to establish the new territory as a subsidiary, or a branch. This is a crucial part of the planning process in a Global Business Expansion.
Your answer to this question depends on a few factors, such as the opportunities you perceive in the new market, as well as any regulatory or cultural challenges you may want to tackle in your new territory or country. Other questions you may want to ask yourself during this decision time include:
- What is the establishment process like – do you need a legal entity in the country first before setting up other processes, like payroll?
- What is the process for acquiring work permits and residency permits for employees?
- How long will it take for the company to be able to legally do business?
If your questions are more specific to the country you want to expand, check out our Country Guides. If you want to know more about the main differences between these entity types, you can read more about them below.
What are the main differences between a subsidiary and a branch?
When deciding on whether you want to open a branch office versus opening a subsidiary company in a new territory, you will need to consider three points:
- What your primary business interest(s) will be
- What your goals are for the entity you choose
- How you will handle taxation and liability
The requirements for the incorporation of a branch and subsidiary will vary according to the country, but the main requirements include a local address, incorporation documentation, and representatives of the parent company. The requirement for a local bank account also varies according to the payroll laws of the country you are expanding to. Share capital is only required for subsidiaries, but not for branches.
The characteristics of both entities are in the table below:
Understanding what makes both the branch and subsidiary distinct from the other makes a huge difference in making the decision for your business expansion.
However, one also needs to know the benefits and drawbacks of each entity type, before deciding which one is the best choice for you.
What are the pros and cons of a branch?
- Parent organization maintains a greater level of control: A branch office receives all instructions from the parent company, as well as reports to it in all its decision-making processes, providing the parent company with greater control.
- Easier to integrate due to the same laws and policies than the parent company/head office: Since a branch must be incorporated under the documentation of the parent company, the policies and culture of the parent company are easier to implement into the branch’s operations.
- It costs less to establish: Branches do not require any share capital to be provided beforehand, and the set-up costs to set up are considerably less than those of a subsidiary company.
- Offers the parent company greater tax benefits: In a majority of cases, any revenue that is earned by a branch office is handled by tax treaties signed between the country of the parent organization, and the country of the branch (eliminating double taxation). So, any taxes that the branch office has to pay are handled by the parent company, which can benefit from the taxation laws and benefits of the branch office’s location.
- It is the simplest form that a business may take for business expansion: A branch is often the simplest and safest way for a company to expand its brand into a foreign country and explore new markets. Other company types require more regulation, documentation, and compliance measures.
- More difficult to explore new business opportunities for parent organizations: A branch is restricted in its business activities, so the lack of independence creates more difficulty in market exploration.
- If the branch has legal problems or debts, a parent organization is liable: Parent companies are completely liable for any of the branch’s debts, fines, or legal settlements, which also increases the risk of the expansion.
- Finding employees for the branch: This depends on the country’s labour and migration laws, but finding employees is a lengthy and demanding process, especially if you are transferring employees to the new branch.
What are the pros and cons of a subsidiary?
- Subsidiaries are independent of their parent company: A subsidiary is a separate legal entity, so it may conduct business more flexibly and easily, form partnerships, and explore new markets with little to no restrictions from the parent company.
- A subsidiary adds more accessibility and greater credibility to the parent organization: In most cases, foreign clients, service providers, and banks prefer doing business with a subsidiary for both legal and financial reasons, creating better accessibility to your business and sector.
- A subsidiary is more flexible than a branch: Subsidiaries enjoy a greater degree of flexibility in the issuing or transferring of shares to third parties (such as investors, partners, employees etc.), as well as the public stock exchange.
- Can explore more economic opportunities in a foreign country: A subsidiary can explore new markets in a foreign and need not necessarily stick to the same market as the parent company.
- May take advantage of cost efficiencies in a foreign country: Parent companies that open foreign subsidiaries can often take advantage of the country’s manufacturing and labour costs.
- A subsidiary offers greater liability protection for the parent organization: Since a subsidiary’s legal identity is separate from the parent company, that offers the shareholders of the parent company greater legal protection. They have no liability in the case of legal problems or debt of the subsidiary.
- Subsidiaries cost more to establish and open: Subsidiary incorporation procedures are significantly higher than those of branches. Subsidiaries must have their own documents (including translations and legal advice), business or trade licenses, bank account, office space, payroll system, and more – which accumulate in costs.
- Face regulatory and cultural challenges: If you want to open a subsidiary in a new territory, you must carefully study the cultural, political, and regulatory environments of that country – as they will all have a significant effect on how the subsidiary will work. Shareholders or directors who live in the country can help the parent organization better understand how things work.
- Costs can be high in case of regulatory and legal problems: If a subsidiary falls into certain issues in terms of profit or revenue, there are more intricate legal and financial questions involved, especially when the legal system or language is not one you or your company are familiar with.
Contact us today to learn more!
Choosing between a branch and a subsidiary office in a foreign territory can be a difficult and complex issue – particularly if you are invested in expanding into new markets as quickly as possible.
It not only takes time to decide on the course of establishment and type of operation, but it also takes time to do research and understand the different laws, rules, and customs of the country and how they do business.
We use our global infrastructure to help companies onboard teams in over 100 countries, without the need to set up a subsidiary or a branch office.
For more information about what we can do for your company’s expansion, contact one of our consultants today.