Branch vs. Subsidiary: Which Structure is Right for Your Global Operations?

When expanding into new international markets, products or service lines, organizations can establish a branch or a subsidiary. Both entities have distinct characteristics, with the most significant difference being the impact on the company’s risk management strategy. The decision to form and register either structure is typically made on a case-by-case basis and requires different supporting documents. The process also varies from country to country.
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What is a Branch?
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A branch is a part of a company that is closely tied to, and still operates under, the company’s governance. A company will select the branch option when operations are limited, and it wants to maintain full control.

Companies should consider a branch when the following factors are important:
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• ‍Control and simplicity: A branch provides centralized control and management over the operations in a foreign market, allowing for simpler coordination with the parent company.
• ‍Short-term or limited presence: A branch is a more agile and cost-effective solution when testing the waters in a new market or opening a smaller operation.
• ‍Reduced costs: Branches are not independent legal entities and have lower setup and administrative costs.
• ‍Fewer local compliance requirements: Sometimes compliance obligations for a branch can be met more easily than for a subsidiary. For example, this is the case in the United Kingdom. However, in Germany branches face the same level of compliance requirements as subsidiaries.
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What is a Subsidiary?

A subsidiary is a separate entity in which 50% or more shares are owned by another company known as the parent company. A subsidiary is typically preferable when operations are more extensive, and the parent company wishes to limit liability.

Companies should consider establishing a subsidiary when seeking to maintain:
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• Local market independence: A subsidiary is a better option when a company wants a significant degree of independence in a new market or when entering a market with complex regulatory or legal requirements.
• Risk mitigation: A subsidiary’s separate legal status can shield the parent company from liabilities and legal issues in foreign markets.
• Long-term operations: A subsidiary provides the opportunity to build a local presence, gain local market trust and access local benefits (e.g., tax incentives or grants) in the long-term.
• Separate ownership: A subsidiary is a preferable structure when the company plans to offer local investors a stake in the foreign market.

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Additional Considerations

Increasingly, companies are opting to form and register subsidiaries due to the global nature of business operations and the need for a higher degree of independence in adhering to local rules and regulations, regardless of where the parent company is based. Unlike branches, subsidiaries also limit liability for the parent company. Additionally, subsidiaries offer greater flexibility in building a local presence through branding and marketing efforts, while ensuring compliance with local laws. Properly structured, subsidiaries can provide significant tax efficiencies, including benefits related to value-added tax (VAT).

However, it’s important to note that certain jurisdictions present unique challenges. For example, managing subsidiaries in India and China can be difficult due to the regulatory, cultural, operational and political nuances of doing business in these countries. Decision-making should take the regulatory landscape into account.

For branches, compliance requirements can be stringent, since a branch is subject to both the parent company's requirements and local regulations. The branch’s profits are taxed as part of the parent company's income, so tax implications must be considered carefully, particularly in terms of the parent company’s tax jurisdiction and the timing of financials, which may not align with local regulatory timelines.

The choice between establishing a subsidiary or a branch largely depends on business goals, market conditions, regulatory considerations and the company’s risk management strategy. Subsidiaries are better suited for long-term operations requiring a strong local presence, while branches are ideal for smaller, simpler or more temporary market entries where control, cost and risk management are priorities.
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How Agile Legal Helps

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Agile Legal’s experienced international services team delivers solutions across all aspects of global subsidiary management – from company secretary, registered office, directorships and treasury services to vendor management.

Our team’s expertise in local rules and requirements, relationships with local service providers, and ability to streamline processes and reduce risk, allows us to help you select the appropriate business structure to navigate regulatory compliance and tailor our solutions to your specific needs.

Look to Agile Legal as your strategic business partner in entity management and engage us early to achieve the best possible outcomes. Contact us now for a consultation on your global entity needs or subscribe to our newsletter to keep up with future updates and resources.