The Difference between a Branch and a Subsidiary Company: Which is the best option for going global with your business?

The Difference between a Branch and a Subsidiary Company: Which is the best option for going global with your business?

There are more and more Spanish businesses looking to grow their business internationally, It is probably an objective that you also have for your business in the future. Nowadays, managing an international business for a another country is a lot more simper thanks to  tools like the internet, which break down borders and allow you to operate within a global market. In order to achieve it, you need to choose the most convenient legal form, branch or subsidiary. Very often we confuse the two terms given that they both function to broaden your businesses horizons, so that you can start capturing new markets. However there is a big difference between branch and subsidiary, not only in the legal and fiscal side of things but also in the layout, organization and objectives side.

Both are legal forms with the objective of growing businesses internationally

Subsidiary

It´s a legal identity independent from the parent company i.e. an extension of the same business but in another country.  The control the subsidiary company lies with the parent company, because it holds a major percentage of the shares and capital of the business. However the subsidiary company runs independently from the parent company taking its own risks, and taking into account the regulations and norms of the country it’s in.

Branch

The branch form is the secondary establishment of the parent company, located in another area. Given that it is only a part of the company, they carry out the same activities within the market and the branch is dependent on the parent company, they have a subordinate relationship because the branch cannot function without the parent company.

Going deeper, what is the difference between subsidiary and branch?

Once both concepts have been defined, what form of society is best suited to broaden your company’s horizons? The answer would vary depending on your interests. Before choosing between one alternative and the other to take the step towards the internationalization of your business, you will have to take into account the differences between subsidiary and branch in the practical field. These distinctions are governed based on certain legal and fiscal aspects, essential in choosing the form that best fits the needs of your business.

Legal Personality

The subsidiaries, as mentioned above, are independent of the parent company, and therefore have their own legal personality and name, different from the main company. In this way they retain their autonomy, however fiscally, they are subject to the same regulation as the other mercantile entities of the territory where they are established.

On the contrary, branches are not a different company and aren´t independent from the parent company and they do not have a legal personality of their own, although they must register legally in the mercantile register. On the other hand, they can be created by individual entrepreneurs or by mercantile companies, but they will always depend on them.

Administration and Responsibilities

With subsidiaries, liability is limited for the parent company. This is due to their autonomy, because they can carry out activities themselves which are different from the activities carried out by the parent company. For this reason, the subsidiary is liable to its own debts. Therefore, the main company is not affected. On the other hand, the General shareholders meeting will be responsible for the administration of the subsidiary.

On the other hand, in the branches, there is unlimited liability. The possible debts will be compulsorily assumed by the parent company without limitation, since it depends on the activity of the branch. In this case, the manager of the branch office shall be the representative of the parent company in the territory where it is located.

Tax Obligations

From the fiscal point of view, the subsidiaries are subject to the legislation of the state where they are, so they will pay their taxes in the place where they have their headquarters. Therefore, they have the obligation to display their accounts in the mercantile register and pay corporate tax just like tax payers

On the other hand, branches will either pay corporate tax or non-resident income tax.

 

Once the difference between branch and subsidiary companies is made clear, many companies opt for a branch as a way of starting to take their business international so that once it has grown and is making profits they can convert it into a subsidiary company. In the same way, it is important to choose a strong starting point for the base of the expansion and to take into account the interests of the business before making the final decision.

In Lexington we offer you the opportunity to manage your company, wherever you may be, thanks to our Virtual Offices. Therefore you will be able to organize your business with total flexibility and without worrying about unnecessary expenses.

“I have no regrets in taking risks for something that was important to me”

Arthur Miller

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