If your company has chosen to open up to the foreign market, the next step consist in deciding wich is the best way to carry out the investment. There are several legal formulas through which you can access the foreign market, the main ones being the subsidiary and the branch, which are the subject of our analysis.
Firstly, a branch is understood as a secondary establishment without legal status, endowed with permanent representation and a certain degree of management autonomy through which the company’s activities are partially or wholly carried out. In other words, it is a delegation of the same company, sharing the same corporate purpose and legal status, but with its own physical premises and clientele.
On the other hand, a subsidiary is an entity controlled directly and indirectly by a parent company forming a group of companies. It is characterised by the fact that it has its own legal status, which means that it is subject to the rights and obligations that correspond to it, independently of those of the parent company.
The main differences between the two modalities are as follows:
- Legal status. The branch does not have a legal status and the subsidiary does..
- Minimum equity. The incorporation of a branch requires no equity outlay, whereas a subsidiary requires a equity outlay of 3,000 or 60,000 EUR, depending on whether it is a limited liability company or a public limited company.
- Liability. In the case of a branch, it is unlimited and assumed in full by the parent company, whereas in the case of a subsidiary, it is limited to the contributed equity.
- Representation and governance. A legal representative will be assigned to the branch, who will be a proxy of the parent company, to deal with the tax authorities. The subsidiary consists of a board and management body.
- A subsidiary keeps its own accounts. It cannot compensate losses against the parent company, but is allowed to deduct payments made to the parent company for patents, interest or royalties. The branch also keeps its own accounts, but the latter’s accounts relate only to the purchase and sale transactions carried out, and to the assets assigned to the activity. In addition, it can deduct its management and general administrative expenses. Lastly, in the event of opting for this method, the parent company must file the consolidated annual accounts with the Commercial Register of the country where it is incorporated, in accordance with the legislation of the country of origin.
- A foreign subsidiary will be incorporated under the laws of the relevant country. However, from a tax perspective, the branch is treated as a permanent establishment of the non-resident parent company. Therefore, a branch will be taxed under the applicable Double Taxation Convention or Non-Resident Income Tax (25%), while the subsidiary will be taxed under Corporate Income Tax (25%).