A subsidiary is a company, corporation or limited liability company that is controlled by a parent company, through the ownership of more than 50% of the subsidiary’s voting stock.
For the purposes of taxation and regulation, the parent company and subsidiary are considered separate entities. The subsidiary, and consequently the parent company, must adhere to the laws of the country where the subsidiary resides.
The advantages of establishing a subsidiary in a foreign country includes the expansion of international presence, lower labour and production costs and potential benefits of tax and creditor protection. In addition, the legal liabilities of the parent company are limited to the capital contributions made to the subsidiary.
In the EU the Parents-Subsidiary Directive has recently been amended; this now means that the parent company has to hold only 10% of shares in a subsidiary to qualify for exemption of withholding tax, and double taxation is better eliminated with the parent company’s tax imputed against the subsidiary’s tax on profits.
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