The Benefits of Establishing a Branch or Subsidiary in Europe
Any business legally established in a European country may open a secondary establishment, such as an office, agency, Branch or Subsidiary, in another EU member state. Here we look at the benefits of, and differences between, setting up a Branch and a Subsidiary.
What’s the difference between a branch and a subsidiary?
A branch is a more independent entity that conducts business in its own name but still acts on behalf of the company. A branch is not legally separate from the foreign parent company and so is also subject to the local laws governing the foreign parent company.
Despite not being autonomous, the branch conducts business independently and so must be listed in the commercial register of the country it resides in. It is a requirement that the business name of the branch must include the business name of the foreign parent company for identification.
A subsidiary is an incorporated entity created in the host EU country in accordance with one of the national business legal forms. The capital of the subsidiary is either fully owned by the foreign parent company (making it a Single Member Company recognised in all EU countries) or controlled by a company in collaboration with minority local partners (therefore making it a ‘joint subsidiary’).
Depending on the chosen legal structure for the subsidiary, the relevant statutory provisions must be observed; for example, entry in the commercial register, rules on minimum capital, and business registration. The subsidiary is the more popular structure to incorporate in Europe.
It is much easier to conduct businesses through an independent legal entity and a subsidiary or Limited Liability Company usually gives a business more credibility with third parties such as banks, service providers, and partners.
Is a branch the opposite of a subsidiary?
In a sense, yes. A subsidiary is an autonomous, separately incorporated entity which is still able to share assets and intellectual property with its parent company.
By contrast, a branch is legally conjoined to its parent company. This means it is subject to the laws governing foreign businesses, as opposed to those governing national businesses.
There’s a decent argument to claim that a holding company is also the opposite of a subsidiary. A holding company is set up to buy and hold the stock of other companies. A subsidiary meanwhile is a business whose majority stake is owned by another company, which could be a holding company.
What are the requirements for a European branch?
In all EU countries, branches are required to:
- Register in the companies registries
- Register with the relevant tax and VAT authorities
- Register with the social security offices
- Publish information on the controlling company and its activities
Subsidiaries must go through the legal registration procedures in their host country, just as a normal Limited Liability Company would.
The benefits of establishing a branch or subsidiary include:
- While offices, agencies and Branches do not have a legal personality, Subsidiaries are legally independent from their foreign parent company. This makes it easier to conduct businesses as the Subsidiary is an independent legal entity
- A Subsidiary also gives more credibility to the business, particularly with banks, service providers and partners
- Branches are useful for gaining an understanding of the local and finding out whether the business can find a niche there
- A Branch is also incredibly cost efficient, with less tax liability due to small annual turnover, and few overhead costs due to its size
- In terms of liability, a Subsidiary is much more beneficial as an independent entity from the foreign parent company and so shareholders have no liability for the debts or undertakings of the Subsidiary. As a Branch is not autonomous, the foreign parent company is fully liable for the Branch and its activities
The Subsidiary offers a somewhat greater measure of flexibility in the sense that, as opposed to the Branch office, it may issue or transfer shares to third parties, i.e. partners, investors, venture capitalists, managers, employees or other group companies within the framework of a reorganisation or joint venture. It may also issue bonds or shares to the public and obtain quotation on a stock exchange.
What is a wholly owned subsidiary?
A wholly owned subsidiary is one where the entirety of the subsidiary’s stock is owned by its parent company. A normal subsidiary is between 51% and 99% owned by its parent company. This is an important distinction in many cases, as the level of control exerted by the parent company will affect their financial liabilities, as well as the power to make changes and delegate resources.
Both Subsidiaries and Branches have various benefits for European businesses and can be a great way to expand throughout Europe, increasing awareness and building up a customer base from accessing new markets.
For more information on forming a European subsidiary or branch, don’t hesitate to contact us.