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.
Branch vs Subsidiary
Firstly, what is the main difference between a European Branch and a European 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.
In all EU countries, Branches are required to:
- Register in companies’ registries, with the relevant tax and VAT authorities, and the social security offices
- Publish information – as is the same in all EU countries – on the controlling company and their activities.
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, an 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.
Subsidiaries must go through the legal registration procedures in their host country as a normal Limited Liability Company would.
The benefits of Branch or Subsidiary
The benefits of establishing a European Branch or Subsidiary include the following:
- While offices, agencies and Branches do not have a legal personality, Subsidiaries are legally independent of 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 reorganization or joint venture. It may also issue bonds or shares to the public and obtain quotations on a stock exchange.
Both Subsidiaries and Branches have various benefits and requirements 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.