For any company contemplating expanding into a new market, the advantages and disadvantages of setting up a branch or foreign subsidiary will depend on the business opportunities, as well as the cultural and regulatory climate of the specific country.
There are challenges associated with overseas expansion, and while some business issues are universal, such as complying with payroll regulations, other elements are more country-specific and require research into potential solutions to prevent unexpected delays or costs.
The rate of UK based companies setting up an entity in the European Union or in country’s further afield has increased greatly since the sign off of Brexit. For many companies that trade internationally, the benefits of setting up a business will help to reduce the delay in trading goods between countries and also alleviate product registration legislation and rules, depending on the chosen country.
There is often confusion regarding the position of the subsidiary company and what it does. A subsidiary company is a company that is either owned or owned in majority by another company. The company that owns the subsidiary is known as a parent company or a holding company.
Setting up a subsidiary in a foreign country can have many positive effects such as expanding brand recognition, opening access to new markets and using efficient production methods to control costs. Entering a new location can mean increased revenue and business expansion that would not be possible in the home country.
However, in order to initiate a worthwhile venture in each new country, a company must consider factors such as:
- Cost and time to establish a foreign subsidiary
- Corporate policy toward compensation and other HR issues
- Hiring and ‘supervising’ local staff including degree of autonomy
- Compliance risk for payroll, taxation and immigration rules
- Establishing secure office premises, employee residences and bank accounts
- Evaluating the growth potential against the required investment
- Permanent establishment issues resulting in taxable local revenue
- Contingency plans in the event that the new foreign office needs to be closed
How to Set Up a Subsidiary
A subsidiary company may be partly owned or entirely owned by another company but bear in mind that this isn’t like trading under a different name. The subsidiary is another company, so it must be incorporated as one.
When forming your company internationally, it’s wise to employ a company director who is a resident of the country you’re entering and is experienced with setting up local companies and understands the rules and legislations in place. You may need to pay a bond if you do not have country-based nationals as directors. You also need a registered office address in the country you are setting the subsidiary up in.
Depending on your chosen country you may be able to find guidance from the DIT (Department for International Trade), specific country trade bodies (e.g. CBBC – for China) or your accountants / accountants with international affiliations. Ideally you will want an understanding of employment rights in termination, local company law and shareholders agreements, and local audit requirements.
Many countries also differ in their approach to Anti-Bribery & corruption legislation, Child Labour laws, data protection and Conflict minerals. It is important that either you or your advisors understand local requirements with regards to these and how local rules may impact your global brand.
Setting up local bank accounts for foreign subsidiaries can take longer than expected as in many countries Know Your Client legislation requires detailed information about the ultimate beneficiaries of any funds – which would in this case be your shareholders. In certain countries they may also operate exchange control restrictions, impacting your ability to get money back out of that country easily.
It is recommended that robust Directors & Officers Insurance cover is taken up for any foreign subsidiary as legislation and penalties for non-compliance will differ from the UK.
If you plan to use your subsidiary to export or import goods, consideration will be required for how you charge for products and services and funding of the subsidiary – known as Transfer pricing to ensure that both tax regimes are satisfied will the allocation of trading profits.
A little background reading and local support will help to alleviate language, cultural and communications problems but they will almost certainly occur at some point.
Like with any other private limited company, you can make changes to your subsidiary after incorporation. You can sell part of the company to another company to give it multiple owners, or you could even transform the subsidiary company into a company that stands on its own.
Should You Set-up a Subsidiary Company?
A subsidiary company is only necessary in a few scenarios. You need to think about setting up a subsidiary company if:
- You are Operating Overseas – Companies with a UK based headquarters will often opt to set-up a subsidiary company abroad if their main trading operations are overseas. There are many tax and administrative advantages to doing this.
- Two Different Businesses – Sometimes you may have different arms of your business that are so radically different that they need to be formally separated.
- Team Differences – Some companies create a subsidiary if they have a team working on a different project at another office. The project is likely not relevant to the business’s primary purpose, so a subsidiary can allow them to make a formal separation.
Every instance of setting up a subsidiary is different and whilst this article gives interesting points and overviews, you’ll still need professional guidance with setting up a subsidiary abroad. For flexible and professional support around this activity, get in touch with Associate Finance Director, Linda Harvey, via firstname.lastname@example.org or call 07805 031822 to book your free one hour 1-2-1 consultation.