Understanding Difference between Branch and Subsidiary
- Introduction
- Branch
- Subsidiary
- Establishing Branch vs Subsidiary
- Key Differences between Branch and Subsidiary
- Advantages and Disadvantages of Branch vs Subsidiary
- Al Taasis is Your Forever Business Partner
Introduction
You aspire to expand your business and look into potential growth opportunities, but you need to figure out which corporate structure is more suitable. It is important to know your options and understand the differences.
- What will be your primary business activity?
- How will you manage taxation and liability?
The requirements for establishing a branch and subsidiary vary from country to country.
Contact us to learn more about the specific requirements in Saudi Arabia.
This article will guide you on how branches and subsidiaries work and their pros and cons.
Branch
A branch is an extension of a company; however, branches are physically present in multiple locations. Branches are set up to access diverse markets for business and provide services to large number of customers. It has no distinct legal identity. A branch office is an integral part of its parent company. The company is liable for any actions of the branch.
Every company branch has different sales targets, and they compete with other branches. The branches carry out the same business activities as its head office. The branch manager reports to the head office. Usually, branches share the same marketing materials, but they must adapt to the marketing techniques that suit the target audience of the foreign country where it is located.
Please read our blog Why should you open a branch office in Saudi Arabia?
Subsidiary
A subsidiary is legally independent, but its shares are owned or held by another larger company called a holding company. The holding company and its subsidiaries are known as a corporate group. Though a subsidiary is controlled by its parent company, it has a separate legal identity from the parent company. Even the parent company is not liable for the subsidiary activities.
- It can enter into contracts in its name.
- It is liable to separate taxes from its parent company.
Establishing Branch versus Subsidiary
The branches are set up to increase customer reach and approach diverse markets, whereas a subsidiary is formed for a broader expansion strategy. Every country has different laws and regulations for setting up branches and subsidiaries.
We are well-informed about Saudi local laws. Al Taasis is your trusted business setup partner for expansion to Saudi Arabia.
Ten Key Differences between Branch and Subsidiary
| Key Differences | Branch | Subsidiary |
|---|---|---|
| Reporting Entity | Head office | Holding company |
| Resources and Systems | Rely on head office | May or may not rely on holding company |
| Business Activities | Restricted to conducting the same activities as the parent company | May or may not conduct the same activities as the holding company |
| Branding | Share the same logos & slogans | Own unique branding |
| Legal Status | Same legal standing as the parent company | Separate legal standing from its holding company |
| Liability | Extends to its parent company | The holding company owns no liability for the subsidiary. |
| Account Maintenance | May or may not maintain joint accounts with the head office | Separate accounts from the holding company |
| Ownership | Fully owned by the parent company | 50%-100% owned by the holding company |
| Financial Loss | In case of loss, the parent company can close the branch. | If a subsidiary does not turn out to be profitable, it can be sold. |
Key Differences between Branch and Subsidiary
Branches and subsidiaries may have some common characteristics, but their structures are different from each other. The differences include the following:
Business Activities A branch carries out the same business activities as its parent company, whereas a subsidiary can conduct a separate business activity from its holding company.
Branding Branches follow the branding of their parent company. They will share the same logos, fonts, messaging, and slogans. Subsidiaries have branding that may or may not be the same as the holding company.
Legal status The legal status of a branch is the same as its company, while the subsidiary has separate legal standing from its holding company.
Liability A branch’s liability extends to its parent company, whereas for a subsidiary, it does not extend to the holding company.
The parent company is solely responsible for the actions of its branch, while it has no legal liability for the subsidiary.
Account Maintenance Branch accounts may or may not be managed by the parent company. Subsidiary financials are separate from its holding company.
Ownership A branch is wholly owned by its parent company, while the holding company partially owns a subsidiary, and the shares range from 50-100%.
Financial Loss In case of financial loss, the parent company is responsible for the debts of the branch office. A subsidiary is responsible itself for its loss and debts.
Advantages and Disadvantages of Branch versus Subsidiary
While considering the right option for expanding to Saudi Arabia, you must be aware of the advantages and disadvantages of setting up each. You can establish your business compliantly with the proper knowledge and a trusted partner, Al Taasis.
| Pros & Cons | Branch Office | Subsidiary |
|---|---|---|
| Incorporation | Simple & straightforward | Complex procedures as compared to a branch |
| Cost | Cheaper than a subsidiary | Expensive than a branch |
| Managerial Control | The head office has full control of its branch managers and staff. | The holding company does not have full control over a subsidiary and its staff. |
| Liquidation | Simple closure with the transfer of staff and assets, but the parent company is liable for the branch’s debts. | Liquidated and de-registered with complex procedures as compared to a branch |
| Legal Liability | The parent company can be sued for the actions of its branch. | The holding company is not legally liable for the actions of subsidiary. |
| Taxation | Liable to corporate income tax as per foreign country where it is located. Taxed only on the profit, which is attributed to the branch raising uncertainty in tax calculation. | Liable to corporate income tax as per foreign country where it is located. Taxation is clear and straightforward for a subsidiary. |
| Visa and Immigration | Bringing foreign employees and hiring local staff is complex. | Comparatively easy to hire local staff as the subsidiary has a local presence. |
| Compliance | A branch is not subject to capital requirements like a subsidiary. | Subject to capital requirements and ongoing financial reporting. |
| Contractual Disputes | In the case of branch closure, no local entity is responsible for its debts, so debt recovery is complicated & expensive. | A subsidiary is responsible locally for its debts and disputes. |
Al Taasis is Your Forever Business Partner
The advantages and disadvantages of establishing a branch versus a subsidiary differ depending on the business activity and the country where you want to expand. Deciding on the branch or subsidiary becomes easy when you consult an expert local business setup consultant.
Al Taasis understands the differences between branches and subsidiaries and helps you select the one that fits your business requirements. We know which option is best for your business expansion to Saudi Arabia, and we have the expertise to set up subsidiary and branch office.
Contact us to know more about the prerequisites of your business journey.
