Businesses looking to expand outside their home countries and take advantage of new markets need to choose carefully if they will open a subsidiary or a branch of their company based on the benefits and disadvantages of each type of entity.
Each business form has its own advantages and disadvantages and the decision of opening one or another depends on the activities to be undertaken by the parent company, considering the branch is often the more employed type of structure by foreign enterprises. For instance, if you want to open a branch or subsidiary in Germany, guidance from experts in company formation matters in Germany is advisable.
Let’s see below what would make a foreign company decide for a branch office instead of a subsidiary.
The branch office offers a greater level of control to the parent company
Foreign companies establishing branch offices will usually be attracted by the fact that this business form offers a greater level of control. The branch office is a dependent type of company, which means that its activities are entirely overseen by the parent company. The same happens in the decision-making process – the parent company will have full control over its branch.
There are many European countries, such as Malta, Italy and Luxembourg in which the branch office offers a great level of control. For example, those who must choose between a subsidiary and a branch in Italy will usually choose the second option.
The branch office will be subject to the laws in the parent company’s country
Even if at first, this could seem a disadvantage, the branch office is governed by the legislation of its parent company’s home country primarily, while the laws in the country in which it is established will have a limited effect. This will ensure a more effective management of the parent company.
Those interested in setting up a branch or a subsidiary in Luxembourg, for example, should know that the branch will be subject to less stricter requirements upon registration.
It is cheaper to open a branch office
Speaking about Europe, close to Italy is Malta and when comparing the costs of opening a branch and a subsidiary in Malta, it will prove much cheaper to set up the former type of company, as there are no share capital requirements involved.
Branch offices are recognized all over the world
There are countries in which the subsidiary is not a recognized business form, which is a great advantage of the branch office which is recognized. Even in offshore jurisdictions, such as Seychelles, branch offices can be set up under very advantageous conditions. For instance, foreign banks can set up branches in Seychelles and benefit from the advantageous legislation governing the financial industry.
The branch office offers more tax benefits
From a taxation point of view, the branch office is often a better choice compared to the subsidiary. The branch office is covered by the double tax treaties signed by a country and we could safely say that there is no country in the world to have not signed at least one double tax agreement. For example, Canada which is one of the largest countries in the world has a quite extensive network of such conventions, therefore companies from all over the world establishing branches in Canada will benefit from these agreements.
The branch office is, perhaps, the simplest business form a company has at its disposal when considering expanding its activities. From the simple requirements which must be fulfilled to the incorporation procedure which takes less compared to that of a subsidiary, the branch office has obtained popularity in countries all over the world and it represents one of the safest ways of extending a business under the rules of the parent company’s home country.