Foreign Subsidiaries: What Are They and Do You Need One?

A parent company might own all of a subsidiary or achieve control by having a majority ownership stake (i.e., over 50%). A subsidiary differs from a division, which is not a separate legal entity as far as liability, regulation, and taxation are concerned. A subsidiary must not be confused with an affiliate either, which is less than 50 percent owned by the parent company. The holding or parent company must own more than 50% of the subsidiary company.

Definition and Example of a Subsidiary

• Subsidiaries can serve as valuable conduits for accessing new markets, especially in regions with complex regulatory environments or cultural nuances.
• This intricate relationship forms the foundation of subsidiary company dynamics, granting the parent company a considerable degree of influence over the subsidiary’s operations and decision-making processes.
• The control is established through ownership of a significant portion of the subsidiary’s voting stock, often exceeding 50%.
• Additionally, navigating complex bureaucratic processes to register and operate a subsidiary requires time and expertise.
• Since subsidiaries must remain independent to some degree, transactions with the parent may have to be “at arm’s length,” and the parent might not have all of the control it wishes.

Lengthy and costly legal paperwork burdens result, both from the formation of a subsidiary company and in filing taxes. A parent may have management control issues with its subsidiary if the sub is partly owned by other entities. Decision-making may also become somewhat tedious since issues must be decided through the chain of command within the parent bureaucracy before action can be taken. In some cases, creating subsidiary silos enables the parent company to achieve greater operational efficiency, by splitting a large company into smaller, more easily manageable companies. A Subsidiary Company is a company that’s owned and operated by another business, or parent company.

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• As you can see, companies around the world use subsidiaries to control and manage large, diversified businesses.
• In addition, subsidiaries can contain and limit problems for a parent company to some extent, with the subsidiary serving as a kind of liability shield in the event of lawsuits.
• Having subsidiaries helps companies limit liability risks across a business organization.
• This is because LLCs are more flexible, cost effective and simpler to manage compared to corporations.
• A subsidiary is a separate legal entity, while a branch or division is a part of a company that is not considered to be a separate entity.

Foreign Ownership

There has to be uniformity in the accounting policies while combining the statements. The different layers of subsidiaries are called first-tier, second-tier, third-tier and so on. As seen in the image below the parent company owns more than 50% share in two subsidiaries. The one subsidiary, however, owns 50% of a subsidiary making this a second-tier subsidiary for the parent company the same follows for any lower-tier subsidiaries. A parent company has considerable influence over the subsidiaries they can for example decide to dissolve a subsidiary, claim its assets, merge the two companies or elect a company’s board of directors. There are however legal, tax and marketing reasons that could prevent what is a subsidary the company from doing that.

What are the types of subsidiaries?

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Step 4: Open Local Bank Accounts and Set Up Tax Registrations

As a subsidiary functions as a separate entity, it usually has its own management team and CEO. However, the parent company will get a significant say in who runs the company and who sits on its board of directors. Unlike Employer of Record (EOR) models, foreign subsidiaries provide businesses with greater control over their local operations. From hiring employees directly to managing day-to-day activities, subsidiaries allow companies to align operations with their global strategy while adapting to local needs. However, managing a subsidiary company requires careful consideration of governance, financial reporting, and regulatory compliance.

Subsidiary Pros and Cons

The primary difference between a subsidiary and an affiliate lies in the degree of ownership and control. In a subsidiary relationship, the parent company typically holds a majority stake (over 50% ownership) and exerts significant control over the subsidiary’s operations and management. In contrast, an affiliate relationship implies a less significant level of ownership, often ranging from 20% to 50%.

A foreign subsidiary is a company that is owned or controlled by a parent company but operates in a different country. While the parent company holds ownership, the subsidiary is considered a separate legal entity under the laws of the country where it operates. This separation allows the subsidiary to manage local operations, hire employees, and comply with local regulations independently, while still contributing to the overall goals of the parent company. We are currently looking at entities where the parent company owns majority voting stock and thus has a controlling interest in the subsidiary.