In today’s business society and culture, it is not uncommon for aspiring companies to establish some form of office in another country. These representations of a business entity in a foreign country can be branches or subsidiaries. Recently, due to globalization, more companies than ever before are looking for ways to conduct business overseas. Establishing a foreign subsidiary is an important step in improving a business’s reach into new markets as well as getting tax benefits.

What is a foreign subsidiary?

A foreign subsidiary company is a business entity that is owned to a certain degree by another entity from a foreign country. Another name for a subsidiary company is the daughter company. The company owning the subsidiary is called the holding company or a parent company.

It should be noted that even though a parent company can own 100% of the daughter company, they are not merged into a single entity. The subsidiary is considered a separate legal entity from the holding company as far as all tax and liability matters are concerned. However, the holding company influences the policies, decisions, and plans implemented by the subsidiary, proportional to the ownership stake the parent company has in the subsidiary.

Foreign subsidiary and holding company - financial relation

A foreign subsidiary is considered an asset of the parent company and will definitely show up on the parent company’s annual balance sheet. However, it can be difficult to translate the assets from a foreign currency into the home country’s currency.

Additionally, a daughter company will have a completely different set of bank accounts from its holding company. Foreign subsidiaries are usually not subject to US income tax, since the IRS does not consider this type of business as a US company, even if they are wholly owned by a US business. Foreign Subsidiaries are taxed according to the laws of the host country and they pay taxes to this country, as well.

Finally, as long as the laws and regulations of the host country allow businesses to establish subsidiary companies, the parent company does not need to establish a branch office.

Examples of subsidiary companies

Probably the most famous example of a subsidiary company would be Instagram. This company was acquired by Facebook in 2012, and while they do function as different entities, Instagram is a wholly-owned subsidiary of Facebook. The same applies to the Whatsapp messaging app. Additionally, Google LLC and Google Nest are subsidiary companies of Alphabet Inc.

Namely, most of the products you can get nowadays (especially in the food industry), are manufactured by companies subsidiary to some of the most prominent multinational companies. For example, KFC, Pizza Hut, and Taco Bell are all subsidiary companies of Yum! Brands.