Foreign subsidiary under companies act 2013

Foreign subsidiary under companies act 2013

A foreign subsidiary is an overseas company owned or controlled by a larger enterprise based in another country. Foreign subsidiaries are separate legal entities and must comply with the local jurisdiction law. They’re also responsible for their assets and taxes.

How Does a Foreign Subsidiary Work?

The business entity must be more than 50% owned by a foreign parent company or holding company to be classed as a foreign subsidiary company. If the parent company owns 100% of the shares, this is called a “wholly-owned subsidiary.”

The parent company, along with any other shareholders, should elect a board of directors to maintain control over the management and operations of the foreign subsidiary.

If a parent company owns less than 50% of the foreign entity’s shares, it’s designated an associate or affiliate company instead.

Foreign Branch Vs. Foreign Subsidiary

Both foreign branches and subsidiaries can enable businesses to expand internationally, but they have a crucial difference. A subsidiary is legally and fiscally separate from its parent or holding company, whereas a branch office is not.

This means a parent company remains liable for a branch office but not for a subsidiary. You can find out more about branch offices in our separate guide about local entities.

Foreign Subsidiary Vs. Permanent Establishment?

Permanent Establishment (PE) is a concept or state of being rather than an entity type. Tax authorities generally define a Permanent Establishment as a permanent, ongoing, and revenue-generating setup within its jurisdiction. As such, it may be liable to pay corporate taxes in that jurisdiction.

Because of this definition, a foreign subsidiary is by its very nature a PE. However, many other entities or business structures may be considered a Permanent Establishment, too, including branch offices and affiliate companies. A business may even create PE by hiring staff abroad without opening a physical office.

Pros of Establishing a Foreign Subsidiary

When executed at the right stage of international expansion, establishing new foreign subsidiaries can benefit your business.

It Offers Financial Benefits

Opening a foreign subsidiary can give you increased access to local resources, assets, and grants. It can also be advantageous for tax reasons because your subsidiary pays corporate taxes separately from the parent company.

It Protects Your Parent Company

Unlike a representative or branch office, a foreign subsidiary is treated as a separate legal entity from its parent company. While the parent company still controls how its subsidiary operates, liability and risk are generally isolated.

It Creates Trust & Credibility

In many countries, having an official business presence like a foreign subsidiary can help generate more credibility for your company. Local businesses, governments, industries, and consumers will likely take your company more seriously because it complies with all local regulations. This can increase overall brand trust and recognition in your new market.

Cons of Establishing a Foreign Subsidiary

While your global expansion strategy may benefit from establishing foreign subsidiaries, you also should know that it’s not a simple process. You’ll have to overcome some significant challenges to make it a success.

It’s Expensive & Resource-intensive

Foreign subsidiaries require a significant investment from the offset, both money and resources. In addition to expensive setup and running costs, your team - including senior management - will need to dedicate much time to establishing and maintaining a foreign subsidiary, which may detract from other high ROI activities.

Local Expertise Is Required

Navigating a foreign country's cultural, political, legal, tax, and bureaucratic systems is complex. Without seeking (often expensive) local expertise, your global expansion plans have a much higher chance of failure. You also put your business at a greater risk of non-compliance, which could lead to fines and legal action.

It’s Tricky to Dissolve

If your market doesn’t deliver as expected, closing a foreign subsidiary can be challenging. In some jurisdictions, it can take as long, if not longer, to dissolve a subsidiary than to set one up in the first place. You need to consider closing bank accounts, ending office leases, liquidating investments, giving employees enough notice, and much more.


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