The difference between subsidiaries and branches

The differences and selection between subsidiaries and branches: Subsidiaries and branches are important forms of organizational structure for the operation of modern large companies. Why does a company arrange for some of its subsidiaries to be classified as subsidiaries, while other subsidiaries are classified as branches? Between subsidiaries and branch companies, which is the better choice for a company when establishing branches? Before answering these questions, let’s first take a look at the characteristics of branches and subsidiaries: (1) Branches The relationship between a branch and its head office is somewhat similar to that between a subsidiary and its parent company. However, the legal status of a branch is completely different from that of a subsidiary; it does not have an independent legal status. A branch office is a subsidiary or affiliated entity under the head office that directly engages in business operations. Although the branch has the word “company” in it, it is not a company in the true sense. Since branch offices do not possess the status of legal entities, they do not have an independent legal status nor do they bear civil liabilities independently. (II) Subsidiaries A subsidiary is a legal concept that corresponds to a parent company. A subsidiary has legal person status and can independently assume civil liability, which is a key difference between a subsidiary and a branch office. The parent company and the subsidiary are each independent legal entities, with the subsidiary being under the actual control of the parent company. Under the principle of majority voting by the shareholders’ meeting, the more shares one holds, the greater the influence one has in making decisions regarding the company’s affairs. Parent companies typically control their subsidiaries based on ownership of shares or control agreements. The parent company holds de facto decision-making power over all major matters of the subsidiary, with the ability to determine the composition of the subsidiary’s board of directors being particularly important. In addition to share control, a parent-subsidiary relationship can also be established by entering into certain special contracts or agreements that place one company under the control of another. (III) Differences from a tax perspective: There are significant differences in tax regulations between establishing a branch office and setting up a subsidiary through holding interests. Since a branch is not an independent legal entity, its profits and losses are combined with those of the head office for tax purposes. In contrast, a subsidiary is an independent legal entity, and both the parent company and the subsidiary must pay taxes separately. Moreover, a subsidiary can distribute dividends to its shareholders based on their shareholding only from after-tax profits. Generally speaking, if the company established can be profitable from the outset, it is even more advantageous to set up a subsidiary. When the subsidiary is profitable, it can benefit from various tax incentives and other business advantages offered locally. If the newly established company incurs losses in its early stages of operation, it is more advantageous to set up a branch office, as this can reduce the tax burden on the head office. Subsidiaries and branches are important forms of organizational structure for the operation of modern large companies. Why does a company arrange for some of its subsidiaries to be classified as subsidiaries, while other subsidiaries are classified as branches? This probably needs to be analyzed primarily from the perspective of tax planning, because in an increasingly competitive market environment, all legitimate measures that can improve a company’s economic efficiency are of key importance to businesses. Choosing an organizational structure that offers tax advantages is one of the important ways to achieve this goal. Countries around the world (including my own country) have many different regulations regarding tax treatment and other aspects for subsidiaries and branches, which provides enterprises or multinational companies with options regarding the organizational structure for setting up such subsidiaries. 1. Advantages of establishing a subsidiary: (1) Limited liability in the host country as well (sometimes a guarantee from the parent company is required) ； (2) Subsidiaries report their corporate performance to the parent company only in terms of production and business activities, whereas branches must report a comprehensive overview to the head office ； (3) Subsidiaries are independent legal entities, and their income tax is calculated separately. Subsidiaries can enjoy tax incentives, including tax holidays, provided by the host country to its resident companies, whereas branches, as part of the parent company sent abroad, are generally not given additional benefits by the host country ； (4) When the tax rate applied by the host country is lower than that in the country of residence, the subsidiary’s accumulated profits can benefit from deferred taxation ； (5) It is much more flexible for subsidiaries to remit profits back to the parent company compared to branches; this means that the parent company’s investment earnings and capital gains can remain in the subsidiary, or can be remitted when tax burdens are lower, thereby securing additional tax benefits. (6) Many **provide for a reduction or exemption from withholding tax on dividends paid by subsidiaries to their parent companies. 2. Benefits of establishing a branch company: (1) Branch companies are generally easier to manage, and the requirements regarding financial accounting systems are also simpler ； (2) Branches may incur lower costs and expenses compared to subsidiaries ； (3) Since a branch is not an independent legal entity, turnover taxes are paid at the location where it is situated, while profits are taxed collectively by the head office. In the early stages of operation, branch companies often incur losses, but these losses can be offset against the profits of the head office, thereby reducing the tax burden ； (4) Profits delivered by branches to the head office generally do not require withholding tax ； (5) Capital transfers between branches and the head office are not subject to taxation since they do not involve changes in ownership. As can be seen from the above, there are significant differences in tax benefits between subsidiaries and branch offices; therefore, corporate entities should carefully compare various options, consider all factors comprehensively, and make proper plans when choosing an organizational structure. But overall, the most important difference between the two organizational forms is that a subsidiary is an independent legal entity; it is considered a resident taxpayer in the country where it is established and generally has to fulfill all the tax obligations applicable to other companies in that country. A branch is not an independent legal entity; it is considered a non-resident taxpayer in the country where it is established and bears only limited tax obligations. The profits and losses of branch companies must be combined with those of the head office, that is, in what is known as \"consolidated financial statements\". China’s tax laws also stipulate that there are two ways in which corporate subsidiaries can pay taxes on their earnings: one is to file tax returns independently ； First, merge and pay taxes centrally at the head office. The form of tax payment to be used depends on the nature of the company’s subsidiaries – whether they are separate taxpayers subject to corporate income tax. It must be noted here that the combined calculation of profits from overseas branches and the head office affects the tax burden in the country where the residents are located. As for the host country in which the branch is situated, it usually still has to levy taxes on the income attributable to that branch itself; this is what is known as the tax jurisdiction based on the source of income. This problem does not exist when a branch is established within the country, and companies should take this into account when planning their tax strategies. So, regarding the choice between branches and subsidiaries. There are significant differences in tax regulations between establishing a branch office and setting up a subsidiary through holding interests. Since a branch is not an independent legal entity, its profits and losses are combined with those of the head office for tax purposes; whereas a subsidiary is an independent legal entity, and both the parent company and the subsidiary must pay taxes separately. Moreover, a subsidiary can distribute dividends to its shareholders based on their shareholding only from after-tax profits. Generally speaking, if the company established can be profitable from the outset, it is more advantageous to set up subsidiaries. When the subsidiary is profitable, it can benefit from various tax incentives and other business advantages offered locally. If the newly established company incurs losses in its early stages of operation, it is more advantageous to set up a branch office, as this can reduce the tax burden on the head office.

To use the most vivid analogy, the relationship between a subsidiary and its parent company is like that between a mother and her son: although they are related, they are two separate entities, independent legal persons. The relationship between the head office and its branches is like that between a person and their thigh; the branches are part of the head office and are not independent legal entities.

Subsidiaries handle direct business relations with departments such as industry and commerce, taxation, and social insurance, while branches handle these matters on behalf of the parent company. A subsidiary is like a son who sets up his own household after getting married, but still remains connected. The parent company is like a family that continues to live together even though its son has started his own household.

Correction: A subsidiary is like a son who sets up his own household after getting married and lives separately.

The qualifications of the head office can be used by its branches, but subsidiaries cannot; they need to apply for them again.

The degree of freedom for subsidiaries and branches is different. A subsidiary is independent and has an equity relationship with its parent company.

The biggest difference is that a subsidiary is a company with legal person status, while a branch does not have such status.