Branch or Subsidiary? 6 Rules for Choosing Your Legal Structure Before You Expand Abroad

On Friday, March 10, 2023, California regulators closed Silicon Valley Bank. Three days later, on Monday morning, HSBC bought SVB's British arm for one pound. The UK business kept its customers, its deposits and its staff, and its clients were paying salaries that week as if nothing had happened.

That outcome was not luck. Silicon Valley Bank UK was a separate British company, ring-fenced and supervised in London, not a branch of the American bank. When the parent failed, the subsidiary could be sold on its own in a weekend, because legally it was its own company. A branch would have gone down with the ship.

Most companies will never face a bank run. But every company that sells abroad eventually faces the same question SVB answered years before its crisis: when we go to a new country, do we open a branch of the company we already have, or do we create a new company there? Our group has been in business since 1890 and today operates across eight verticals with sales in more than 75 countries, and I have learned that this "boring" legal choice decides your liability, your tax bill, your banking and, eventually, whether you can sell or close that market cleanly. These are the six rules I use.

What is the difference between a branch and a subsidiary?

A branch is your existing company operating in another country. It has no separate legal personality: its contracts, its debts and its lawsuits belong to the parent. A subsidiary is a new company incorporated under local law and owned by the parent. It signs its own contracts, files its own accounts and, as a rule, answers for its own debts.

There are two other options worth naming, because they are often the right first step:

• A distributor or agent, which owns nothing of yours and carries no local entity cost.
• A representative office, allowed in many countries for marketing and liaison only, with no right to invoice local customers.

The choice is not about paperwork; it is about which balance sheet absorbs the risk of the new market. Everything else follows from that.

Rule 1: Decide which balance sheet should carry the risk

Start with the worst case, not the business plan. What happens if a customer sues, a product fails, a lease goes wrong or the market simply does not work?

With a branch, the claim reaches the parent company and everything it owns. With a subsidiary, the creditor normally stops at the subsidiary's assets, unless the parent has signed guarantees or the courts pierce the corporate veil because the subsidiary was run as a shell.

• Low-risk activity (a sales office, a few employees, no heavy contracts): a branch can be acceptable.
• High-risk activity (manufacturing, construction, hospitality, real estate, consumer products): a subsidiary is almost always the right container.

If a single lawsuit in the new country could threaten the business at home, you need a wall, and only a subsidiary builds one. It is the same logic I apply when we look at any acquisition: keep each risk in the box where it belongs.

Rule 2: Know that the tax authority may decide for you

Many companies believe that if they do not register anything, they have no taxable presence abroad. Tax authorities disagree. Under Article 5 of the OECD Model Tax Convention, a company can have a permanent establishment if it has a fixed place of business in the country, or a person there who habitually concludes contracts, or plays the principal role in concluding them, on its behalf.

The consequences are real. In 2016, Spain's Supreme Court upheld the tax authority's view that Dell's Irish sales company had a permanent establishment in Spain through its local commissionaire. In 2019, Google agreed to pay about €965 million in France to settle a long-running investigation into its tax affairs there.

An unregistered team that signs deals abroad is not a low-cost structure; it is an unregistered branch with back taxes and penalties attached. If you already have a salesperson in the market, as we discussed in our article on hiring your first country manager, get local tax advice on what that person is allowed to sign.

Rule 3: Compare the full cost, not just the setup fee

The incorporation fee is the smallest number in the decision. The real comparison is the yearly cost of keeping the structure alive:

• Subsidiary: local accounts and audit where required, corporate tax returns, a registered address, often a local director, intercompany agreements and transfer pricing documentation.
• Branch: lighter local reporting in many countries, but the parent's own accounts may need to be filed or translated locally, and the branch's results flow straight into the parent's tax return.

Setup costs have fallen in many places. Spain, for example, cut the minimum share capital of a limited company (SL) from €3,000 to €1 with its 2022 business-creation law. Cheap to open does not mean cheap to run: budget three years of compliance, not just the first invoice from the lawyer.

Rule 4: Model the tax on profits and on the money you send home

In most countries both structures pay local corporate tax on locally earned profits. The difference is how the money comes back.

• A subsidiary pays profits to the parent as dividends, which may suffer withholding tax unless a tax treaty or a directive (such as the EU Parent-Subsidiary Directive) reduces it.
• A branch remits profits directly, but some countries apply a branch profits tax to mimic the dividend tax. The United States charges a 30% branch profits tax under Section 884 of the tax code, unless a treaty reduces it.

Losses matter too. In some countries a branch's early losses can offset profits at home, which helps in year one. A subsidiary's losses usually stay trapped inside the subsidiary until it makes money.

Run the numbers for year one, year three and the year you plan to send cash home, because the cheapest structure in a loss-making launch is rarely the cheapest at scale. And if your group is large, the OECD global minimum tax of 15% now applies to groups with more than €750 million of revenue, which narrows many old structuring tricks. The cash side deserves the same care as managing the currency risk of selling abroad.

Rule 5: Think about how customers, banks and regulators see you

Structure is also a signal. A local company is often easier for a local customer, a landlord or a bank to deal with. It has a local tax number, local accounts and a local legal face.

• Regulated activities such as banking, insurance, alcohol distribution or real estate frequently require a locally licensed entity.
• Large customers and public tenders may only buy from a local company.
• Local banks lend to subsidiaries with their own balance sheet far more readily than to branches of an unknown foreign parent.

Ask your first three customers, your banker and your regulator what they need to see before you decide, not after. In our experience, the answer often settles the question on its own.

Rule 6: Choose the structure you can sell, merge or close

Every market entry should be planned with its exit in mind. A subsidiary can be sold by transferring its shares, brought into a joint venture, or liquidated as a single company. A branch cannot be sold as such; you have to transfer its assets, contracts and employees one by one, which is slower, costlier and often triggers taxes.

The structure that lets you leave cleanly is worth more than the one that saves a few thousand euros on the way in. It is exactly why SVB UK could change hands in a weekend.

A practical sequence works for most mid-sized companies:

1. Test the market through a distributor or agent.
2. Open a small, carefully scoped presence once demand is proven, with tax advice on permanent establishment.
3. Incorporate a subsidiary as soon as you hire a team, sign local contracts, hold stock or need a bank.

Key Takeaways

• A branch is your company abroad; a subsidiary is a new local company you own. The real choice is which balance sheet carries the risk.
• If one lawsuit abroad could hurt the business at home, use a subsidiary.
• Having people who sign deals in a country can create a permanent establishment even if you never registered anything.
• Compare three years of compliance costs, not just incorporation fees.
• Model tax on profits and on repatriation: dividends, withholding and branch profits taxes change the answer.
• Customers, banks and regulators often require a local entity, so ask them early.
• Pick the structure you can sell, merge or close, because exits are where branches get expensive.

Frequently Asked Questions

What is the difference between a foreign branch and a foreign subsidiary?

A foreign branch is the parent company itself operating in another country, with no separate legal personality. A foreign subsidiary is a separate company incorporated under local law and owned by the parent. The branch's debts and liabilities belong to the parent, while a subsidiary normally answers only with its own assets.

What are the advantages of using foreign subsidiaries for global expansion?

The main advantage is limited liability: problems in the new market generally stay inside the subsidiary. Subsidiaries are also easier to present to local customers, banks and regulators, can hold local licenses, and can be sold, merged or closed as a single unit. The trade-off is higher ongoing compliance, such as local accounts, tax filings and transfer pricing documentation.

Is a branch taxed in the foreign country?

Yes. A branch is usually treated as a permanent establishment and pays local corporate tax on the profits it earns there. Some countries, including the United States, also charge a branch profits tax when profits are remitted, unless a tax treaty reduces it. The home country then typically gives relief for foreign tax through a treaty or a foreign tax credit.

What are the rules for consolidating foreign subsidiaries?

Under both IFRS and US GAAP, a parent that controls a subsidiary must consolidate it in its group financial statements, regardless of the country. The subsidiary's accounts are translated into the parent's reporting currency and intercompany balances and transactions are eliminated. Local statutory accounts are still required separately in the subsidiary's own country.

When should a company switch from a branch to a subsidiary?

Usually when the local operation hires a real team, signs significant contracts, holds inventory or property, or needs local financing. Those are the moments when liability, banking and regulatory needs outgrow what a branch can offer. Converting later is possible, but it is cheaper to plan the move before the business has grown.

Build the Box Before You Fill It

Going abroad is exciting, and the legal structure feels like the least interesting part of it. It is also the part you cannot easily undo once customers, staff and contracts are inside. Choose the container on purpose, with the exit in mind, and the market can grow without putting the rest of the company at risk. If you want to see how we have built a group of companies across countries and generations, explore the Manzanos Enterprises group.