Are you an international company considering setting up a branch or subsidiary in the UK, but not sure which structure is best for your business? We explain the difference between the two and weigh up the pros and cons of each option to help you decide.
*This blog was first published in February 2016 and has been updated with new information for accuracy.
What is a branch?
Every expanding company will at some point grow beyond its headquarters. At this point, 'branches' of the business are usually established. When a non-UK company sets up a physical presence in the UK, it creates a UK branch, also known as a UK establishment. This way, a foreign company can do business in the UK without setting up a legal entity there.
In many cases, a branch performs the same functions as the head office and has no distinct legal personality from it. They are both components of one broader company. This means that all transactions are carried out in the parent company's name, which makes it liable for the branch's actions.
Setting up a UK branch
To open a UK branch, you must first register with Companies House, the registrar of companies in the UK. Any overseas company that establishes a UK branch must give that branch a name, which can be the original company name or another title under which
it intends to trade in the UK.
Advantages of setting up a branch
The main reason for establishing a subsidiary instead of a branch is to maintain independence from the parent company. However, there are also advantages that speak in favour of establishing a branch, such as:
The parent company maintains a greater level of control
A branch office receives all instructions from the parent company and reports to it in all its decision-making processes, providing the parent company with greater control.
Offers the parent company greater tax benefits
In a majority of cases, any revenue that is earned by a branch office is handled by tax treaties signed between the country of the parent organisation, and the UK (eliminating double taxation).
Any taxes that the branch office has to pay are handled by the parent company, which can take advantage of the taxation laws and benefits of the UK –
- Corporation tax is only charged on UK profits.
- Branches can use profits made by their parent company to make up for any losses made in the UK. This gives earlier loss relief than for a UK subsidiary.
It's also worth noting that a branch can later be converted into a limited company if necessary, and it can also be closed without formal notice.
Disadvantages of setting up a branch
While a branch can be a less expensive and faster option, it also has some drawbacks. Consider these ahead of establishing a branch.
Liability of parent organisation
The parent company and its shareholders remain liable for the branch’s operations, including debts, fines, or legal settlements.
Branches usually run into difficulties when engaging in legal contracts, since UK companies are wary of entering into agreements governed by non-UK laws.
Limitation of branch activity
The business activity of a branch is limited due to its lack of independence from the parent company. The parent company will always have full control and authority over the branch, which means that every decision made by the branch must be approved by the parent company. This makes market exploration difficult because of the centralised management approach. Branches, for example, cannot offer more services without the consent of the parent company.
What is a subsidiary?
The formation of a foreign subsidiary is a common method of international expansion. They are typically formed because of a merger, acquisition or from the ground up in a new location.
A subsidiary differs from a branch in that it is a separate legal entity. This means that it can enter into contracts in its own name and has a tax liability separate from the parent company. It also means that the parent company is not automatically liable for the actions of the subsidiary.
A UK subsidiary is a legal entity incorporated in the UK under the local rules for the formation and registration of companies. A subsidiary is either wholly owned by the parent company or managed by a company in collaboration with local partners.
Setting up a UK subsidiary company
To create a subsidiary, you must first establish a new UK company. It's a good idea to get help from an advisor to make sure the company is incorporated as required and that the directors and shareholders are appointed correctly.
Advantages of setting up a subsidiary
It may come as no surprise that the advantages of establishing a subsidiary correlate closely with the disadvantages of establishing a branch. A subsidiary is more autonomous and offers several measures of protection for the group of companies to which it belongs.
A UK subsidiary has far more freedom than a branch. This means you won't have to reconcile your subsidiary's financial statements with those of the parent company, and you'll be able to form partnerships and diversify into new industries.
As a separate legal entity, a subsidiary provides greater legal protection to the parent company and shareholders because the liabilities of the limited company cannot be claimed against the parent company's assets.
A UK subsidiary is governed by UK company law. This makes it easier for a limited company in the UK to enter into legally binding agreements.
Disadvantages of setting up a subsidiary
There are some disadvantages to establishing this type of entity, but these are mostly administrative and can be dealt with relatively easily. Before starting the process, make sure you’re prepared for:
Increased costs and time spent on admin
UK company law often has greater filing requirements and procedures for subsidiaries than that of branches, which means accumulative establishment costs.
Another cost consideration is that start-up trading losses can only be carried forward against future trading profits, not against the parent company's current year profits.
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An important note on tax
Tax law varies considerably from country to country. It is therefore essential for a company to take local advice on its home country’s tax position about foreign business and the above issues, while also considering the UK tax position.
A subsidiary must pay Corporation Tax on all profits earned in the UK and abroad, whereas a branch only has to pay Corporation Tax on profits earned in the UK. We recommend contacting an SME accounting expert before deciding which business structure you will employ.
For advice on expanding your business into the UK give UK business migration team a call on +44 (0) 20 7759 7553. You can also email us and we’ll get back to you as soon possible.
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