What constitutes a foreign subsidiary?

A foreign subsidiary, also known as a daughter company, is a business entity either wholly or partially owned by a foreign entity. If the parent company holds less than 50% ownership, it’s termed an affiliate. The parent company, alternatively called the holding company, retains control over the subsidiary, even if owning 100%, yet they remain distinct legal entities for tax and liability purposes.

Distinguishing Branch Offices from Subsidiaries

A branch office operates as an extension of the parent company in another country, sharing its activities and tax returns. In contrast, a subsidiary functions independently, complying with local laws and filing separate tax returns. Despite the parent company's control, subsidiaries enjoy greater autonomy.

Permanent Establishment vs. Subsidiary: Tax Implications

While a subsidiary operates under the parent company's jurisdiction, a permanent establishment relinquishes some tax control to the host country. It may occur if the foreign entity maintains a fixed place of business or acts as a dependent agent. Once classified as a permanent establishment, local taxes apply, potentially complicating compliance.

Benefits and Drawbacks of Establishing Foreign Subsidiaries

Launching a foreign subsidiary offers access to new markets, employment opportunities, and tax incentives. However, the process is lengthy, expensive, and subject to cultural and regulatory challenges. Increased bureaucracy and legal complexities may arise due to differing international laws, necessitating careful planning and legal counsel.