Global ExpansionInternational PEO

Creating a Foreign Branch vs Subsidiary: Which One Is Right for Your Business?

By August 19, 2020No Comments
Man choosing which path to take

Before expanding your business into new territories, you must consider how your business will maintain compliance in your target markets. The first step to compliance is establishing a legal presence in your new market. There are many ways to do this, such as setting up an entity, hiring foreign independent contractors, or utilizing other global hiring solutions.

As your company begins to research all the different ways to hire overseas workers, you will come across an important decision: should you establish a foreign branch, or would a subsidiary better suit your needs?

In most cases, the answer to that question is straightforward, but to make the best decision possible for your business and your international growth goals, you must keep a few key factors in mind.

A Foreign Branch vs. a Subsidiary: What’s the Difference?

A foreign branch is another location of your company that operates entirely in another country. Think of it as an extension of your main office, similar to adding on an extension to your current office, but on a global scale.

A subsidiary, on the other hand, is a new business in a foreign country. It is considered a separate legal entity, which has several distinct pros and cons, depending on your foreign growth goals and what internal resources you have available to manage this new entity. A subsidiary may have an entirely different business purpose than its main parent company, while a branch operates in the same way. It’s important to note that your corporation must own more than half of all available voting stock with a subsidiary.

The Pros and Cons of Branches and Subsidiaries

One of the main advantages of opening a foreign branch is a more straightforward tax process. Because a branch office is considered an extension of your primary location, you typically do not need to file a separate tax return. If your branch office is in a foreign country, there is usually a tax agreement between your parent company and the country, so you avoid being taxed twice.

This topic of tax compliance also brings up one of the major benefits of a subsidiary over a foreign branch: the former enjoys a far greater separation of risk than the latter. When you open a foreign branch, if that branch experiences a local compliance issue, it could easily create a ripple effect that negatively impacts the rest of the company. With a subsidiary, any risk (and the consequences of those risks) is separate from the parent company.

Of course, this also means that your tax structure is more complicated, and it takes additional time and effort to make sure that the subsidiary is compliant with all local tax laws and regulations. This time commitment could limit the number of countries you can expand into because each country comes with its own set of tax codes, and your company must maintain compliance.

Avoid the Burden of Establishing a Branch or Foreign Subsidiary

There is another option that has benefits over both a branch and a subsidiary, and that is choosing a global hiring solution, such as International PEO (Professional Employer Organization).

International PEO enables your company to compliantly hire in almost any country without establishing a foreign legal entity. An International PEO partner acts as your legal Employer of Record, which means they hire talent on your behalf and manage all payroll, benefits, risk mitigation, and compliance, while you maintain day-to-day control of your supported employees.

The benefit of International PEO over a branch or subsidiary office is that you establish a foreign presence quickly and compliantly. Your company can leave any market just as fast in the future if it proves not to be a viable part of your global growth goals. International PEO partners also help your teams navigate different tax requirements, saving time and bandwidth that many companies do not have internally.

While International PEO has several benefits, it is not a viable option for every company looking to expand overseas. For example, if your company is looking to hire a high headcount in a specific country, International PEO is typically not cost-effective. If your company is in certain industries that need to hold fixed assets in a country, such as manufacturing or real estate, International PEO is also not an option. Companies that need to own physical property or have a more prominent legal presence in a country will likely need to open a branch office or foreign subsidiary to be compliant.

Which Global Expansion Option Is Best for Your Business?

Choosing the right global expansion method for your business is a complex decision, and there are many factors to consider. Establishing a subsidiary, a foreign branch, or using international PEO are just a few options. Each hiring method has different pros and cons that you must carefully consider before moving into foreign markets, or you risk being noncompliant with local laws.

You don’t have to decide on the best global expansion option alone. If you’d like guidance on establishing a foreign branch or subsidiary in a new country, or if you want to explore if International PEO is a viable option for your company, get in touch with our global expansion experts today.