Difference between branch and subsidiary

what is meant by a branch?

A branch is an expansion of a company that aims to have a physical presence in multiple locations. The primary objective of a branch is to tap into various markets and cater to a broad customer base. A branch office is an integral part of the parent company, with the parent company assuming responsibility for the actions of the branch office. Furthermore, it lacks a distinct legal identity.

Each branch office operates independently, engaging in the same business as the head company. As a result, there is healthy competition among the branches to meet their sales targets. Every branch office is required to have a branch manager who is responsible for reporting to the head office. While all branches may have identical marketing materials, it is crucial for their marketing strategies and plans to be tailored to the specific foreign country they are operating in. 

What is meant by a Subsidiary?

A subsidiary company is a separate legal entity that is owned by a larger company known as a holding company. The holding company and its subsidiaries are recognized as a corporate group. A subsidiary company is under the control of the parent company, yet it maintains a distinct legal identity. The parent company is not held accountable for the actions of its subsidiary companies. It would be seen as an independent entity capable of entering into contracts on its own behalf, and the tax regulations for a subsidiary company would differ from those of its parent company.

Major Difference Between Branch and Subsidiary

One key distinction between a branch and a subsidiary lies in their respective purposes. Branches are established to extend customer reach and tap into different markets, while subsidiaries are created as part of a larger expansion strategy for the parent company. Here, we outline the key distinctions between a subsidiary and a branch. Take a look at them and delve into the significant contrasts.

• 1. Reporting Entity

The reporting entities for both the branch and subsidiary are distinct. Although the branch is required to provide reports to the head office, the subsidiary must submit reports to the holding company.

• 2. Branding Efforts

The branding effort of a branch and parent company would be identical, as they utilize the same logo and slogans. A subsidiary has the freedom to develop its own distinct branding initiatives.

• 3. Resources and Systems

In order to access resources and systems, branches typically rely on the head office, whereas a subsidiary may or may not have a dependency on the head office. A subsidiary enjoys greater independence in comparison to a branch.

• 4. Business Activities

In order for a branch to align with its parent company, it is crucial that their business activities remain consistent. However, a subsidiary has the flexibility to engage in a different business activity than its parent company.

• 5. Legal Status

Both a branch and its parent company hold equal legal standings. However, a subsidiary may possess independent legal status in contrast to the parent company.

• 6. Liability

The responsibility of a branch reaches to its parent company. Although the holding company is not responsible for any obligations of the subsidiary

• 7. Maintenance of the Accounts

A branch has the choice to either continue or discontinue the joint accounts with the head office. However, it is important to note that a subsidiary does not have a joint account with the holding company.

• 8. Control Over Management

The head office exercises complete authority over the branch manager and staff. On the other hand, when it comes to a subsidiary, the level of control is more restricted.

• 9. Ownership

In the case of a branch office, the parent company would have complete ownership, whereas for a subsidiary, the ownership would be limited to a range of 50 to 100%.

• 10. Performance and Financial Loss

If a branch is operating at a loss, the parent company has the option to close it. However, if a subsidiary is experiencing a loss, the holding company may choose to sell it.

• 11. Incorporation

Starting a branch office is relatively straightforward, but the process of establishing a subsidiary can be quite intricate.

• 12. Cost

Starting and running a branch is more cost-effective than starting a subsidiary.

• 13. Legal Liability

The holding company is not legally responsible for the actions of the subsidiary, while the parent company is held liable for the actions of the branch office.

• 14. Taxation

The branch is responsible for paying corporate income tax on the profit it earns, which is determined by the foreign country where it is situated. Income tax obligations for subsidiaries vary based on the country in which they are situated. However, the taxation process for subsidiaries is straightforward and transparent.

• 15. Visa and Immigration

The process of hiring foreign employees and local staff can be quite intricate for the branch office, whereas for the subsidiary, it is relatively straightforward due to their local presence.

• 16. Liquidation

When it comes to a branch, the parent company assumes responsibility for the branch office's debt, and the process of closure involves smoothly transferring staff and assets. However, when it comes to a subsidiary, the procedures involved can be quite intricate, involving liquidation and deregistration.

• 17. Capital Requirements

Unlike a branch, a subsidiary is obligated to meet capital requirements and must adhere to financial reporting standards.

• 18. Contractual Disputes

Managing debt recovery during a branch closure can be a complex and costly process. The absence of a local entity to assume responsibility for the debts adds to the challenge, whereas a subsidiary would typically be accountable for its debts on a local level.

CIG Saudi Arabia - Your Trusted Business Partner in Saudi Arabia

It is important to have a clear understanding of the difference between branches and subsidiaries before making a decision on which one to establish based on your business preferences. Prior to establishing a subsidiary company or branch, it is essential to have a comprehensive understanding of the local rules and regulations. To select the most suitable option for your business goals and requirements, it would be beneficial to seek guidance from consulting business setup professionals such as CIG Saudi Arabia. As the leading business setup company in Saudi Arabia, we have extensive knowledge of the distinctions between subsidiaries and branches, as well as the various rules and regulations that apply to each. Contact us today to discuss your business plan and collaborate on achieving your business goals.

Conclusion

So, do you understand what a branch and a subsidiary are, as well as the distinction between a branch office and a subsidiary? I really hope you do! We have experience setting up enterprises in many nations, including Saudi Arabia, so we are well-versed in the varied trends and business models. And as we work on your project, we apply our knowledge and experience. Thus, why do you delay?  Pick up the phone and give us a call so we can talk in-depth about your upcoming Saudi Arabian business venture.