Most major corporations create separate subsidiaries for doing business in foreign countries. This tactic minimizes a parent company’s international taxes, among other financial benefits. Before looking at said benefits in detail, it’s important to understand the difference between parent and subsidiary companies.
What is a Parent Company?
A parent company has a controlling interest in a subsidiary company or owns a majority of the subsidiary’s voting stock. For instance, Facebook is a parent company of WhatsApp.
But note that parent companies are separate legal entities from their subsidiaries. This means liabilities, taxation, and other factors affect each company separately.
What is a Subsidiary Company?
A subsidiary is a company owned by a parent company. Owning a subsidiary means the parent company has over 50 percent of the subsidiary’s shares.
Financial Benefits of Operating as Subsidiaries Abroad
1. Limited Liability of the Parent Company
Many businesses create subsidiaries to shield themselves against lawsuits. For instance, if you have a subsidiary that operates in a foreign country, lawsuits brought against that company will not affect the parent company. That’s because the parent company, as a separate legal entity, is not liable for a subsidiary’s actions.
But note that this will only work if the subsidiary’s operations maintain a level of independence from the parent company.
2. Tailoring Services
Creating subsidiaries to operate abroad lets you tailor your foreign services and operations to suit the requirements of the host country. For example, KFC modified its menu and operations in Asia to suit the needs of customers in that region. Because the Asian outlets are subsidiaries, how they operate has no bearing on the operations of US outlets.
3. Tax Gains
A parent company can create subsidiaries to take advantage of friendlier tax laws in other states or international tax laws. You can also create subsidiaries that are nonprofit organizations and take advantage of tax exemptions for such corporations.
4. Different Identities
You can create subsidiaries to develop brands that resonate better with people in different locations. For example, Coca-Cola produces Abbey Well bottled water in the UK, which is distinct from Alhambra, its bottled water subsidiary in the US.
At MKS&H, our business consultants can help optimize your business to better suit your goals. That includes guiding you in creating subsidiaries to expand the reach of your organization while minimizing international tax obligations.
Contact us today for an initial consultation to get started.