For those organisations that have decided to set up a UK presence, a subsidiary is a popular option with many benefits. Below we explain what a subsidiary is, and why you may (or may not) choose to incorporate a UK subsidiary rather than set up a UK Branch.
We find the vast majority of clients choose to incorporate a subsidiary unless there are specific tax or corporate drivers in favour of a branch. We look at the key reasons for this further below.
What is a UK Subsidiary Company?
A UK subsidiary is simply a UK company that is owned by a non-UK company. The UK company is part of the same group as its parent, but it has separate legal personality, can enter into contracts, has limited liability and operates as a stand alone entity. Normally it is subject to UK taxes and laws in the same way that any other UK company is.
What is a UK Branch?
A UK branch is created when a non-UK company sets up a physical place of business in the UK. Technically, this is known as a UK establishment but it is often referred to as a branch. It is a way for a foreign company to do business in the UK without setting up a legal entity. The UK establishment will be subject to UK taxes and can do business in the UK, but it does not have a separate legal personality. Therefore, any assets and liabilities of the UK establishment are assets and liabilities of the foreign company.
Any liability is ring fenced in a subsidiary and does not impact the parent company unless it provided a guarantee or similar. Any liability incurred by a UK branch will be owed by the parent company as well.
A UK branch can enter into all types of commercial contracts, including financing arrangements. However, branches are a lot less common and practically branches often find it harder to enter into commercial agreements.
Branches do not require statutory audits. All UK incorporated companies require a statutory audit unless it, together with the group to which it belongs, is “small”. To be small, the group must meet two out of three criteria on a consolidated basis: turnover less than £10.2m, Balance Sheet total of less than £5.1m, or an average of 50 or fewer employees.
For Branches, corporation tax is charged on UK profits only. UK subsidiaries pay tax on their worldwide profits (subject to credits for taxes suffered overseas). Branches may also offset losses incurred in the UK with profits generated in their parent company’s tax return. Branches often find it harder to register for VAT.
The cost will vary from client to client but, as a general rule, we find that the setup and ongoing costs related to a subsidiary are lower than for a branch.
Subsidiary or Branch or Both?
As a general rule, setting up a subsidiary is quicker, cheaper and makes it easier to do business in the UK. For some clients, there are specific tax or regulatory requirements that favour a branch over a subsidiary but in the vast majority of cases we would recommend a subsidiary.
We have been working with Elemental CoSec for the past 5 years, and we've had a fantastic experience. Nick and his team are highly professional and responsive, and they are a key partner to our business in the UK. We highly recommend working with them.”
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