If your business or company is looking to expand abroad, then you’re probably considering opening a foreign subsidiary. As you might know, a foreign subsidiary is an established entity that a parent company owns in a different country. The company might have its HQ in San Francisco, but a subsidiary in Mexico City or Madrid.
Deciding whether to open a foreign subsidiary is a major business decision. In this article, we provide an overview of what a foreign subsidiary is, as well as 5 pros and 5 cons of establishing this type of entity in another country.
The parent company of a subsidiary is the holding company of that entity. Parent companies with less than 50% ownership in the entity are known as affiliate companies.
Although there are different types of subsidiaries in each country, the parent company will almost always still have some say in 1) how business is conducted and 2) who is involved in the management of the foreign entity.
How the company operates will depend on how the parent company has chosen to set up the subsidiary. For instance, subsidiaries may be just one offset of the parent company. Or companies might have multiple subsidiaries spread out around the world, each with different business activities and purposes.
If you’re planning to expand your business in a new country, you will normally have the option of choosing between opening a branch office or establishing a foreign subsidiary.
A branch office is an outpost of the parent company that is located in a different country. A foreign branch office is almost completely reliant on the parent company. The key goal of a branch office is to run all of the parent company’s business in that country. You also need to have a permanent establishment to conduct business out of a new jurisdiction. This type of physical presence is usually taken more seriously than a subsidiary. If you’re operating an organization’s branch office abroad, you will need to comply with more laws and regulations than what is required for running a foreign subsidiary.
A subsidiary, on the other hand, operates as a separate legal entity from the parent company and is similar to an LLC in the United States. The parent company will have some stake and control of the subsidiary, but the subsidiary has more freedom and autonomy, especially when it comes to how the day-to-day operations are handled.
When you choose to open a subsidiary as a limited liability company (LLC), the parent company will have a lot less control over the entity. This gives the foreign subsidiary the advantage of molding operations in a way that better aligns with the culture and business practices of the new country.
For example, business practices in Germany, a country that values promptness and structure, will differ a lot from somewhere like Spain, a country that prides itself on a healthy work/life balance. Many Spanish employers schedule rest times (siestas) for employees in the middle of the work day.
By choosing to open a subsidiary in a foreign country, you are giving the entity more control over how daily business is conducted.
Whether it's a wholly owned subsidiary (another company owns 100% of the stock) or a majority-owned subsidiary (51%-99%), the foreign entity has a lot of freedom, as long as the entity generates the necessary profits.
As the parent company, if you choose to open a limited liability subsidiary, you are protecting yourself from any debts that the foreign entity may incur. Opening a subsidiary in another country means you are only responsible for your initial capital investment.
Although you will still have some stakes in the subsidiary, if anything were to go wrong, the parent company won’t be held as legally responsible. This gives your business a bit more independence. After all, you can’t be there in-person managing all of the operations of the foreign subsidiary.
As your company begins to expand, you will probably want to take your business international. Making the jump to open subsidiaries in other countries gives your business the ability to grow your customer base and increase your number of trade options.
With access to more global markets and a larger business, you will also build your credibility as a company. The wider your reach around the world, the more likely people will take your product and company seriously. Showing that you have the financial means and time to expand demonstrates that your business is doing well enough to grow outside of your home country, which can be appealing to customers and investors alike.
Choosing to open foreign subsidiaries also means that you will have to hire employees in other countries, which is a great approach for diversifying your global workforce.
A larger talent pool means new ideas. This can help make your company more relatable to a wider customer base.
If you’re not sure if opening an entity or subsidiary is the right move for your business, consider hiring employees in new markets by partnering with an EOR service like Via.
Opening a foreign subsidiary in another country will take time and money. You will have to account for travel back and forth to the foreign country, local accounting and legal fees, and upfront capital investments. In some countries, you will need to meet a minimum capital requirement, per federal subsidiary laws. Plus, you’ll need to pay your management team.
You will still need to understand all of the regulations governing that specific country, which also means hiring an HR department to manage your foreign subsidiary. To avoid running into compliance issues, you will need to understand what compensation and benefits employees are entitled to (such as paid time off) and make sure that you are properly paying your employees.
Navigating global payroll, employee benefits, and taxes can be complex. For this reason, many companies partner with global payroll service providers(like a PEO or an EOR) to do the heavy lifting.
Another disadvantage of opening a foreign subsidiary is that you will need to hire a legal team that has in-depth knowledge about the laws and taxes governing the country you’re expanding to in order to avoid any compliance issues. If the subsidiary is owned and controlled by a foreign business, which is usually the case, challenges with international tax laws can arise.
Sure, you might know how to comply with federal laws. But a local legal team is necessary to ensure that your team is remaining compliant with state- or province-level regulations. Easy-to-miss nuances in the country’s foreign subsidiary laws can cost your business thousands of dollars in fines and legal fees.
While working with people from different cultures has key advantages for businesses, such as building deeper empathy with your customers, cultural differences can also lead to misunderstandings, poor communication, and confusion.
Tailoring your business practices and operations to a new culture can be challenging, especially if you don’t have a team of on-the-ground experts. For this reason, you want to make sure that your product has a strong fit in the new country. What sells in Mexico won’t necessarily sell in China, for example.
To open an international subsidiary anywhere, you will have to register with a number of bureaucratic structures in the new country to legally and compliantly start running your global business. In most cases, you will need to form a board of directors.
Most countries also require foreign subsidiaries to open a local bank account in order to compliantly pay foreign workers as their employer. In some cases, you will need to file paperwork in person and cut through even more red tape.
Opening a foreign subsidiary has a lot of great benefits for companies hoping to expand their market internationally. You will have new access to a new talent pool and a wider customer base. Most importantly, if you open a subsidiary as a local operation, it can operate as a complete local entity.
However, if you’re just planning on hiring new talent abroad or want to just test the waters in another country, using an EOR service like Via is the best option for expansion. EOR’s already have established entities and legal teams in foreign countries. If you already have an entity established abroad, then you might consider working with a professional employer organization, or a PEO.
Many companies want to hire abroad, but aren’t sure what steps to take. Using a global EOR service like Via helps move the process along smoothly.
With Via, we help you hire, onboard, pay, and care for remote employees across the world. As your employer-of-record abroad, we take care of the local human resources (HR) logistics, such as salary, payroll, benefits, paid leave, remote work, global employment, and tax deductions. Maintaining compliance is our responsibility. You simply focus on building your team and running your business.
If you’re looking to test out a market or start building a local talent hub, partnering with an EOR like Via (as opposed to opening a subsidiary) is probably the strategic move.
Opening a subsidiary can be costly, as you will need to build out a team of local HR, labor, and legal experts. With Via’s transparent pricing, on the other hand, you can pay full-time employees or contractors with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.