What is a subsidiary company?

The concept of a subsidiary company refers to one managed by another entity, known as a parent company or holding. More than half of the share capital is owned by the holding company. It is a method used to establish itself in new markets, where the parent company does not yet have a presence and seeks to develop its activity there.

At the same time, a subsidiary company may have other subsidiary companies, considering these together with the parent company as a group. Each of the subsidiaries may be under the responsibility of one or more companies. When the responsibility is not shared we would be before a wholly owned subsidiary.

The subsidiary company should only act according to the guidelines established by those responsible for its holding company, although for the purposes of regulation and payment of taxes they are considered as independent bodies of the parent company.

Reasons for creating a subsidiary company

Large companies choose to create a subsidiary for different reasons. Here are more details:

  • Start-up of business in another country: for legal and economic reasons, it is recommended to start a subsidiary company that allows the activity of the holding company in the destination territory.
  • Increase profits: the creation of subsidiary companies allows in many cases to achieve greater tax benefits, especially in relation to the payment of taxes.
  • To prevent business risk: the start-up of subsidiaries helps to avoid certain risks in the accounts of the parent company.

The definition of a subsidiary company should not be confused with that of a branch. The first has its own legal personality and the branch is an administrative division of the company. In addition, in the event that the subsidiary company is based in another country other than the parent company, it must comply with the regulations of said territory, while the branch will operate and respect the laws established in the country in which the holding company is located.

Know all the information about the business holding, its advantages and disadvantages and how to get to create one.

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