A subsidiary company is a separate legal entity that is controlled by another company, (generally known as a parent company). 

The parent company is often a Holding Company and can have either a majority or partial ownership stake in one or more subsidiaries.

Acquiring or establishing subsidiaries can be beneficial for several reasons, such as limiting liability, managing risk and tax planning. A corporate group structure featuring subsidiaries and a holding company can also make regulatory compliance easier.

How are subsidiaries set up?

A subsidiary company is usually established via one of two methods:

• It can be formed by its own parent company - for example, they may want to expand into new markets or to isolate activities in specific areas. 
• They can be brought into the corporate group through an acquisition/takeover.

Why are subsidiaries established?

There are plenty of reasons why you might want to establish a subsidiary company, whether through creation or acquisition. These include, but aren’t limited to:

Business Asset Protection

A subsidiary is a separate legal entity from its parent company. This means that the parent company’s assets are protected from debts or liabilities incurred by the subsidiary. The subsidiary prevents financial repercussions or issues from being passed to the corporate group.

Isolating Risk

Higher-risk ventures, such as developing an experimental product, can be split from the parent company via a subsidiary. This helps protect the parent company or corporate group from potential losses or damages. 

Market expansion

Subsidiaries can be established to target new geographic regions or customer segments, particularly if these bring specific local regulations or unique risks.

Tax-free business sales

A holding company may be able to sell a subsidiary tax-free. This works especially well if the shareholders do not need the cash on sale and would like to reinvest the proceeds.

Tax reliefs for multiple businesses

Subsidiary companies can move assets between each other without paying taxes. This allows non-profit-making businesses to surrender their losses to profitable companies to enable quicker tax relief.

Subsidiary Company FAQs

What is the difference between a subsidiary and a branch?

While a subsidiary is a separate legal entity from its parent company, a branch is an extension of the parent company. This means it shares and contributes to its parent company's assets, liabilities, and legal responsibilities.

What is a wholly-owned subsidiary?

A wholly-owned subsidiary is a company that is 100% owned by its parent company. This means the parent company has complete control over the subsidiary, including its operations, and its decision-making.

Despite being fully owned by its parent company, a wholly-owned subsidiary is still a separate legal entity with its own operations and liabilities.

Can a parent company be liable for its subsidiaries?

Parent companies are usually not liable for the actions or liabilities of their subsidiaries because they are separate legal entities.

But there are a few exceptions to this.

• In cases of suspected fraudulent activity or undercapitalisation, courts may disregard the corporate group structure and hold a parent company liable for the actions or debts of a subsidiary.
• The parent company may also be liable if it is directly involved in the subsidiary's actions. Examples include providing negligent advice or if the parent company exercises control over the subsidiary’s operations.
• Parent companies may be held liable for environmental damage caused by their subsidiaries.

What is subsidiary management?

If a large corporation has control of various subsidiary companies, this is known as subsidiary management. It is the process by which corporate groups ensure that subsidiaries align with the overall corporate strategy while maintaining autonomy and efficiency. Subsidiary management includes:

• Strategic alignment and goal setting
• Identifying and mitigating risks 
• Maintaining open communication between parent and subsidiary companies
• Assessing subsidiary performance
• Ensuring legal and regulatory compliance

Do subsidiaries have separate financial statements?

In most cases, subsidiaries have separate financial statements because they are separate legal entities. So, they are usually required to maintain and submit separate financial statements for tax calculations, accountability, and transparency.

How does a parent company control its subsidiaries?

A parent company controls its subsidiaries through a combination of ownership, legal structure, and operational oversight. It may appoint board members, make executive appointments, or use centralised IT, HR, or legal systems.

Can a parent company loan money to a subsidiary?

Yes. Inter-company loans are common financial arrangements between parent and subsidiary companies. They allow a parent company to provide funds for expansion, working capital, or other operational needs. While inter-company loans can be beneficial, there are several complex factors to consider, so financial advice must be sought.

Can a subsidiary leave the parent company?

There are a few ways a subsidiary can “leave” its parent company. For example:

• The management team of the subsidiary purchases the company from the parent company through a Management Buyout (MBO)
• The parent company sells the subsidiary to another company.
• The subsidiary is separated from the parent company and becomes an independent entity, known as a demerger.

Each of the above will involve strict rules and require careful planning, legal expertise and (sometimes) significant resources.

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Whether you are looking to set up a Holding Company or establish new subsidiaries for an existing one, Gravitate can help. This includes incorporating the new companies required, and setting up the desired structure and competing all necessary compliance work. If you want to know more, please contact us.

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