For the purposes of US international tax laws, it is very important to distinguish a subsidiary from a branch. Let’s define both terms in this short essay.
Subsidiary vs. Branch: Definition of a Branch
A branch is a direct form of doing business by a corporation in another country where the corporation retains the direct title of the assets used in the branch’s business. In other words, a branch is a direct extension of the corporation to another country.
Most importantly, there is no separate legal identity between a corporation’s branch in one country and its head office in another. It is all the same company doing business in two countries.
One of the practical advantages of a branch is that it usually requires a lot less effort to establish a branch than a subsidiary. However, it is not always the case – for example, in Kazakhstan, creation of a branch is a very formal process. Moreover, while the legal formalities may not be that complicated, the tax consequences of having a branch in another country may be far more complex.
Subsidiary vs. Branch: Definition of a Subsidiary
A subsidiary is a complete opposite of a branch. It is a separately-chartered foreign corporation owned by a US parent corporation. In other words, a subsidiary has its own legal identity separate from that of its parent US corporation. In the eyes of a local jurisdiction, the US corporation is merely a shareholder of its foreign subsidiary; the US corporation is not directly doing any business in the foreign jurisdiction.
Of course, a situation can be reversed: it can be a foreign parent corporation that organizes a US subsidiary. In this case, the foreign parent company will have its separate identity from its US subsidiary. It will be merely a shareholder of the US company in the eyes of the IRS.
As a separate legal entity, subsidiaries will usually have a host of legal and tax duties in the jurisdiction where they are organized.
Subsidiary vs. Branch: Forced Tax Similarities
Despite these legal differences, the US tax treatment of a subsidiary and a branch created some artificial similarities between these two forms of business. The reason for these similarities is the huge potential for tax deferral through subsidiaries.
The basic trend here is to minimize the advantages of a separate legal identity of a subsidiary, making it a lot more similar to a branch when it comes to tax treatment. The IRS has achieved this through the usage of a number of anti-deferral regimes, such as Subpart F rules and GILTI tax, as well as transfer pricing rules.
Contact Sherayzen Law Office to Determine Whether a Branch or a Subsidiary is Best for Your Business
Whether you are a US business entity who wishes to do business overseas or a foreign entity that wishes to do business in the United States, you can contact Sherayzen Law Office for professional help. We have helped domestic and foreign businesses with their US international tax planning concerning their inbound and outbound transactions, and we can help you!