Subsidiary vs Branch: International Decision Guide

So your business is looking to expand overseas. You know that means setting up a company abroad, but you’re unsure whether a subsidiary or a branch office is the best move.

The decision is far from straightforward. Even seasoned legal and finance experts can find the differences between subsidiaries and branch offices confusing when the regulations vary so widely between countries.

Plus, you must be confident in your choice because it carries lasting consequences. Choosing the wrong structure for your business can lead to unexpected tax exposure, compliance gaps, and administrative complexity. And once you’ve established your company in the new company, it’s not something you can simply undo.

That’s where Deel believes we can help. We’ve supported global organizations as they establish and manage their presence through subsidiaries and branch offices in over 150 countries. In this guide, we’ll share our firsthand insights so you can choose the structure that best fits your needs and minimize the risks to your business.

What are the key differences between a subsidiary and a branch office?

Both subsidiaries and branch offices enable you to operate legally and hire workers overseas. However, they have some key differences that affect how you run your business.

Legal structure and liability

A subsidiary is a separate legal entity incorporated under local law in the country where it operates. Businesses typically own more than 50% of their shares to maintain control.

On the other hand, a branch office isn’t a separate legal entity. It functions as an extension of your parent company in another jurisdiction and remains under your full ownership and direct control.

Both types of structure require you to register your business with the local authorities and may require you to appoint a legal representative. For example, most types of entities in Singapore must have at least one director, manager, or partner who is a permanent resident. But if you’re unclear on the steps, Deel Entity Setup can guide you through the process of collecting the paperwork, filing applications, and paying fees.

Tax and profit allocation

As separate entities, subsidiaries are taxed as independent companies. They pay corporate income tax locally and are responsible for their tax filings.

Authorities tax branch offices as part of the parent company rather than as a separate business. You remain legally liable for any obligations such as payments, tax returns, and record keeping.

Additionally, you’re required to report on any profits from branch offices in your main country. You may face some withholding taxes, but they’re usually offset by tax treaties and other agreements. Subsidiaries don’t typically have any such requirements.

Financial requirements

Most countries require newly incorporated entities to have a minimum share level of capital to demonstrate their financial solvency. It shows the authorities that you can meet your obligations and you aren’t a shell.

As a newly incorporated entity, subsidiaries are usually subject to this requirement. The minimum capital needed can vary widely between contexts. For instance, the UK only asks for a nominal figure of £50 to register private limited companies, while you need €25,000 for a German GmbH.

Branch offices usually don’t need a minimum share capital to incorporate. Instead, you must prove your parent company’s existence and that it’s in good standing.

Local hiring

Both structures enable you to employ workers locally. The key difference is that subsidiaries can act as the legal employer, whereas the branch office must hire under your parent company’s name. While the branch office still needs to follow local employment laws, it does so on your behalf and is not ultimately liable for any compliance issues.

Brand perception

Subsidiaries can trade under a separate name while branches must use the same details as the parent company. However, the relationship between your organization and its local entities may influence public perceptions of your brand.

Many famous companies are actually subsidiaries with their own distinct brands. For example, an international company called Mondelez owns Cadbury’s in the UK and Toblerone in Switzerland.

Pros and cons of a subsidiary

Here are the main trade-offs to consider before committing to establishing a foreign subsidiary:

Pros and cons of a branch office

While a branch office offers many advantages as an alternative, it also has some limitations to consider:

Alternatives to subsidiaries and branch offices

Feeling unconvinced by both options? Here are some other paths that businesses take to hire overseas and conduct business abroad:

International contractors

If you just want to leverage foreign talent, hire freelancers to handle specific projects and tasks. This strategy requires minimal setup and no long-term commitment.

The main barrier is ensuring compliance with local regulations. Most countries have a strict definition of employment and impose penalties for worker misclassification. But HR teams may have difficulty interpreting foreign laws and drafting contracts that reflect a freelance arrangement.

Consider using a solution like Deel to classify workers and generate locally-compliant contracts. All you have to do is share a few details about the arrangement. Deel Contractor checks what you’ve agreed against relevant laws and verifies that it doesn’t pose a compliance risk.

For added protection, Deel Contractor of Record assumes full liability for worker misclassification and the costly consequences that can follow—like fines, back taxes, and penalties. This means you can confidently grow your team in 150+ countries while we handle the legal risks on your behalf.

Mergers and acquisitions

Some businesses enter a foreign market by acquiring or merging with an existing local company. It gives you an immediate legal presence, established workforce, and relationships.

But mergers and acquisitions are hardly a shortcut to international expansion. Even small deals typically take longer than establishing an entity due to the need for negotiations, regulatory approvals, and integration. They make the most sense when you want access to operations or licenses that you wouldn’t be able to access otherwise.

Employer of Record (EOR) service

Partnering with an EOR enables you to hire workers in foreign countries without establishing an entity. The provider becomes the legal employer on paper for tax, payroll, and compliance purposes while you retain control over operations.

With a leading solution like Deel EOR, companies can:

• Legally hire workers in over 150 countries
• Onboard in days instead of weeks and months
• Reduce the risk of tax and compliance issues
• Get fast access to local HR, payroll, and legal expertise

EORs are a flexible solution for companies looking to expand abroad. You can use them to test markets, access foreign talent, or manage compliance for distributed teams. As your strategy develops, you can always transition from the EOR model to an entity model.

Subsidiary or branch office? Best use cases for different scenarios

Neither structure is objectively better than the other. The decision about whether to use a subsidiary or a branch office comes largely down to your individual goals.

Expanding sales and client contracts abroad

If you’re planning to generate direct revenue, a subsidiary is usually the most practical option. It can issue contracts, collect payments, and file taxes as a locally incorporated entity, reducing administrative bottlenecks.

A subsidiary may be your only option in some cases. Many clients, banks, and regulators require you to have a locally incorporated entity to generate direct revenue. For example, the Indian government only allows branch offices within strict limits and with prior approval from the Reserve Bank of India.

Supporting existing customers locally

Branches are ideal if you have an established customer base in your target country. Local teams can handle business activities like after-sales support and account management without you having to create a separate entity. All billing can remain under the parent company’s name, and you can continue to manage processes such as imports and logistics at your headquarters.

This setup is common in tech and manufacturing, where a local presence builds trust. Bosch is a good example, as this international company has dozens of branches in various countries to provide support to local customers buying its electronics.

Meeting regulatory requirements for licensing

Highly regulated sectors may require you to incorporate a local entity to hold a license. The government needs to have a greater degree of oversight and control to ensure compliance with local laws. If you have a branch office, they can’t enforce sanctions and penalties as easily on your parent company abroad.

Finance and banking companies are often subject to these requirements due to the significant risk to customers. For instance, Revolut had to establish a local entity in Lithuania before it could receive its banking license.

Opening physical facilities

While both structures can operate from physical sites, subsidiaries face far fewer restrictions. Branches may need regulatory approval and be limited to non-commercial functions.

Hiring on-site workers is a common barrier. Regulators often prefer you to have a local entity so they can ensure they’re managing tax withholding, workers’ compensation, and labor law compliance properly. While this adds an extra step to incorporation, solutions like Deel Entity Setup can help ensure you’ve got everything in place for compliance.

How to choose between a branch office and a subsidiary

Are you closer to choosing a structure? Here’s a set of questions you can use as a decision framework for narrowing down your options.

• How long do we plan to operate in this market? If you’re only planning a short-term project, an EOR lets you skip the expense of entity setup
• Which business activities will we conduct? Some operations may require a local entity. If not, you may prefer to open a branch for speed and cost-efficiency
• How much liability can you assume? A subsidiary contains all the risk if your parent company doesn’t have the capacity to absorb debts and compliance issues
• How important is local credibility to our strategy? If your industry depends on customer trust, a subsidiary can help you build more confidence. Similarly, an EOR can provide you with a hiring entity and a branded portal
• How much independence do local teams need? Consider whether you need to keep decision-making closer to headquarters or whether you can afford to give managers more autonomy
• How will we manage entities? Whichever route you go, a service like Deel can help you keep track of paperwork and ongoing compliance

Simplify global expansion with Deel

Expanding into a new country is a major step, and choosing between a subsidiary and a branch office is only the start. Whatever you decide, you must register with local authorities, meet tax obligations, and ensure employment contracts are compliant.

Deel Entity Setup makes that process straightforward. Our team supports you as you establish and maintain a presence abroad, whether you’re setting up entities or hiring through our Deel EOR service. We give you the tools and the expertise to operate confidently from day one.