What are the advantages and disadvantages of setting up a subsidiary?
Benefits of setting up a subsidiary
(a) for the parent company
1. The subsidiary can conduct independent and complete accounting, and the loss will not offset the profit of the parent company;
2. The establishment of subsidiaries by enterprise groups can make the business areas that need to be developed in the long-term strategy of group companies develop by leaps and bounds, make the whole group stronger and bigger in these areas, and thus enhance the core competitiveness of the group;
3. At the same time, by establishing the independent legal person status of subsidiaries, the operating risks of subsidiaries can be effectively limited to a certain range, and the group company only bears the risks within the scope of capital contribution, and will not suffer greater losses because of the mistakes of subsidiaries, and will not infringe on the interests of other business departments and other subsidiaries of the group company;
4. On the other hand, through their own efforts, subsidiaries form intangible assets such as goodwill and brand in the business field, which is helpful to enhance the overall image of enterprise groups.
(2) For subsidiaries.
Management aspect
1. It is also a limited liability in the host country (sometimes it needs the guarantee of the parent company);
2. Economic independence and property independence from the parent company. The subsidiary's report to the parent company is limited to production and business activities;
3. Due to the independence of economic status and legal status, the subsidiary will not be directly affected by the cancellation or dissolution of the parent company due to legal, economic or investor investment strategies;
4. Independent management, the influence of the parent company is limited to the influence of the major shareholders on the company itself.
Tax aspect
1. The subsidiary is an independent legal person, and its income tax is levied independently. Subsidiaries can enjoy the preferential tax treatment provided by the host country to their resident companies, including tax holidays. Subsidiaries bear all tax obligations, and branches only bear limited tax obligations. The subsidiary is an independent legal person and can enjoy various preferential policies such as tax exemption period and preferential policies;
2. When the applicable tax rate of the host country is lower than that of the country of residence, the accumulated profits of subsidiaries can benefit from deferred tax payment;
3. It is much more flexible for the profits of subsidiaries to be repatriated to the parent company than to the parent company, which means that the investment income and capital gains of the parent company can stay in the subsidiaries or be repatriated when the tax burden is light, thus obtaining additional tax benefits;
In many countries, the dividends paid by subsidiaries to the parent company can be exempted from withholding tax.
Disadvantages of setting up subsidiaries
1. Setting up a subsidiary with independent accounting in other places requires a lot of procedures, which are complicated and costly;
2. The requirements are relatively high, and the establishment of subsidiaries must meet the conditions and procedures stipulated in the Company Law and the Regulations. Only companies authorized by the state can invest to set up wholly-owned subsidiaries (that is, wholly state-owned subsidiaries), and other companies can only set up holding subsidiaries in the form of limited liability companies or joint stock limited companies;
3. The company's initial establishment of a subsidiary is risky;
4. Subsidiaries are fully obligated to pay taxes and need to pay income tax independently, and the tax payment level is relatively high;
5. If the company invests in other limited liability companies or joint stock limited companies, and the articles of association stipulate limits on the total amount of investment or guarantee and the amount of individual investment or guarantee, it shall not exceed the prescribed limits.