Subsidiaries and their main characteristics

Subsidiaries and their main characteristics

A subsidiary is a business entity that is connected to another, known as the parent company, and is under its direction. Despite this connection, it operates independently.

The parent company typically directs and manages, at least in macro decision-making, the business operations of its subsidiaries, thus determining the commercial and economic strategy of the group.

This occurs when a company (the parent) contributes sufficient capital to the subsidiary to gain majority control, thereby obtaining control of it.

The main characteristics of a subsidiary are as follows:

• Control: they are owned by their parent company in a sufficient amount to maintain majority control, allowing the parent to direct its commercial strategy through them.
• Independence: despite being connected to and controlled by their parent company, subsidiaries enjoy their own legal personality, distinct from that of their parent, with their own statutes, governing bodies, and administrative structures.
• Responsibility: having their own legal personality, they act in their own name and at their own risk and venture, meaning that the consequences of their actions and any debts they incur are their own responsibility, not extending to the parent company.
• Benefits: although subsidiaries are independent entities, being directed and integrated into a business group with their parent company allows them access to economic, technological, or knowledge resources, and synergies can be created between the subsidiary and its parent.

There are various reasons why a company might be interested in creating a subsidiary:

• When a company is interested in expanding to another country or other regions of the same country. This way, a subsidiary can be directly created in that region to operate directly and from the beginning from there, better adapting to local legislation.
• The subsidiary, being in that region, can offer better and more tailored services to the needs of local consumers, as it better understands the target market.
• It can entail tax benefits. This entirely depends on the legislation of each country.

As previously mentioned, a subsidiary is governed by the prevailing legislation in the country where it is based, as it is a completely independent legal entity. Therefore, a foreign entity interested in creating a subsidiary in Spain could and would have to adopt any corporate form permitted by our legislation.

If a subsidiary is established in Spain, having its own legal personality, it must pay corporate tax like any other company.

Differences between subsidiary and branch

There are similar corporate figures to subsidiaries that can cause confusion, such as branches. The main differences between a branch and a subsidiary are broadly as follows:

• Both share the aspect of having a parent company on which they depend to varying degrees. Branches have an identical corporate purpose to their parent company and do not have their own legal personality, unlike subsidiaries.
• Subsidiaries have their own distinct name, whereas branches have the same name as their parent company.
• The difference in legal personality leads to another substantial difference between the two figures. A subsidiary has its own responsibility, and its debts cannot be extended to its parent company. In contrast, a branch, sharing legal personality with its parent, means any debts it acquires must be assumed by the parent company.
• Regarding independence, the parent company has a majority stake in its subsidiary, which, to varying degrees, is directed by its parent but has its own management bodies. Branches have a permanent representation of the parent company.

In summary, establishing a subsidiary can be an effective strategy to increase competitiveness, access new markets, improve local management and control, and take advantage of specific economic and legal benefits of the destination country.