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What is a Foreign Subsidiary? When do you need one?

Planning to expand globally but unsure whether to open a foreign branch or set up a foreign subsidiary? That’s a common dilemma businesses usually face when weighing expansion options overseas. However, setting up a foreign subsidiary is usually a safer option and this article tells you why. Let’s explore all aspects of this business strategy and why and when you should consider going down this route.

What Is a Foreign Subsidiary?

In its simplest definition, a foreign subsidiary is a company that operates in one country but is partially or wholly owned by the parent company that is based in another country. A foreign subsidiary is also known as a daughter company and is a separate legal entity that must comply with the local jurisdiction's tax and employment laws.

Let’s understand some of the pros and cons of establishing a foreign subsidiary.

Advantages & Disadvantages of a Foreign Subsidiary

Thanks to the explosion of global hiring and expansion beyond local geographies, businesses today are faced with exciting opportunities. Establishing a foreign subsidiary is one of the most effective ways to make inroads into a foreign market.

However, a foreign subsidiary comes with its own set of advantages and disadvantages and this is where a reliable Employer of Record (EOR) service provider can be of enormous help.

Setting up a foreign subsidiary as part of a global expansion strategy comes with several perks:

Legal and Financial Landscape of Foreign Subsidiaries

A foreign subsidiary is legally independent of its parent company and manages its own business operations. It has to comply with local taxation and employment laws of the country in which it has been set up, which could vary from its home country. Any issues arising from non-compliance, or a lawsuit or fine from local authorities, have to be faced by the subsidiary while the parent company retains immunity.

When Should You Set Up a Foreign Subsidiary?

Obviously, setting up a foreign subsidiary is not for everyone. It all depends on the long-term goals of a business

A company may consider setting up a foreign subsidiary if they plan to:

Foreign subsidiaries prove viable only if the parent company has validated its target market and is ready to commit to long-term investments.

Alternatives to a Foreign Subsidiary

Are there any alternatives to setting up a foreign subsidiary? Yes, options exist for businesses that are keen on global growth but without establishing a foreign subsidiary. You may engage contractors to avoid setting up an entity or partner up with an EOR that specializes in international employment solutions. Let’s delve into these in more detail:

1. Engage independent contractors or freelancers

Engaging independent contractors to create a foothold in a foreign market without taking on the burden of entity establishment is a good alternative. This option gives benefits like cost savings, staffing flexibility, and reduced exposure to lawsuits. Independent contractors can be hired on a service fee and on a per-project basis as well. This enables organizations to leverage international talent without a long-term commitment.

2. Partnering with an Employer of Record

The second and more fail-safe option for expanding into a foreign market is to partner with an Employer of Record (EOR). By partnering with an EOR, a business can enjoy the benefits of entity establishment without getting drawn into the time-consuming registration process, massive upfront investment, and incurring compliance risks.

Enjoy Business Expansion Minus the Risks with a Reliable EOR

Partnering with an EOR is a great way to establish your footprint in a foreign country if you want to avoid all the nitty-gritty and hassles of compliance, investment, and logistics in a foreign land.

The fact of the matter is that many businesses cannot afford the time and resources required for entity establishment—especially if they plan to enter multiple markets worldwide. That’s where a reliable EOR like BGC can really help them achieve their business goals of expansion and growth without getting tied up in the legalities of compliance in a foreign land. BGC has a proven track record of helping businesses increase their speed to market, onboard and offboard international talent, and, most importantly, avoid compliance risks.

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