Subsidiary or branch: how to choose

Almost every overseas group entering the UK picks between two structures, and most pick the subsidiary. The minority of cases where a branch is better are real, and they are decided by things that do not appear on a comparison table.

The two structures

A UK subsidiary is a new private limited company owned by the existing company. It has its own legal identity. It signs its own contracts, employs its own staff, owes its own debts, and files its own accounts. Incorporation is an online filing that completes in a day, and the company needs a name, a registered office in the UK, at least one director who is a real person, a shareholder, and articles of association. There is no minimum share capital.

A UK establishment, commonly called a branch, is the existing company carrying on business in the UK. It is not a separate entity. It must be registered at Companies House within one month of opening, and registration requires a certified copy of the parent's constitution, translated into English if it is not in English, together with the parent's latest accounts where its home law requires it to publish them. That paperwork is why a branch takes weeks where a subsidiary takes a day.

Liability

This decides most cases on its own. With a branch there is no separation whatsoever: a UK customer's claim, a UK employment claim or a UK debt is a claim against the parent company and everything it owns. With a subsidiary, the parent's exposure is generally limited to what it has put in, subject to the usual exceptions of guarantees it gives, wrongdoing it participates in, and any comfort letters it signs.

The exceptions matter more than they sound. A UK landlord or a major customer will often ask the parent to guarantee the subsidiary's obligations, and once it has, the difference has been given away for that contract. It is a negotiation rather than a structural point, but limited liability is a starting position, not a guarantee.

What goes on the public record

A subsidiary files its own accounts at Companies House each year, and anyone can read them. A branch files the parent's accounts, where the parent's home law requires it to publish accounts, and those are also public. For a private group whose global figures are not otherwise available, that is often the decisive point, and it works in the subsidiary's favour: a small UK subsidiary's accounts reveal far less than the parent's consolidated ones.

Tax

Both pay UK corporation tax at the same rates on their UK profits. The difference is in how the profit is arrived at. A subsidiary has its own books, its own revenue and its own costs, and the charges between it and the parent are set by intercompany agreements written in advance. A branch's profit has to be worked out as if the UK operation were a separate business dealing at arm's length with the rest of the company, with a reasoned allocation of head office costs. That allocation is a transfer pricing exercise performed on something that has no separate accounts, which is the part groups find hardest to defend years later.

Losses

A subsidiary's early losses stay in the subsidiary and are carried forward against its own future profits, or surrendered to another UK company in the same group. They cannot reach the parent abroad. A branch's losses, because the branch is the parent, can often be set against the parent's profits at home, depending entirely on the parent's own country's rules.

For a group expecting two or three years of losses before the UK operation turns, that timing difference can be worth more than everything else on this page. It is also the one item here we cannot advise on, because it depends on the tax law where the parent is. Ask your advisers at home the specific question: can we use UK branch losses against domestic profits, and what happens to them if we later incorporate?

What usually decides it

• Employing people. Both can employ, but a subsidiary is the cleaner employer, which is the entity that would hold a sponsor licence to hire someone without UK work rights.
• Customers. UK enterprise buyers and public-sector bodies often require a UK contracting entity, and some procurement processes cannot accommodate a branch at all.
• Banking. UK banks are set up to onboard UK companies. A branch account is possible and more awkward.
• Perception. A UK company reads as a commitment to the market. This is soft, and UK customers and staff respond to it.
• Filings. A branch has no confirmation statement, which is a small saving, but it must notify Companies House of changes to the parent as well as the establishment, which is a larger ongoing nuisance for a group that reorganises often.

Changing later

Moving from a branch to a subsidiary is a normal, planned piece of work: incorporate the company, transfer the trade and assets at a defensible value, deregister the establishment, and manage the tax so the transfer itself does not create a bill. Groups that expect to convert should say so at the start, because a branch set up with the conversion in mind is cheaper to convert than one that was not.

The short version

Choose a subsidiary unless you have a specific reason not to. The usual specific reason is that your home country will let you use the UK losses and you expect several years of them. Where it is close, the default is the subsidiary, because limited liability and keeping the parent's accounts off the UK register are worth more than the set-up saving.