Are you a company thinking about setting up a new branch or subsidiary in the UK but unsure about which setup suits your business objectives? Let us explain the differences, between the two options and evaluate the pros and cons of each helping you make a informed choice.
What is a branch?
When businesses grow they commonly set up locations apart from their main office. If a company from outside the UK sets up an office in the UK it forms a UK branch, also known as a UK establishment. This enables a foreign company to do business in the UK without needing to create a legal entity.
Often a branch performs functions to the main office and is not legally distinct, from it. Both are integral parts of a single overarching company. Consequently, all transactions occur under the name of the parent company, rendering it responsible for the actions of the branch.
Establishing a UK branch
To set up a branch in the UK the initial step is to register with Companies House, the recognized authority for company registrations in the UK. When a foreign company is forming a UK branch they need to choose a name, for the branch, which could either be their existing company name or a different title they plan to use while operating in the UK.
Advantages of establishing a branch
Choosing to create a subsidiary of a branch is often motivated by the desire to retain independence from the main company. However there are benefits that favor setting up a branch office:
Greater control retained by the parent company
A satellite office follows the guidelines set by the company and is involved in all decision making activities guaranteeing that the main company retains a greater level of supervision.
Potential tax benefits for the parent company
Most of the time the profits made by a branch office are controlled by tax agreements, between the parent companys home country and the UK, which helps avoid taxation. Moreover the parent company handles any taxes paid by the branch office enabling it to take advantage of the UKs tax laws and benefits:
- Corporation tax is levied solely on UK profits.
- Branches can utilize profits generated by the parent company to offset any losses incurred in the UK, enabling earlier loss relief compared to a UK subsidiary. Moreover, it’s worth noting that a branch can be converted into a limited company if necessary and can be dissolved without formal notice.
Disadvantages of establishing a branch
Despite being a potentially cost-effective and expedited option, establishing a branch comes with certain drawbacks that should be considered before proceeding:
Liability of the parent company
The parent company and its shareholders bear responsibility for the branch’s operations, encompassing debts, penalties, or legal settlements.
Limitations on branch activities
The branchs operational freedom is limited because it relies on the parent company for direction and approval of all decisions. This centralized management approach complicates market exploration, as branches cannot expand their services without the parent company’s consent. Additionally, engaging in legal contracts poses challenges, as UK entities may be hesitant to enter agreements governed by non-UK laws.
