Differences between a branch office and a subsidiary

LEGAL, TAX, COMPLIANCE AND LIABILITY DIFFERENCES FOREIGN COMPANIES MUST CONSIDER

Foreign businesses entering Australia must decide between registering a branch office or establishing a subsidiary.

While a branch office may offer administrative simplicity, it comes with higher financial reporting obligations and exposes the foreign parent to direct legal liability. A subsidiary, though requiring local, resident directorship and setup, provides stronger insulation, simpler compliance, and potential tax benefits—making it the preferred choice for many international businesses.

 

VIDEO SCRIPT

Today I’m in Darmstadt, Germany, which is my base when I’m in Germany. It’s pretty miserable day today, so I thought I would give you an inside view of the Waldspirale, the Hundertwasser apartments in Darmstadt. This is where I stay when I’m in Darmstadt.

In the last few episodes, I’ve been talking about some things you need to consider when deciding how to structure your business in Australia. I’m going to look in more detail at some differences between setting up a branch office and setting up a subsidiary.

Each structure has its advantages and disadvantages, and in deciding which structure to use, you will probably want to weigh up which vehicle can provide you with the more beneficial structure from a tax and a liability perspective. The administrative and operational efficiency of each structure will also have an effect on your decision.

In this video, I’m going to talk about some selected features and requirements. In doing so, I’m not giving any financial or tax advice, and you should seek specific tax advice from a specialist cross-border tax advisor as a tax issues are complex and varied depending on what jurisdictions are involved and how your business is structured in your home country.

 

Directors

A branch office of a foreign entity does not have to have an Australian director. The provisions of the foreign entity’s jurisdiction of the foreign entity regulating the entity apply to it. It does, however, need to appoint a local Australian agent to run the daily operations of the branch of the Australian branch office.

In contrast, an Australian subsidiary must have at least one director who is over 18 years of age and is an Australian resident.

 

Registration

Both a branch office and an Australian subsidiary must be registered with the Australian Securities and Investments Commission, or ASIC, as we call it in Australia. The registration process is different for a branch office than for a subsidiary. More documents are required to set up a branch office than for an Australian subsidiary. All directors of the foreign entity who is setting up the branch office, as well as all directors of an Australian subsidiary, must obtain a Directors Identification Number or DIN. This involves verifying their identity with the Australian Business Registry Services.

 

Financial Reporting

The financial reporting requirements differ between branch offices and subsidiaries in Australia. They are typically more onerous for a branch office. At least once per year, a branch office must lodge with ASIC a copy of its balance sheet, its profit and loss statement, its cash flow statement and any other documentation; it is obliged by law to lodge in its home country. These documents must be translated into in English.

In contrast, a foreign owned subsidiary does not usually have to lodge financial accounts unless it’s over a certain size. It only needs to confirm its corporate details and pay an annual review fee to ASIC, which currently is 310 AUD, so not onerous.

 

Legal status

The legal status of a branch office compared to a subsidiary is very different.

A branch office has no separate legal personality in Australia, and therefore, the foreign entity that owns the branch office is legally, responsible for the actions of the branch office. The foreign entity can be sued in Australia, and the local agent may be personally liable for any penalties imposed on the foreign entity for breaches of the law by the Branch Office.

A foreign owned subsidiary, on the other hand, is a completely separate legal entity in Australia. It incurs debts and obligations in its own right, and the foreign parent company is not typically responsible for those. Liability generally remains with the subsidiary in Australia, and doesn’t flow through to the parent company. Manufactuer’s liability is an exception to this, where the parent company can still be held responsible under Australian legislation. Company directors can be personally liable for some actions of the company in very limited circumstances and there are some liabilities in some states of Australia that cannot be covered by Directors & Officer’s insurance.

 

Insurance tax treatment

There are significant differences in the treatment of tax between a branch office and a foreign owned subsidiary. What I’m giving here is a very general overview. As I’ve said above, it is important to get specialist cross-border tax advice specific to your circumstances.

Both a branch office and a foreign owned subsidiary must apply for a Tax File Number and an Australian Business Number.

A branch office is taxed as a separate entity in Australia on all of its Australian sourced income. A subsidiary, on the other hand, is taxed in Australia on its worldwide income from all sources. That is, the subsidiaries income, not the parent company’s income. Tax, is not withheld if the branch office sends its profits offshore. A branch office must lodge a company tax return each year, even if there is no income tax liability arising, and must register for GST.

A subsidiary must generally lodge an income tax return each year. Unfranked dividends paid to the global parent may be subject to dividend withholding tax, depending on the parent’s country of residence and any applicable double tax treaty. Franked dividends are generally not subject to dividend withholding tax. A subsidiary only needs to register for GST if it expects its annual revenue to exceed 75,000 AUD. It’s important that you also get advice about transfer pricing if you are operating an Australian subsidiary.

In my view, the most significant differences between a branch office and a foreign owned subsidiary are the Financial Reporting and who bears a liability for the actions of the Australian business and the tax treatment.

You need to balance each of these differences when deciding which structure is best for your business.

I’ve given you a general view of the regulatory landscape at a point in time. That landscape will always be extensive and could change at any time. The tax situation certainly varies depending on whether there is a tax agreement in place with your country of origin, and what the terms of that agreement are. This video is not intended to be exhaustive and may not be current by the time you are viewing it.

I would welcome the chance to talk to you about your specific circumstances so we can partner with you to work out the best structure for your global business.