Setting up a business and trading in the UK: Establishment or subsidiary?
Expanding your business into the UK is a significant step that requires careful planning and decision-making. When it comes to setting up a business and trading in the UK, one of the key decisions you will need to make is whether to establish your business as a permanent establishment or a subsidiary company. Both options offer distinct advantages and disadvantages, and the right choice depends on your business goals, strategy and specific circumstances.
This article will explore the differences between a permanent establishment and a subsidiary, providing you with the information you need when you’re looking at how to establish a company and trade in the UK. If you’re unsure of what is a subsidiary company in the UK or which option is better, we’re here to help.
What is an establishment?
A permanent establishment, also known as a branch, is an extension of a foreign company operating in the UK. It is not a separate legal entity but rather a part of the parent company that operates within the UK.
The establishment is registered with Companies House, but it remains legally connected to the foreign parent company, meaning that the parent company is responsible for the establishment’s actions and liabilities.
What is a subsidiary company in the UK?
A subsidiary company is a separate legal entity incorporated in the UK, wholly or partially owned by a foreign parent company. Unlike a permanent establishment, a subsidiary has its own legal status, which means it can enter into contracts, own assets, and be liable for its own debts independently of the parent company.
Key differences between establishment and subsidiary
When it comes to exploring how to establish a company in the UK, understanding the key differences between a permanent establishment and a subsidiary company is crucial for making the right choice for your business.
If you find yourself unsure of what is a subsidiary company in the UK or whether an establishment is the better choice, you’re not alone, which is why it’s important to do your research first.
Legal status
Establishment: a permanent establishment is not a separate legal entity; it is legally part of the foreign parent company. This means that the parent company is directly liable for any legal issues or debts incurred by the establishment in the UK.
Subsidiary: a subsidiary is a separate legal entity incorporated in the UK. It operates independently of the parent company, which means the parent company is not directly liable for the subsidiary’s debts or legal obligations.
Taxation
Establishment: an establishment is subject to UK tax only on the profits it generates in the UK. However, the parent company must also consider the tax implications in its home country, as profits may be subject to double taxation.
Subsidiary: a subsidiary is subject to UK corporation tax on its worldwide income. This may provide opportunities for tax planning, especially if the UK has a lower tax rate than the parent company’s home country.
Regulatory compliance
Establishment: establishments must comply with UK regulations, but their reporting obligations are typically less onerous than those of subsidiaries. They must register with Companies House and file annual returns, but they do not need to file separate accounts if the parent company’s accounts are available.
Subsidiary: a subsidiary must comply with all UK regulatory requirements, including filing annual accounts, holding annual general meetings (AGMs), and maintaining statutory registers. The regulatory burden is higher, but this comes with the benefit of being recognised as a full UK company.
Advantages and disadvantages
Both establishments and subsidiaries have their pros and cons, which must be weighed carefully. Setting up a business and trading in the UK is a major commitment, which is why it’s vital that you first do your research and then seek expert help.
When you’re looking at how to establish a company in the UK, it’s important to be aware of all the facts in order to make an informed decision.
Advantages of an establishment
- Lower cost: a permanent establishment is generally less expensive than setting up a subsidiary.
- Simplified operations: with fewer regulatory requirements, establishments can operate more flexibly.
- Centralised control: the parent company retains direct control over UK operations.
Disadvantages of an establishment
- Increased liability: the parent company is fully liable for the establishment’s debts and obligations.
- Tax complications: establishments may face complex tax issues, including double taxation.
- Limited credibility: as it is not a separate entity, an establishment may lack the local credibility of a subsidiary.
Advantages of a subsidiary
- Legal protection: a subsidiary provides a shield against liability, protecting the parent company.
- Tax advantages: subsidiaries can benefit from the UK’s tax treaties and tax planning opportunities.
- Local presence: a subsidiary is viewed as a local entity, enhancing credibility with customers and partners.
Disadvantages of a subsidiary
- Higher costs: setting up and maintaining a subsidiary involves higher costs and administrative burdens.
- Complex compliance: subsidiaries must comply with extensive UK regulatory and reporting requirements.
- Less control: the parent company may have less direct control over a subsidiary’s day-to-day operations.
Decision-making factors when setting up a business in UK
Choosing between a permanent establishment and a subsidiary involves careful consideration of various factors. Setting up a business and trading in the UK may be done for many reasons, from gaining greater operational flexibility to expanding business operations as part of a wider strategy push.
Business goals and strategy
Your long-term business goals and strategy play a critical role in determining the best structure. If your goal is to establish a strong, independent presence in the UK with potential for growth, a subsidiary may be the best option. However, if your strategy is more focused on short-term market testing or maintaining centralised control, an establishment could be more suitable.
Financial considerations
Financial implications are another critical factor. Establishments typically have lower setup and operational costs but may face complex tax issues. Subsidiaries, while more expensive to establish and maintain, offer potential tax advantages and liability protection.
Operational flexibility
Operational flexibility is crucial for scaling and growth. Permanent establishments offer more direct control but may be limited in their operational scope. Subsidiaries, with their independent status, provide greater flexibility and potential for scaling, but with increased complexity.
Moore Kingston Smith is here to help
The decision to set up a permanent establishment or a subsidiary in the UK depends on various factors, including your business goals, financial considerations, and the level of control and liability you are comfortable with. By carefully evaluating your specific circumstances and long-term objectives, you can choose the structure that makes it as easy as possible when you’re exploring how to establish a company in the UK.
This article is provided for information purposes only. It is not intended to constitute legal advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. If you would like more information on setting up a business and trading in the UK, don’t hesitate to get in touch with our legal services team.
