Asia is an ideal place to internationalize your business. You have two options:
- Establishing a subsidiary
- Registering a branch office.
Each structure has its legal implications.
So, which is the ideal option? Read on to learn more.
Legal structure and liability
A subsidiary is an independent legal organization registered in Singapore. It is not tied to its parent company. Therefore, the liability is restricted to the assets of the subsidiary. This structure shields the parent company against direct exposure to local debts and obligations.
A branch office, however, is not a distinct legal entity. It is regarded as an extension of the parent foreign company. Consequently, the parent company still bears all the liability of the operations of the branch. This includes the legal or financial risks of company incorporation in Asia.
Ownership and control
Foreign owners own a subsidiary fully. But they must comply locally. You can structure governance to suit Singaporean corporation requirements. This adaptability allows customization to local business practices.
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A branch office is supposed to be run in the name and form of the parent company. This guarantees uniformity in governance. However, it restricts customization locally. All operations are directly under the parent firm.
Set up and compliance requirements
When creating a subsidiary, you will have to:
- Register with the authorities
- Have at least one local director
- Comply with continuing requirements.
On the other hand, establishing a branch office is often quicker. It requires less start-up.
Nevertheless, you also have to designate a local representative. In addition, you must adhere to reporting requirements related to the financials of the parent company.
In the end, the compliance of branches may become complicated over time because of cross-border reporting.
Tax treatment and incentives
One of the major distinguishing factors is taxation. A subsidiary is considered to be a local tax resident. Therefore, the company may benefit from Singapore’s:
- Corporate tax incentives
- Exemptions
- Bilateral tax treaties.
This will greatly lower your effective tax rate. Particularly during the initial years of operation.
A branch office is taxed as a non-resident. It is usually not entitled to the same tax incentive that subsidiaries enjoy. This may increase tax exposure.
Also, the profits are recorded as per the parent company. As a result, it can make it difficult to plan international taxation.
Business scope and long-term strategy
A subsidiary is able to undertake a large scope of business locally. Hence, it builds a reputation among local clients and partners. This can facilitate expansion and investment.
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A branch office is more suitable for the short- to medium-term entry. For example, market testing or regional support. It is restricted to the work of the parent company. This can limit diversification.
The final take
The decision of whether to open a subsidiary or a branch in Singapore is based on your:
- Risk tolerance
- Taxation plan
- Long-term goals.
A subsidiary is more flexible, tax-favorable, and offers liability protection. A branch office is easier to establish with direct control by the parent company.
