If you are a company looking to establish a presence in the UK the question soon arises whether you should set up as a branch or a subsidiary in the UK.  Initially neither may be necessary as the company may be able to test the waters by operating from its home country, with no taxable presence in the UK.

However, once the need for a taxable presence in the UK has been established, or where the business is such that a legal entity in the UK is needed in any case, the parent should consider whether to set up in the UK through a branch (also known for tax purposes as a permanent establishment), or a subsidiary.

An overseas company may also acquire a UK permanent establishment without intending to do so: where the business in the UK develops to the point that the company has a fixed place of business in the UK through which the business of the company is carried on, it will have a permanent establishment. The company may also acquire a UK permanent establishment where it has a UK agent who habitually exercises authority to do business on behalf of the company.

In both cases, care should be taken by overseas companies with operations in the UK, either directly, or through an agent, to ensure that those UK operations do not amount to a permanent establishment unless and until that is intended by the parent company.

Choosing between a branch and a subsidiary

Arguably, there is little difference between setting up a branch and setting up a subsidiary: both require Companies House registration, and similar registration with HMRC for direct tax, VAT and PAYE/NIC as appropriate.

A branch is easier to wind up, if the experiment proves unsuccessful, as it is automatically closed when the trade of the branch ceases. In contrast, closing a subsidiary requires a formal procedure (winding-up, striking off, or the appointment of a liquidator).

An overseas parent may prefer the relative anonymity of a subsidiary: a branch is required to file the financial statements of the overseas parent at Companies House. Where the parent company is not already required to prepare and disclose financial statements, then it will have to prepare accounts for submission to Companies House. In contrast, a UK subsidiary is only required to file its own financial statements

However, ultimately, the choice between a branch and a subsidiary will depend on the parent company’s position: for example, regulatory requirements may dictate that a branch is used (for example, certain financial activities require a minimum level of capital which is easier to maintain where the parent company capital is taken into account, instead of having to adequately capitalise a subsidiary).

The parent company’s tax position also needs to be considered. For example, it may be preferable to have a subsidiary in the UK where the UK operations will need to be funded by loans from the parent company, a UK branch cannot generally have a tax deduction for interest paid to the parent (where it is, effectively, internal interest) whereas a UK subsidiary will generally have a UK tax deduction for that interest.

Tax considerations

There are a number of distinct differences between a branch and a subsidiary in the UK; the key difference from a tax perspective is that a UK branch will be subject to UK corporation tax on the profits of the parent company which are attributable to that branch. A UK subsidiary is subject to UK corporation tax on its worldwide profits.

This is because a UK subsidiary is a separate legal entity to the parent company, whereas a branch has no separate legal existence to the parent company.

As part of this, any start-up losses of the branch should be available to the overseas parent to set against home profits (depending on the tax regime in the parent’s jurisdiction); this can make it very attractive to begin operations in the UK through a branch, as this can enable loss relief for start-up costs to be obtained much sooner than if a UK subsidiary is used, where the start-up losses will need to be carried forwards against future profits in the UK.

A branch can be incorporated, when the UK venture has been established, without any UK tax costs using the reliefs for transfer of a trade. The tax consequences in the parent company jurisdiction need to be considered to determine the tax costs, if any, there.

If you would like to discuss how to set up a subsidiary in the UK or whether a branch might be a better option,  please call AA matthew & Co International on 09078132116, 07019971133.

Please note that this article provides an overview of the regulations in force at the date of publication and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the authors or by AA Matthew & Co International.