Foreign Subsidiary

What is a Foreign Subsidiary?

A foreign subsidiary is a legally registered business entity established in a country outside of its parent company’s home jurisdiction. It is owned—wholly or partially—by the parent company but operates under the laws and regulations of the host country. While it may carry the parent brand or offer similar services, a foreign subsidiary has independent legal status, its own tax obligations, financial statements, and local governance structures. 

Foreign subsidiaries are distinct from branches or representative offices. They can enter into contracts, hire local staff, acquire assets, and be held liable under local law. In global expansion, subsidiaries allow companies to scale operations while tailoring their compliance, tax, and employment strategies to specific markets. 

Why Do Companies Establish Foreign Subsidiaries? 

A foreign subsidiary is a strategic asset that enables international companies to operate more flexibly and compliantly in new territories. Key reasons for establishing one include: 

• Market Entry: To offer products/services directly to a foreign market under local regulations 

• Legal Separation: To reduce liability exposure of the parent company 

• Tax Strategy: To leverage favorable local corporate tax regimes (where compliant) 

• Regulatory Compliance: Some countries require a local entity for employment, invoicing, or government contracts 

• Brand Trust: A local legal presence can increase credibility with clients, suppliers, and talent 

This structure is particularly useful for medium to large enterprises with long-term operational goals in a target market. 

Foreign Subsidiary vs. Branch Office vs. Representative Office 

Choosing the right model depends on the business strategy, risk appetite, and regulatory landscape of the target country. 

Employer Responsibilities When Operating a Foreign Subsidiary 

Running a foreign subsidiary requires adherence to host country regulations related to: 

• Payroll and employment laws 

• Corporate tax filings and audits 

• Local governance (e.g., board requirements, equity restrictions) 

• Data privacy and cross-border data transfer 

• Employee benefits, social security, and termination processes 

Employers must also be mindful of permanent establishment (PE) risks, intercompany agreements, and transfer pricing compliance. These complexities make local legal, tax, and HR advisory support essential from day one. 

How Does a Foreign Subsidiary Hire Employees? 

A foreign subsidiary acts as a local employer, enabling businesses to: 

• Issue contracts in compliance with local labor laws 

• Set up local payroll, benefits, and statutory contributions 

• Enroll employees in national insurance or social schemes 

• File monthly and annual employment-related returns 

However, setup timelines and maintenance costs can be significant. Employers must budget for company incorporation, ongoing administration, and regular compliance updates—especially in highly regulated or fast-evolving jurisdictions. 

When Is Setting Up a Foreign Subsidiary the Right Move? 

Establishing a foreign subsidiary makes sense when: 

• You plan to hire a significant number of employees in a country 

• You want to invoice clients locally or enter into local contracts 

• The country’s laws require a local entity for employment or operations 

• You seek to optimise corporate structure for tax or liability reasons 

• Your market entry strategy includes long-term physical presence 

Alternatively, if testing a new market or hiring a small number of staff, an Employer of Record (EOR) may be more cost-effective and faster to implement. 

How TopSource Worldwide Supports Foreign Subsidiary Strategy 

TopSource Worldwide helps businesses determine whether forming a foreign subsidiary aligns with their international expansion goals. Our services include: 

• Jurisdictional research and compliance planning 

• Entity setup and registration 

• Ongoing statutory filings and corporate secretarial support 

• Localised payroll and HR administration 

• Risk mitigation for tax, PE, and regulatory exposure 

For companies seeking agility without sacrificing compliance, we also offer Employer of Record solutions in 180+ countries—enabling hiring without an entity until you’re ready to commit to a full subsidiary model.