Subsidiary, branch or liaison office: which way to set up abroad?

Quick answer. To set up abroad, three vehicles coexist. The liaison office is a non-commercial presence (prospecting, representation, intelligence) with no legal personality: it does not invoice, does not conclude contracts and is, in principle, not taxed on profits because it is not a permanent establishment. The branch is an extension of the parent company, with no legal personality of its own: it carries on a commercial activity, constitutes a permanent establishment taxable locally and binds the parent company. The subsidiary is a company under local law with legal personality, autonomous, with limited liability, taxed as a local company. The choice depends on the activity, the accepted risk and the stage of development.

Approaching a foreign market is not just about signing contracts remotely. As soon as the presence materialises — a salesperson on site, premises, a regular activity — the question of the structure arises, with legal, tax and liability consequences. Three vehicles are available, from the lightest to the most structuring, consistent with an international expansion strategy.

The liaison office (or representative office) is the lightest form. It serves to prepare a setup: prospecting, advertising, information, intelligence, introductions.

• No legal personality. It has neither its own assets, nor capital, nor a distinct name: it is part of the parent company.
• No commercial activity. It can neither invoice, nor conclude contracts, nor directly supply services to customers. Its role is strictly preparatory and auxiliary.
• No tax on profits. Carrying on no commercial operation, it does not constitute a permanent establishment and is therefore, in principle, not subject to profit tax in the host country.

Its limit is also its strength: as soon as it crosses the line of commercial activity (sale, conclusion of contracts), it becomes a branch and taxable. The liaison office is an antechamber, not a lasting solution for selling.

The branch is an extension of the parent company in the host country. It has its own premises and carries on a commercial activity, but remains without distinct legal personality.

• Taxable permanent establishment. Carrying on an economic activity locally, the branch constitutes a permanent establishment and is taxed locally on the profits attributed to it.
• The parent company is bound. Lacking distinct assets, the branch binds the parent company for its debts: liability is not ring-fenced.
• Attached accounts. Its results attach to those of the parent company, subject to the local taxation of the permanent establishment, which requires suitable accounting.

The branch suits a real commercial activity that one does not (yet) wish to house in a distinct company.

The subsidiary is a company under local law, with legal personality, its own capital and assets.

• Legal autonomy. It acts in its own name, with its own governing bodies and accounts.
• Limited liability. The parent company is in principle bound only up to its contributions: the risk is ring-fenced.
• Local taxation. The subsidiary is taxed as a local company; the upstreaming of profits to the parent, as dividends, depends on the tax treaties, the withholding tax and the parent-subsidiary regime.

The subsidiary is the most structuring vehicle, suited to a lasting presence and significant development.

The notion of permanent establishment. Beyond the chosen form, the host country's administration may characterise a permanent establishment as soon as there is a fixed place of business or an agent with the power to bind the company (Article 5 of the OECD model). A salesperson concluding contracts may suffice: the qualification does not depend only on the chosen label.

The foreign company setting up in France. The same logic applies in reverse: we cover it in our guide on opening a branch in France by a foreign company, the mirror of the rules described here.

Team mobility. Posting or expatriating employees to the setup is a separate, social and tax analysis, covered in our matrix on mobility abroad.

• The label does not make the tax. A "liaison office" that sells or contracts is reclassified as a taxable permanent establishment.
• The branch binds the parent. Without legal personality, it does not ring-fence the risk: the parent company answers for the debts.
• Transfer pricing. Between the parent and the subsidiary (or the permanent establishment), transactions must be valued at arm's length, on pain of a reassessment.
• Local law prevails. Each country has its rules: the form, taxation and obligations depend on the host jurisdiction.
• Anticipate profit upstreaming. Dividends, withholding tax and treaties condition the setup's net return.

Recently, an SME wanted to test a European market before committing lastingly. The temptation was to immediately create a subsidiary, for credibility. We proposed a two-step path: first a liaison office for prospecting, untaxed and inexpensive, then a switch to a subsidiary once the market was validated. Conversely, another company, already in a commercial phase, hesitated between branch and subsidiary: we chose the subsidiary to ring-fence the risk, despite a higher initial cost. The right vehicle always depends on the stage and the risk, not on a general principle.

Our conviction, as accountants registered with the Ordre, is that a setup is built in stages. The liaison office prepares, the branch tests the activity, the subsidiary anchors lastingly. The frequent mistake is to choose the most structuring vehicle too early, or to let a liaison office "spill over" into an undeclared commercial activity. It is a trade-off we handle within structuring support and international tax advice.

Hayot Expertise advice. Before choosing, start from your real activity. Exploring without selling? The liaison office suffices, provided you do not cross the line of commercial activity. Starting an activity, without (yet) wanting a distinct company? The branch fits, bearing in mind it binds the parent company. Setting up lastingly and wanting to ring-fence the risk? The subsidiary is the way. And in all cases, check the notion of permanent establishment and transfer pricing upstream: that is where reassessments are decided.