date | theme

27. July 2022 | Set up a branch – these 5 points you should consider

28. July 2022 | Founding a subsidiary: what you have to consider (this article)

29. July 2022 | Franchise as an alternative to branch and subsidiary

Anyone who wants to start a subsidiary should be aware of all the consequences. After all, you set up a company with a subsidiary that has its own management and can therefore act completely autonomously in external relations. While some accountability remains with respect to the parent, the influence on ordinary transactions is very limited. Nevertheless, accounting takes place at group level. However, exceptions can also apply which make it possible to exempt them. As an alternative to individual taxation, Community taxation as a body can also be sought. In addition, some peculiarities must be considered when we set up a subsidiary. This includes the preparation of a social contract, the registration for registration in the commercial register as well as possibly the business registration and other administrative procedures. However, the question of management is particularly important. Here we recommend considering whether to involve the management staff in the subsidiary in order to create performance incentives.

Forming 1st subsidiary – Introduction

The fact that successful companies continue to expand over time is no secret. The question is how to expand. It is therefore a question of how to put into practice the establishment of new structures. Several possibilities are available for this purpose. On the one hand, you can simply set up a business site at the new location. This is uncomplicated insofar as this does not require any own management structures. One could also consider setting up a branch. Here, however, a separate branch management is required, which makes decisions only for its own location. However, management for the entire company continues to take place from the company’s place of management. If, on the other hand, you want to set up a new location completely independently, then you can achieve this via a franchise system on the one hand, but also via a subsidiary.

Here we want to specifically address the circumstances associated with the plan to establish a subsidiary. For the other alternatives, further contributions are available as a source of information. In addition, special circumstances related to the establishment of subsidiaries by foreign companies are also disregarded.

Set up 2nd subsidiary – Definition of terms

2.1. What is a subsidiary?

As banal as it may seem, we should first clarify what we mean by a subsidiary and how we distinguish it from the other alternatives. A subsidiary is first and foremost an independent company. However, another company is involved in the subsidiary. It depends on the control of the subsidiary. This means that one can only speak of a subsidiary if there is another company that controls the subsidiary in any way.

2.2. When is there mastery?

Classically, such control takes place over the majority of the voting rights. This can usually be seen in the participation relationships. In the case of a participation of 50 % or more, control is normally guaranteed. However, there may be social contractual or other agreements that influence domination. On the one hand, minority control is conceivable, for example through pool agreements between several shareholders. On the other hand, as a majority shareholder, you can voluntarily transfer part of your own voting rights to another shareholder.

2.3. How does a subsidiary differ from other forms of company?

Now we know what a subsidiary is. We can now distinguish them from a business, branch or franchise. An establishment of a company depends in every respect on the decisions of the management. By comparison, a branch has a certain autonomy, but is dependent on and has to comply with management decisions in contexts affecting the entire company. Accordingly, a branch does not know a managing director, but at best a branch manager. In this case, the authority can therefore be available at most as Prokura. A subsidiary, on the other hand, has and needs independent management. It is also to be understood as an independent legal entity, so it can exercise its own rights, but is also subject to its own obligations. This also applies to a franchise, but then the aspect of mastery is missing.

Founding a subsidiary – legal basis

Before we take action and set up a subsidiary, we should still appreciate the legal basis. For this purpose, we first consider § 290 (1) sentence 1 HGB. There we find the definition of a subsidiary already given in the previous chapter. It should be recalled that the parent company controls the subsidiary directly or indirectly. Thus, parent and subsidiary companies are related companies. Furthermore, we read in § 271 paragraph 2 HGB that parent companies and subsidiaries have to prepare a joint consolidated financial statements.

However, according to § 296 HGB, it is possible for the subsidiary to waive its inclusion in consolidated financial statements if certain conditions are met. On the one hand, a separate financial statement for the subsidiary is possible if the parent company is sustainably and extensively affected in its right to exercise its control over the subsidiary. A second possible reason is if the preparation of the consolidated financial statements entails considerable and thus disproportionate costs. The third reason therein shall be assumed if the parent holds the shares in the subsidiary only for the purpose of resale. This is therefore hardly considered for our interests, because we usually want to set up the subsidiary in order to use it. A fourth reason is if the significance of the subsidiary in relation to the economic and financial situation of the parent company is only of a minor nature.

4. How we set up a subsidiary

Now let’s take a closer look at what to consider when starting a subsidiary.

4.1. Establishment of a subsidiary: choice of company form

So this is about the question of in which legal form you want to set up a subsidiary. Should it be a partnership or a corporation? In most cases, companies decide to establish a subsidiary in the legal form of a GmbH. However, one should always pay attention to the tax effects associated with the choice of legal form. After all, this decision is usually made in anticipation of a long-term development, so that the choice of legal form has a significant impact on the taxation of the subsidiary. On the other hand, there may also be reasons for a different, more tax-attractive choice of legal form, for example as preparation for the sale of the subsidiary. The establishment of a subsidiary can also take place within the framework of a joint venture.

4.2. Establishment of a subsidiary: Articles of Association and Commercial Registration

We establish a subsidiary by drawing up a social contract. At a GmbH, this requires a notarized deed. Subsequently, the subsidiary must also be registered for registration in the commercial register. In the meantime, however, an entry in the transparency register is usually also required.

4.3. Establishment of a subsidiary: Business registration and other administrative procedures

For a commercial company, there is an obligation to register a business. If the subsidiary is to operate commercially, then a business registration is also required for it. On the basis of the business registration, other institutions will also find out that you are setting up a subsidiary. Therefore, a notification is made to the respective competent chamber as well as possibly the building office and the health office. In addition, the subsidiary should also be registered with the competent professional association in a timely manner. They will then be the compulsory insurance for accident protection.

Founding a 5th subsidiary – our conclusion

Establishing a subsidiary means refraining from exerting significant direct influence over that company. Finally, only the management hired by the parent company is responsible for this. As a parent company, however, one retains general control over the property of the subsidiary. If you want to offer an incentive to develop the subsidiary as successfully as possible, you can, for example, directly or indirectly involve the managing directors in the subsidiary.

In addition to these questions about how to run the subsidiary, there are also other aspects that play a prominent role in considering whether to set up a subsidiary. This certainly includes the question of taxation. In order to do this, however, we must consider both the taxation of the subsidiary and the parent company. If you create a group with the establishment of the subsidiary, the taxation takes place at the level of the group. An organ body could be interesting here. It makes it possible to offset losses of one company against profits of the other.

So if you set up a subsidiary, there are also some other obligations. This means the application for registration in the commercial register as well as the business application. But you also have to pay attention to these details if you want to start a subsidiary.