Companies must decide which legal form to operate when entering new markets or expanding domestically. The most common options are to create a subsidiary or open a representative office
The choice between these forms depends on the business’s goals, the scale of its operations, legal requirements, and tax burden. A subsidiary is an independent legal entity with greater autonomy in decision-making but is subordinate to the parent company. On the other hand, a representative office is not a separate legal entity and performs mainly auxiliary functions, acting on behalf of the parent company.
In this article, we will examine the key differences between a subsidiary and a representative office, their advantages and disadvantages, and the specifics of their registration and taxation. This will help entrepreneurs and company managers choose the most suitable form for business development.
What is a representative office and a subsidiary?
A subsidiary is a legal entity created by another company (the parent company) under its control. Unlike branches or representative offices, a subsidiary has full or partial independence: it conducts business in its name, enters into contracts, hires employees, and is legally responsible for its obligations.
In Belarus, a subsidiary is registered in one of the organizational and legal forms provided for by law (for example, a limited liability company (LLC) or a joint-stock company (JSC)). The primary condition is that the parent company must own a controlling stake or share in the authorized capital, which ensures influence on the subsidiary’s management. In addition to a controlling stake or share, a subsidiary can be recognized as such under an agreement concluded with the parent company. A company is assessed as a subsidiary when another company can determine the decisions made by the subsidiary.
A representative office is a separate division of a foreign or Belarusian company that is not an independent legal entity. It acts on behalf of and in the interests of the parent company, representing its interests in a particular territory.
The main purpose of a representative office is not to conduct independent commercial activities but to perform auxiliary functions, such as marketing research, finding partners, negotiating and promoting the parent company’s goods or services, and concluding transactions on behalf of the company. A representative office cannot independently conclude transactions or conduct business on its behalf.
Like a subsidiary, a representative office can open accounts in Belarusian banks.
The main differences between a representative office and a subsidiary
The main difference between a representative office and a subsidiary is that a representative office, unlike a subsidiary, is not a legal entity. Subsidiaries operate based on a charter and are registered in the Unified State Register of Legal Entities, while representative offices are not. A representative office operates based on a representative office regulation. The charter of the parent company must contain an entry about the representative office. Let us list other differences:
Financial and legal liability
A subsidiary company operates based on its own charter and is independently liable for its obligations but not for the debts of the parent company. The parent company may bear risks depending on the degree of control. For example, for transactions that the subsidiary has made on the instructions of the parent company, it bears joint and several liabilities. The representative office has no economic independence, and all responsibility for its actions lies with the parent organization.
Taxation
A subsidiary company pays taxes in the country of registration by local legislation.
A representative office can pay taxes only if it is recognized as a permanent establishment, that is, if it carries out commercial activities. A representative office of a foreign company in Belarus can become a permanent establishment. This is not a legal status but a status associated with the obligation to pay taxes in Belarus when a foreign company carries out economic activity in Belarus through a representative office for more than six months.
Registration and regulation of activities
Registration of a subsidiary company occurs according to the standard procedure for creating a new legal entity (registered in the Unified State Register).
A representative office of a foreign company is registered with the Ministry of Justice of the Republic of Belarus. Representative offices of Belarusian companies are not registered with government agencies. For them, the parent company approves regulations (a document that sets out the operating procedures of the representative office) and includes the representative office in its charter.
Thus, the key difference is the degree of independence: a subsidiary company acts as a legal entity, while a representative office represents the interests of the parent organization without the right to conduct business independently. The choice between these forms depends on the company’s goals, level of control, tax aspects, and scope of activities.
Advantages and disadvantages of each option
The choice between a subsidiary company and a representative office depends on the business goals, the desired level of independence of the division, and tax and legal aspects. Let’s consider the main pros and cons of each option.
Pros and cons of a subsidiary
Advantages:
Complete legal independence
A subsidiary is an independent legal entity that can enter into transactions, own assets, hire employees, and conduct financial activities without direct intervention from the parent company.
Management flexibility
Despite control by the parent company, a subsidiary can independently make decisions within the framework of its activities, adapting to local market conditions. The parent company can make the decisions for the subsidiary.
Tax optimization
A subsidiary can take advantage of local tax regimes, benefits, and agreements to avoid double taxation, which, in some cases, reduces the tax burden compared to a representative office.
In turn, a representative office of a foreign organization that is not recognized as a permanent establishment pays only payroll and property taxes in Belarus.
Expanding business opportunities
A subsidiary can independently participate in tenders and obtain licenses and permits, which is especially important in areas that require special business conditions.
Disadvantages:
Complexity of registration and administration
Creating a subsidiary requires more time and effort than opening a representative office. Full accounting records and compliance with local legislation are also necessary.
Separate tax and legal liability
A subsidiary must pay taxes in the country of registration, keep records, and comply with local regulatory requirements, which can increase the costs of maintaining a business. For representative offices, taxes are paid by the parent company. The representative offices of foreign companies risk being recognized as a permanent establishment (if they conduct economic activity and receive revenue). In this case, you will need to pay taxes in Belarus.
Advantages and limitations of a representative office
Advantages:
Simplified registration and administration
A representative office is not a legal entity, so its opening and operation are associated with fewer legal and administrative difficulties.
Minimal tax liabilities
If a representative office does not conduct commercial activities, it is exempt from paying most taxes, limited to payments related to personnel and administrative expenses.
Promoting a business without significant investments
A representative office is ideal for marketing research, finding partners, and preparing the market for launching a business without the costs of full-fledged business operations.
Limitations:
1. No right to independent commercial activity
A representative office cannot enter into contracts, sell goods and services, or conduct full-fledged financial activities without the parent company’s approval.
2. Financial dependence on the parent company
The parent company covers all expenses of the representative office, making its maintenance less profitable in the long term.
3. Limited legal status
Unlike a subsidiary, a representative office cannot participate in tenders, obtain licenses and certificates for its activities, or fully participate in business relations in the local market.
The choice between a subsidiary and a representative office depends on the business goals. If the company plans to conduct full-fledged commercial activities in another country or region, it is better to create a subsidiary. If it is simplynecessary to represent the parent company’s interests and engage in marketing or market analysis, it is more expedient to open a representative office.
How to Choose Between a Subsidiary and a Representative Office?
The decision depends on multiple factors, including business goals, financial capabilities, tax considerations, and legal restrictions. Making the correct choice requires a comprehensive analysis of all potential implications.
Key Factors to Consider
1. Market Entry Goals
A subsidiary is preferable if the company plans commercial activities (contracts, sales, services).
A representative office is sufficient if the main goal is market research, brand promotion, or partner negotiations.
2. Degree of Autonomy
A subsidiary operates as an independent legal entity, offering excellent decision-making and financial management flexibility.
A representative office depends on the parent company, limiting functionality but simplifying control.
3. Tax Burden
A subsidiary must pay local taxes but can benefit from tax incentives and double taxation treaties.
A representative office (if non-commercial) is exempt from profit tax but may have other mandatory payments (e.g., payroll taxes).
4. Legal and Administrative Requirements
Registering a subsidiary requires more time, documentation, and resources and full accounting.
A representative office is simpler to establish but has limited legal capacity.
5. Financial Costs
A subsidiary involves higher expenses (taxes, rent, reporting, etc.).
A representative office is cheaper but may not meet long-term business needs.
6. Risks and Liability
A subsidiary bears independent legal liability, reducing risks for the parent company (though the parent may still be liable for obligations arising from its instructions).
A representative office acts on behalf of the parent company, meaning any legal issues directly affect the headquarters. Thus, its operations should be clearly defined in the Regulations for the Representative Office, drafted and approved by the parent company.
Practical Business Recommendations
What should a company consider when choosing a market entry structure? Here are some tips:
1. Define Long-Term Goals
Clearly outline whether the purpose is market research, marketing, networking, or full-scale operations.
2. Conduct Legal and Tax Analysis
Study the target country’s laws, as differences in taxation, registration, and business permissions may impact the decision.
3. Assess Financial Capacity
A subsidiary requires significant investment, so calculate potential costs and revenues. A representative office may be more economical if testing the market.
4. Consult Experts
Legal and tax advisors can help assess risks, choose the best structure, and ensure proper documentation.
5 . Evaluate Scaling Prospects
If future expansion is planned, a subsidiary may be better to avoid restructuring costs later.
6. Consider Alternative Structures
A branch, agency, or partnership with a local firm may be more advantageous.
Conclusion
The right choice between a subsidiary and a representative office depends on business strategy. Companies focused on full-scale operations should opt for a subsidiary, while those aiming to minimize costs and test the market may prefer a representative office.
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