Companies can decide to develop their business by opening a new business entity.
The type of entity can be freely chosen (e.g. representative office, coordination centre, subsidiary, branch office, etc.).
A subsidiary is a company with local nationality that is legally independent of the parent company that has a majority holding in the subsidiary. This implies:
- the parent company has limited liability;
- administrative procedures with regard to the formation and registration of the new company;
- more burdensome administrative and operational procedures as compared to those required for a branch office.
A branch office is an establishment which enjoys a certain degree of independence vis-à-vis the founding company or firm, while not being legally separate from it. This implies:
- fewer administrative procedures with regard to the formation and registration as compared to a subsidiary;
- fewer administrative and operational procedures;
- full responsibility and liability of the parent company.
The parent company must take into account the tax differences between subsidiaries and branch offices.
Who is concerned
Each entrepreneur established in Luxembourg or abroad who intends to grow his business geographically can start up a subsidiary or branch office.
A subsidiary is a company whose capital was formed by more than half through financial contributions from another company, known as the parent company. The parent company is usually responsible for the direction, management and control of the subsidiary through the intermediary of one or more persons (managers or managing directors) appointed by the parent company.
It enables the parent company to broaden its economic activities under a separate legal entity while:
- opening up the subsidiary's capital to other investors;
- maintaining control over the separate entity;
- optimising the allocation of profits and losses between itself and the subsidiary from a tax point of view.
The subsidiary's activity may be identical or different to that from its parent company.
A branch office is a secondary establishment of a main establishment and is defined by a permanent and stable commercial set up or place of operation. The branch office is represented by a representative agent who interacts with the clients in its name.
A branch office must have:
- a physical installation and organisation which are completely separate from the central administration;
- a management headed by an agent representing the central administration but who has sufficient power to benefit from a certain degree of operational independence;
- its own customer base who knows the branch office and undertakes commercial transactions with it without going through the central administration.
The activities of a branch office are necessarily incidental to the activities carried out by the main establishment.
If the entrepreneur decides to set up in a country other than Luxembourg, he will need to take the following into account:
- the tax regime (rate and base) which will apply to the branch office in the country of establishment;
- the 'transfer pricing' and the proper application of bilateral tax treaties in conjunction with the applicable EU Directives;
- possible sanctions (applicable to the Luxembourg parent company) in the case of legal structures used for tax optimisation purposes (abuse of rights, tax evasion, 'anti-treaty shopping' provisions, etc.).
How to proceed
Creation and registration of a Luxembourg subsidiary
In order to set up a subsidiary, the parent company must:
- select the legal form of the subsidiary;
- draw up the constitutional documents;
- apply for a business permit for the new company;
- register the company with the Trade and Companies Register (RCS) like any other Luxembourg company;
- register the company for VAT.
Liability of parent companies
Subsidiaries have a separate legal personality from their parent company.
They can go bankrupt but the parent company is only liable for the subsidiary's commitments up to the amount of its capital contribution.
However, as a result of sureties which are often required from the parent company, the commitments may extend beyond the initial capital.
Daily management of a subsidiary
As a separate legal entity from the parent company, the subsidiary is required to:
- have its own board of directors;
- hold general meetings;
- comply with the standard chart of accounts;
- approve its accounts on eCDF;
- file its accounts with the RCS;
- file its own tax return.
Starting up a Luxembourg branch office
There are several ways to set up a branch office:
- if the parent company is established in Luxembourg: the opening of a branch office is simply subject to a notification to the Ministry of the Economy;
- if the parent company is not established in Luxembourg but in another EU Member State: the parent company is required to apply for a business permit to open a branch office in Luxembourg;
- if the parent company is not established in Luxembourg but in a third country (non-EU country): the parent company is required to apply for a business permit to open a branch office in Luxembourg;
Liability of parent companies
A branch office does not have a separate legal personality from the parent company.
A branch office cannot be made bankrupt and the parent company is fully liable for all of its actions.
Daily management of a branch office
The branch office manager must have been given power of attorney from the parent company in order to act on behalf of the parent company.
A branch office is not a separate legal entity from the parent company and its results are immediately taken by the head office which is responsible for complying with all the legal and fiscal obligations.
However, a branch office of a foreign company must provide the Luxembourg Inland Revenue with financial data on its parent company on a yearly basis.