A subsidiary is a company where the majority of voting shares or stock in that company are owned by another company (the latter company being called the ‘parent company’). 

In a wholly-owned subsidiary, the parent company will own 100 percent of the voting shares in the subsidiary. 

A subsidiary can be contrasted with an affiliate, where less than 50 percent of the company is owned by another company. 

Setting up a foreign subsidiary is a common vehicle for international expansion (see, for example, the Chinese model of a foreign-invested enterprise or ‘FIE). They may be set up from scratch in a new location, or be created as the result of a merger or acquisition. 

Read more about the process for setting up a foreign subsidiary at Setting Up a Foreign Subsidiary: The Main Advantages and Disadvantages.

Unlike a branch, a subsidiary has an entirely separate legal personality from the parent company. This means it can enter into contracts in its own name and that it has distinct tax liability from the parent company. It also means that the parent is not automatically liable for activities carried out by the subsidiary. 

Below we look at the pros and cons of choosing a branch or a subsidiary.