What Is a Foreign Subsidiary? Definition, Benefits, and Examples

Doing business across international borders can be challenging. There are two sides to it. Importing has received extensive media coverage. Exporting is the other side of the coin. Shipping overseas or by air from the United States is expensive. Setting up a foreign subsidiary could reduce that cost. This article will explain how.

Some key takeaways:

• A foreign subsidiary is an affiliated company owned by a domestic parent company in another country.
• A subsidiary is an independent entity with employees, independent accounting, and location-specific financial reports.
• From an accounting perspective, the foreign subsidiary is responsible for its tax filings, financial statements, and regulatory compliance.

What Is a Foreign Subsidiary?

A foreign subsidiary is a company owned by a domestic parent company in another country. Assume the parent company is in the United States. The foreign subsidiary would handle business operations in the nation where it’s based. Some countries require this local presence for companies to process financial transactions within their borders.

Tech and automotive companies are two common examples of this structure. Google Ireland is a foreign subsidiary of Alphabet, Inc. in the United States. Toyota Motors North America is owned by its parent company in Japan. These business entities operate independently, but profits (and losses) flow back to the parent company.

According to the US Bureau of Economic Analysis (BEA), total United States foreign assets were $34.89 trillion at the end of 2024.¹ That number also includes financial investments. However, a significant portion is foreign subsidiaries. The United States is a major player in international trade, so setting up shop in other nations is a common practice.

How Does Foreign Subsidiary Work?

There are several differences between a foreign subsidiary and a branch office in another country. A subsidiary is an independent entity with employees and independent accounting. It usually has location-specific financial reports. Branch offices are simply an extension of the parent company. This is an important distinction for operational and tax purposes.

Legally, a foreign subsidiary operates independently from its parent company. However, the parent maintains an ownership stake, typically 51% or more. If the parental ownership stake is 100%, the subsidiary is “wholly owned.” This structure means the subsidiary must comply with the regulations of its home country. It also must follow those of the parent company's jurisdiction.

You can create a wholly owned subsidiary by creating an entirely new entity. You can also acquire an existing company with an established infrastructure and customer base. This usually comes with local expertise. Starting from scratch is known as a “greenfield” investment. Acquisitions are typically more expensive, but they offer an instant foothold in a foreign nation.

From an accounting perspective, the foreign subsidiary is responsible for its tax filings. It's also responsible for financial statements, and regulatory compliance. The numbers are then consolidated into the parent company’s statements. For example, Google Ireland produces financial reports each quarter. However, their public corporate earnings statement comes from Alphabet.

When Should a Business Form a Foreign Subsidiary?

Companies typically form a foreign subsidiary when they establish a significant presence in another country. That needs to go beyond simple exporting. Foreign subsidiaries are a base of operations to handle financial transactions and local regulatory compliance. This also includes sales and marketing in the new market. Here’s a brief list of good reasons to expand your company this way:

• Local customers prefer dealing with domestic companies
• Regulatory requirements necessitate a local entity
• Tax advantages make local incorporation beneficial
• The business requires substantial local operations. This includes production facilities, staff, or customer service centers

What is one way a wholly owned subsidiary can be established in a foreign market? You can begin by identifying a foreign market as an export opportunity. Follow that up by establishing a local sales or branch office to gradually increase your commitment. The decision to form a foreign subsidiary should come only after you have data that justifies it.

What are the Key Benefits of a Foreign Subsidiary?

There are several operational and financial benefits to forming a foreign subsidiary. We’ve alluded to some of them already. Here’s a more comprehensive list:

Limited Liability Protection

Seasoned business owners learn to create buffers between themselves and their business operations. Companies do the same thing. A foreign subsidiary is legally separated from its parent company. That means the company’s assets are generally protected from the subsidiary’s liabilities. This separation creates a firewall for international operations.

Local Market Advantages

Having a local presence in a foreign country provides significant market advantages. It puts your company on the ground with your customers, helps you navigate local customs and regulations. It may provide tax benefits or easier access to government contracts. Most importantly, it makes you part of the community you’re doing business in.

Tax Planning Opportunities

Operating in more than one country can make tax planning more challenging. Well-structured multinational corporations can use foreign subsidiaries to spread out the tax burden. Global authorities scrutinize this, so be careful about how you set it up. Check with the International Accounting Standards Board (IASB) for guidelines.²

Drawbacks and Risks to Consider

There are two sides to every business scenario. While there are benefits to forming a foreign subsidiary, there are also risks involved. Consider the following:

High Setup and Maintenance Costs

Forming a foreign subsidiary costs money. There are legal fees, incorporation fees, office space expenses, and staffing costs. There are also ongoing costs for accounting, tax filings, and regulatory compliance. It’s important to plan for these with accurate revenue projections.

Management Complexity

Opening a new office adds management complexity. Doing it in a foreign country adds layers to that complexity. You’ll be doing business across multiple borders and timelines. You'll also be immersing your company in a new culture, and balancing local autonomy with corporate control.

Regulatory Compliance Burden

Many companies form a foreign subsidiary to adhere to local regulations. That doesn’t mean the domestic requirements aren’t still there. It’s best practice to hire an international compliance expert to help navigate these issues. Doing it without one could be dangerous.

What is the Difference Between a Subsidiary and a Branch?

The two structures look similar, but there are several differences. To start, a subsidiary and a branch office are two different legal structures. The foreign subsidiary exists as an independent local corporation. The branch is an extension of the parent company. This distinction creates important distinctions, including the following:

• A branch's liabilities directly affect the parent company, while a subsidiary's liabilities are generally contained
• Branches typically face simpler setup processes but more complex taxation
• Subsidiaries can more easily access local financing and government contracts
• Branches often face restrictions on the activities they can conduct in foreign markets

Wise Business: The Easy Way to Manage Global Business Finances

Managing finances across borders with a foreign subsidiary is a significant challenge. Wise Business offers solutions specifically designed for companies with international operations:

• Receive payments like a local with account details & IBAN in major currencies
• Make international payments at the mid-market exchange rate with transparent, low fees
• Hold over 40 currencies in one account without monthly maintenance fees
• Connect seamlessly to accounting software for streamlined financial management
• Create separate accounts for different subsidiaries while maintaining central oversight

Register with Wise Business 🚀

Eliminating hidden fees and simplifying cross-border transactions helps businesses maximize their foreign subsidiaries while minimizing administrative headaches.

The right financial infrastructure can make a crucial difference. Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in 40+ currencies. You can get major currency account details for a one-off fee to receive overseas payments like a local. You can also send money to 140+ countries. Visit Wise Business to learn more.

	Editor & Business Expert:
	Panna is an expert in US business finance, covering topics from invoicing to international expansion. She creates guides and reviews to help businesses save time and make informed decisions. You can read more useful business articles on her author profile.

	Author:
	Kevin D. Flynn is a retired financial professional, business coach, and financial writer. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and ten wonderful grandchildren. When he’s not working, you’ll find him at the golf course or on his back porch reading classic sci-fi novels.

Sources:

1. www.bea.gov/news
2. IASB