Debitoor Dictionary

Accounting terms explained simply

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Subsidiary - What is a subsidiary?

A subsidiary is a company that is at least 50% owned and controlled by a parent company

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When at least half of a company’s shares fall under the ownership and control of another business, this is typically a subsidiary relationship. The parent company can also be known as the holding company, though there is a distinction between the two.

In the UK, a subsidiary is also often known as a private limited company. Legally, a subsidiary is still liable for its own risk and business practises despite being controlled by a parent company.

A holding company refers to a company that holds a controlling portion of shares of a business, but does not operate independently. A parent company is a fully functioning business that has a controlling share of another business. A parent company can own many different businesses. There can also be multiple parent companies.

How subsidiaries are created

The word ‘subsidiary’ refers to a person or thing that plays a supplemental role to another individual or organisation. A company usually forms or acquires the subsidiary in order to gain control of a certain benefit of having partial or full ownership of that business. Subsidiaries are commonly seen in the real estate business.

For example: a company might designate a branch of their business in a different location as a subsidiary in order to gain certain benefits such as certain assets that can lead to more income, to receive tax breaks, reduction of risk, etc.

The subsidiary hands over management of the business to the parent company however, if it operates in a different country (a foreign subsidiary), it still must adhere to the local regulations. A parent company will usually carry out due diligence before creating a subsidiary.

Subsidiary and tax

A UK subsidiary remains wholly responsible for any tax incurred in running the business. However, in some cases, it might be possible for a subsidiary to take advantage of reduced tax rates depending on the parent company and other subsidiaries.

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