Nature of branch offices
Why do foreign companies choose to incorporate branch offices?
From the definition of head office company being legally bound by any legal contract signed by the branch company, we can understand the HIGH risk involved but many foreign companies still choose to incorporate a branch due to the followings:
Speed of Incorporation: A branch office can be set up relatively quickly as all the registration details as company name, directors and shareholders is the same as Head office.
Ease of Commercial Operation: There is no need to set up new accounting, legal, HR and admin system as it is just an extension of Head office. Management wants to use a branch office as an interim step, using it to gain local knowledge and make sales before acquiring or establishing a subsidiary.
Due to the above reasons, foreign company would incorporate a branch and implement control to reduce the risk such as no local bank account and or insist all signing of document by head office directors.
Head office needs to understand where the majority of their worldwide profits and taxation rates of each jurisdiction.
Branch company may not be tax in the location that they operated if it does not fulfil the concept of Permanent Establishment hence all profits will be tax in Head office which may have a low tax rate such as Singapore of 17%.
The branch company can perform non-permanent establishment are activities such as advertisement of products and services and/or communication with regional clients which contribute to Head office commercial activities.
Depending branch local tax laws, Companywide or Head office profits may be exposed to taxation in the country where the branch is located.
Therefore, Head office needs to decide what the best worldwide tax exposure approach on branch incorporation decision.
Different structures will lead to different accounting approaches. The head office has to decide what kinds of yearly or monthly compliance they are willing to consolidate. For example, accounting, tax and audit matters.
As a branch is a not a separate entity, it may not need to have multiple government registrations and may not need to maintain a minimum level of capital to operate. It is also likely to face less stringent local regulations and annual reporting requirements.
Normally, branch office has a lesser compliance issue compared to a subsidiary.