Branch or subsidiary?

Posted by on February 15th, 2018

This is a question that will trouble many founders who choose to establish their company abroad in favour of proximity to the majority of their clients, yet wish to base part of their team (engineers, support etc.) in Greece. This increasingly common choice for startups requires setting up a branch or wholly-owned subsidiary that serves as a cost centre.

We have frequently debated internally, as well as with our external advisors, which of these two options is the best one. As both choices come with their pros and cons, we are sharing our learnings in this post outlining the main guidelines that will streamline your decision process.

A branch is part of the same company, set up in a location other than the main office. By definition, a branch is quite restricted as it is not considered a separate legal entity and has the same legal and accounting identity as the parent company. Therefore, this structure does not shield the foreign parent corporation from liability incurred at the branch level. A subsidiary is a separate company which is controlled more than 50% by the parent company. A wholly-owned subsidiary is also a separate legal entity, albeit wholly-owned by the parent.

In terms of transferring funds, both structures work smoothly as the parent company can just wire money to the branch’s account or lend funds to its subsidiary. In case of profit, a branch would remit the profits to the parent company, whereas the subsidiary’s profits can be distributed as dividend to the parent. As the subsidiary is a separate entity, more options are available in this case. The subsidiary can set its own dividend policy and employee options scheme or could also be sold separately, which may prove useful. For both structures, any share in the parent company’s overhead expenses can qualify as deductible. Transfer pricing documentation in both cases only comes to play once a 100k threshold is exceeded in yearly transaction volume between Greek and foreign entity.

In other practical terms – particular to Greek regulations – the set up or any change in the Articles of Association of a branch needs to be approved by the state (county level) which can take up to a month or even longer. The docs submitted must include translated Articles of Association of the foreign parent and Apostille certification. For a subsidiary, submission to the General Commercial Registry and One Stop Shop service, which is completed instantly, is sufficient.

Our final decision between the two options is largely based on the time and cost required to set up shop, including any impact of the choice on future operating costs. Although one would expect that selecting a branch would result in less legal and accounting costs compared to setting up a separate entity from scratch, it actually requires more time to set up with similar costs in both cases.

Although the focus of this post is the case where the branch / subsidiary acts as a cost center, as a general pointer for the case the company does have sales revenue originating from Greece, one needs to consider which entity they wish their clients to sign with. In the case of the subsidiary, the clients would be signing with the Greek entity, whereas a branch is not considered a separate entity and, thus, the client would be singing directly with the foreign parent.

Finally, another matter to keep in mind is that, in both cases, it is necessary to appoint a legal representative to manage Greek operations. This person needs to have a Greek tax ID and might be determined to be a Greek tax resident by the authorities even though based abroad. One could choose to delegate this to a service provider, but the provider must be carefully selected and vetted as this position would grant access to the subsidiary’s bank account, while also making the provider liable for any obligations owed to the state.

Taking all the above into account, we recommend setting up a subsidiary because it comes with: faster setup, less bureaucracy and a flexible structure which can prove critical in M&A.

A big thanks to the Greek Tech Finance Network and Konstantinos Raikos for their input!

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