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Comparative Analysis: Branch Office vs. Subsidiary

Are you considering establishing a business in the Philippines? If yes, you won’t be the first. Many investors from different countries such as Australia, the United States, United Kingdom, Canada, Singapore, and others have opened a business in the country. The Philippines has a young and skilled workforce with a high proficiency in English, making it a destination for business process outsourcing and other industries.

You might be considering the type of business entity you want before establishing a presence in the country. Two of the entities many consider is a foreign branch office Philippines or a subsidiary.

What is a branch office?

When you open a foreign branch office Philippines, it will serve as an extension of your company. The liabilities of this branch office will be the same as yours. For example, if the branch office encounters legal problems that require the payment of damages, your assets may be used to pay for them. It’s possible to establish a branch office with one person as long as they are a Philippine resident. The latter will serve as a resident agent (can be a juridical or natural person).

What is a subsidiary?

Another option you can consider when you plan to establish a business presence in the Philippines is to register a domestic subsidiary. The latter acts as a separate entity from the main company. When a domestic subsidiary incurs damages, the parent company will not be liable. You can establish this entity with at least two but not more than 15 incorporators.

The incorporators of a domestic subsidiary can be a combination of natural person/s, SEC registered partnership/s, SEC registered domestic corporation/s, as well as foreign corporations.

Foreign corporations as incorporator will have to include the following:

  • Board Resolution
  • Directors’ Certificate
  • Secretary’s Certificate or its equivalent duly authenticated by the Philippine Consulate authorizing the foreign corporation to invest in the corporation being formed and specifically naming the designated signatory on behalf of the foreign corporation.

A single stockholder who may not be a Philippine resident may also form a corporation called One Person Corporation or OPC. An OPC can be a natural person, trust, or estate. The trust does not refer to a trust entity but a subject managed by a trustee. If the single stockholder is a trustee, administrator, executor, guardian, custodian, or other person exercising fiduciary duties, proof of authority to act on behalf of the trust or estate is required. A foreigner may register an OPC but is subject to the applicable constitutional and statutory restrictions. For example, a business that is for a public utility must have 60% Filipino ownership.

What are the key differences between the two?

There are distinct differences between a foreign branch office Philippines and a domestic subsidiary. Here are some of them.

 

When it comes to taxability

Branch Office:

  • A branch office incurs tax on its Philippine source of income.
  • Profits a branch remit to its parent company incur a branch profit remittance tax of 15% or 10% depending on certain tax treaties. If a branch office is in a special economic zone, they get a tax exemption.
  • A branch office does not incur a documentary stamp tax (DST) because it does not issue shares of stock.
  • Depending on certain conditions, the overhead expenses of the Head Office may be appropriated to its Philippine branch office.
  • A branch is not liable to pay the 10% improperly accumulated earnings tax.

 

Domestic Subsidiary:

  • Incurs an income tax on worldwide income.
  • Dividends that a Philippine subsidiary pays to non-resident shareholders incurs a 25% in general or 15% subject to certain conditions or preferential tax treaty rates.
  • A subsidiary is liable to pay DST on the original issuance of shares of stock at the rate of P2.00 for every P200.00 or fractional part of the par value of the shares of the outstanding shares of stock.
  • The Philippine subsidiary is not entitled to the allocation of overhead expenses of its parent company.

 

When it comes to capitalization

Branch Office:

A branch office is a 100% foreign-owned entity. It must have a capital of at least US$200,000. However, if it exports goods or services or generates revenue from other countries that amounts to over 60% of its gross sales, it can be fully foreign owned. In such cases, the Foreign Investments Act considers it an Export Enterprise. Hence, you can register a branch office for as low as P5,000 paid capital. 

 

Domestic Subsidiary:

A subsidiary that exceeds 40% foreign equity should have a minimum paid capital of at least US$200,000. However, if the subsidiary exports goods or services or generates revenue from other countries that amounts to over 60% of its gross sales, it can be fully foreign owned. In such cases, the Foreign Investments Act considers it an Export Enterprise.

 

When it comes to SEC securities deposit requirements

Branch Office:

A branch is required initially to deposit with the SEC for the benefit of present and future creditors, acceptable securities with market value equivalent to at least P500,000 plus an annual additional deposit of 2% of the amount by which the branch office’s gross income exceeds five (5) million pesos.

 

Domestic Subsidiary:

Subsidiaries do not have to deposit securities with the SEC. However, in cases where the single stockholder assumes the position of the treasurer, an OPC must post a surety bond with a computation based on the authorized capital stock (ACS) as shown in the Table below. It is subject to renewal every two (2) years or as may be required upon review of the audited financial statements.

ACS                                            Surety Bond Coverage

1.00 to 1,000,000.00                   1,000,000.00

1,000,001 to 2,000,000.00          2,000,000.00

2,000,001 to 3,000,000.00          3,000,000.00

3,000,001 to 4,000,000.00          4,000,000.00

4,000,001 to 5,000,000.00          5,000,000.00

 

When it comes to SEC registration requirements

Branch Office:

A branch is required to obtain a license to do business here in the Philippines with the Securities and Exchange Commission (SEC). 

The branch must comply with the following financial ratios using audited financial statements of the parent company for the immediately preceding year at the time of filing of application.

Notes:

  • If Solvency Ratio is not within the Benchmark Value, the application is rejected; and
  • If Liquidity Ratio and/or Debt to Equity Ratio is/are not within the Benchmark Value/s, a surety bond for P1 million needs to be submitted to SEC.

Within sixty (60) days after obtaining the license to operate, the branch office is required to deposit marketable securities worth at least P500,000 with the SEC which may be withdrawn upon cessation of the Philippine branch’s operations.

 

Domestic Subsidiary:

If you want to use this type of business entity, you need to register with the SEC.

Now that you’re familiar with the differences between a foreign branch office Philippines and a domestic subsidiary, you’ll know which business entity is appropriate for your plans. We at Manila Bookkeepers have the expertise and experience you need. Our team has leadership with more than two decades of experience in the finance and accounting industry in the country. They can assist you register a subsidiary company in the Philippines, branch office, or representative office.  

Manila Bookkeepers

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