Businesses around the world are interested in making their presence in the UAE. One of the reasons for this is the Expo 2020. An easy way to extend an arm into the UAE market is by setting up a branch or a subsidiary in UAE. There is a lack of knowledge on the difference between the two, especially among international businesses. It is important to understand the difference between the two to take advantage of the business environment.
Here we have curated a summary of the main difference between a branch license and subsidiary license.
1. Legal Entity
Branch License: The branch license is treated as the same legal entity as the main entity outside UAE. This means all the income earned in the UAE is the income of the main company (head office). Therefore the head office has 100% ownership and control.
Subsidiary License: In the case of a subsidiary, a separate legal entity is created, and the main entity outside UAE owns the company inside UAE. Therefore the income earned by the UAE entity is separate from the income of the main company outside the UAE (parent company). Here multiple ownership structures can be looked into, from having 100% ownership, to also having a partnership with other legal or natural entities.
Branch License: Since the branch license is the same legal entity, the liability is extended to the head office company as well. This could be a major concern for investors.
Subsidiary License: Being a separate legal entity, which is a Limited Liability Company, the liability cannot be extended to the parent company.
3. Exit or Sale of Company
Branch License: Since a separate legal entity does not exist, an exit may be a bit more difficult.
Subsidiary License: Since a separate legal entity does exist, doing a share transfer is easy.
4. Maintenance of accounts
Branch License: Since there is only one legal entity the financials must be maintained together, however it will be useful to also maintain a separate set of accounts for the branch for easy understanding of the company performance and compliance in UAE.
Subsidiary License: The financials are to be maintained separately. The parent company will have to consolidate the subsidiary accounts as well, based on the accounting standards being adopted.
Branch License: The activity must match exactly with the licensed activity of the head office. No other activity can be applied for. Upon approval from the regulatory authority this license can be set up.
Subsidiary License: Any commercial or industrial activity can be selected. It is not mandatory to have the activity of the parent company to match.
Do note that in the mainland a subsidiary option cannot be considered as professional licenses are to be owned by natural persons only. In such a case, a freezone option can be considered.
Since the UAE does not have corporate tax yet, there is no difference in the tax implications in the UAE. However, there may be some tax implications for the parent company or head office.
Branch License: The income earned in the UAE is treated as the income earned by the same legal entity, therefore higher chances of tax implications in the home country. Tax laws in the home country need to be reviewed for this.
Subsidiary License: The income earned in UAE is of a separate legal entity, therefore lower chances of tax implications, in the home country of the parent company. Tax laws in the home country need to be reviewed to see if taxes will be on the sales, dividends of the subsidiary, or no taxes at all.
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