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The Creation of International Subsidiaries: Between Business Choice and Tax Strategy

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The creation of subsidiaries is a fundamental step for the growth of large companies. By definition, a subsidiary is a company owned by another company, often called the holding, parent, or even head of the group company. This entity exercises control over the daughter company through a significant equity stake.

At the strategic level, a subsidiary allows a company to partake in several activities of the same business stream (horizontal or vertical integration) or of a different business stream (diversification). For example, a public works company that wants to better manage its supplies could create or buy a company producing construction materials. Likewise, a company operating in the telecommunications sector can diversify by investing in automobiles or agriculture. The purpose of such diversification is to build protection against a possible crisis in the main business sector of the company.

Creating a subsidiary also makes it possible to achieve economies of scale and rationalize resources to reduce costs. This technique makes it possible to pool certain support functions, now managed by the parent company, such as human resources (personnel management and payroll management), the information system (deployment of a CRM or pooling of business management software), or accounting (centralization of services).

Finally, creating an international subsidiary also makes it possible to reduce the amount of tax payable by integrating the losses suffered by the subsidiaries in the balance sheet of the parent company. The tax deficits go up, and an overall result is calculated. It is the basis for calculating corporation tax. The mother-daughter regime allows, for its part, to raise dividends for the benefit of the parent company at a very low tax rate. This is why some parent companies of large European groups are established in countries where taxation is more flexible. But this practice is very well supervised because the border is very thin between tax optimization and tax evasion. Companies that want to risk it should consider having a compliance department to ensure everything is done according to the rules.

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