Top Benefits of Setting Up a Subsidiary Company in the UK
- Published: 4 November 2025
- 11 min read
- Starting a Company
Ruth Dsouza
Author
Ruth Dsouza Prabhu is a content developer who specialises in crafting clear, compelling narratives from complex ideas. With expertise in marketing communications and lifestyle writing, she simplifies business concepts for a wide audience. Her writing blends strategy, storytelling, and thought leadership, always with a focus on clarity, credibility, and meaningful impact.
Mosan Ali
Reviewer
Mosan Ali is our Accounting Manager based in the UK and has a wealth of knowledge of UK GAAP, VAT, and PAYE. With 12 years of experience crunching numbers and ensuring compliance, he keeps our financial reporting ship-shape. Think of Mosan as our blog's accounting guru. He carefully reviews our UK-focused content, ensuring it's accurate, up-to-date, and packed with helpful tips for UK businesses. Get your taxes right from day one with our informative blog posts.
A subsidiary company is a separate entity owned by a parent company. Subsidiaries are designed to help companies enter new markets, manage financial risks, and enjoy tax advantages within a clearer corporate structure. The registration process when setting up a UK subsidiary company can generally be completed online. This article will explore the benefits and strategic uses of subsidiary companies, as well as the steps to set one up.
Key Takeaways
- Establishing subsidiaries allows companies to diversify products, expand into new markets, and manage risks independently without jeopardising the parent company’s core operations.
- Subsidiaries offer significant tax breaks, attracting investors by demonstrating commitment to local markets and enhancing operational flexibility tailored to regional demands.
- Effective management of subsidiaries involves strategic operational practices, clear communication, diligent reporting, and leveraging technology for compliance and efficiency.
Why Do Companies Create Subsidiaries?
Businesses create subsidiaries for a myriad of strategic reasons, each aimed at enhancing their overall business strategy potential under the parent or holding company. One primary motivation is the pursuit of business opportunities that can lead to significant growth and adaptability, especially when companies create two or more subsidiaries.
Forming subsidiaries allows multiple companies to test new ideas, diversify products, and expand into new markets without jeopardising core operations.
Product diversification
Creating subsidiary companies allows parent companies and holding companies to innovate and experiment with new ideas or products while protecting intellectual property and without impacting their main parent company brand. This strategic flexibility enables subsidiaries to restructure or diversify their operations to adapt to market changes, all under the guidance of the parent company’s name.
Operating as separate companies, subsidiaries can protect the parent company’s reputation and maintain stability with access to the existing customer base while exploring new growth avenues.
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Market expansion
Expanding into new markets often necessitates a tailored corporate presence. Establishing subsidiaries allows businesses, including foreign companies and overseas companies, to enter and operate in foreign markets effectively, leveraging local talent and complying with regional regulations. This process is crucial for business expansion.
Risk management
Subsidiaries serve as independent legal entities, providing a buffer that limits parent company liability and financial liability associated with the subsidiary’s actions. A subsidiary can incur its own liabilities and enter into contracts independently.
However, a parent company can sometimes be held responsible for a subsidiary's legal or criminal actions in certain circumstances, despite the subsidiary being a separate entity with its own company governance. The parent company owns a controlling interest and thus retains overall control of a subsidiary through ownership of its stock.
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Key Advantages of Subsidiary Companies
The strategic use of subsidiary companies offers multiple advantages that can significantly enhance a parent company’s operational efficiency and market position. These benefits include:
Tax benefits
Subsidiaries can provide substantial benefits, including:
- Group relief, which allows losses in one subsidiary to offset profits from another within the same group.
- Dividend exemptions for holding companies on profit distributions received from subsidiaries.
- Tax-free transfer of assets between subsidiaries and the holding company within a group structure.
Not all subsidiaries automatically qualify for these tax benefits. Group relief and tax-free asset transfers apply only if certain qualifying conditions and tests are met under HMRC rules. Always verify eligibility before claiming these reliefs.
Attracting investors
Subsidiaries can be attractive to investors by:
- Demonstrating a commitment to specific local markets and compliance with regional regulations.
- Hiring local employees, which supports community relations.
- Enhancing brand reputation and customer loyalty in the new market.
Operational flexibility
Establishing subsidiaries allows existing businesses to adapt their strategies to local market demands and regulations, providing operational flexibility that is crucial for maintaining a competitive advantage as sister companies evolve. This flexibility ensures that subsidiaries can cater to local customer needs effectively, fostering positive business outcomes.
Steps to Set Up a Subsidiary Company
Setting up a subsidiary company involves several crucial steps:
- At least one person must be appointed as a director when establishing a UK subsidiary, typically forming the basis of the board of directors.
- Choosing a company name and selecting a registration package.
- Establishing a subsidiary by creating one or purchasing majority shares in an existing company.
- Engaging in careful planning.
- Managing additional administration.
- Handling statutory reporting.
- Addressing complex accounting standards and considerations.
To set up a subsidiary in the UK, you need a corporate shareholder for the new entity to secure shareholder approval and maintain a clear corporate structure. The UK, for instance, is known for being one of the easier places to establish and run an established company as a UK private limited company. Many established company groups and foreign company entrants benefit from the supportive business environment. To set up a UK limited company, its compliance and statutory filings must be managed effectively to ensure successful UK market entry.
Setting up a limited company is simple with Osome. Our company registration packages cover everything you need – from incorporation and compliance to ongoing filings – so your subsidiary can start operating smoothly under UK law.
Opening a Corporate Bank Account
Establishing a corporate bank account is a pivotal step for any new subsidiary so the subsidiary operates independently of group cash flows. The bank account must be set up in the subsidiary’s name, as it is its own legal entity, facilitating seamless financial operations and compliance with local regulations. Having a dedicated corporate bank account enables the subsidiary company to manage its own cash flow, pay local suppliers, handle employee salaries, and receive payments from customers independently of the parent company.
Additionally, it reinforces the subsidiary's status as an incorporated company with its own management team and operational autonomy. For foreign companies setting up a UK subsidiary, opening a bank account can sometimes be challenging due to regulatory requirements and the need for appropriate documentation, including proof of the subsidiary’s registered office address and details of its directors. However, securing a UK bank account is essential for establishing a credible local financial presence and building trust with customers and partners in the UK market.
Many banks also offer specialised services tailored to subsidiaries, such as multi-currency accounts and online banking platforms, which further enhance operational flexibility and efficiency.
Application for Business Licenses
Obtaining the necessary business licenses is critical, involving an understanding of the region’s specific licensing requirements, which can vary significantly. Obtaining all required licenses legitimises the business entity, opens new business opportunities, and supports long-term strategy and expansion.
The administrative steps involved in setting up a subsidiary are vital for its smooth operation. Tasks include:
- Registering with Companies House
- Appointing directors and shareholders
- Ensuring compliance with legal obligations
Registering with Companies House
Registering a subsidiary with Companies House involves several steps:
- Choosing a new company name
- Obtaining a Company Registration Number (CRN)
- Appointing a local representative if the parent company is foreign
- Securing a UK bank account.
Additionally, the Articles of Association is a key document required for registering a subsidiary in the UK, and directors may state a service address. Often, only the service address is shown on the public register. Submit the Articles of Association, an official address, and a Standard Industrial Classification (SIC) code that reflects the company’s activities.
Appointing directors and shareholders
Appointing directors and shareholders is crucial, and engaging a company secretary can streamline filings for the board of directors. Key points to consider include:
- At least one natural person must serve as a director.
- Having a company secretary for legal matters is advisable and often a careful consideration for governance readiness.
- The parent company should own the majority of shares to maintain control.
Involving local talent in governance tailors practices to regional needs and regulations.
Compliance and legal obligations
Compliance with obligations are paramount, requiring meticulous documentation and adherence to local regulations.
Subsidiaries must file annual accounts and reports with Companies House to maintain compliance for each accounting period. All UK limited companies must prepare and file annual accounts. Additionally, all UK companies must register for corporation tax with HM Revenue & Customs (HMRC).
Securing the right business licences early on not only legitimises your subsidiary but also streamlines registration and compliance processes, laying a strong foundation for future growth.
Differences Between Subsidiaries and Other Entities
Understanding the differences between subsidiaries and other entities is crucial, including when a venture is an associate company rather than a subsidiary. A subsidiary is an entity where the parent or holding company holds a majority of shares (a first tier subsidiary when directly owned), unlike branches and affiliates, which do not require such ownership, including the parent undertaking.
Aspect | Subsidiary | Branch | Associate / Joint Venture | Ideal Use |
|---|---|---|---|---|
| Ownership | Parent company holds more than 50% of shares (100% = wholly owned subsidiary) | Fully owned and operated as an extension of the parent company | Parent company holds between 20%–50% interest (joint control for joint ventures) | Subsidiary: Establishing a distinct local entity with control and limited liability |
| Legal status | Separate legal entity incorporated in the UK | Legally part of the parent company | Separate entity, partially owned | Branch: Extending parent operations directly without full incorporation |
| Operational independence | Operates independently with its own management and governance | Operates under direct control of the parent company | Operates with shared or independent management depending on structure | Associate / JV: Strategic collaboration while sharing legal risks and resources |
| Financial reporting | Consolidated with the parent company’s financial statements | Results fully integrated into the parent company’s accounts | Accounted for using the equity method (share of profit/loss recognised) | Subsidiary: Expanding into new markets while maintaining accounting separation |
| Liability | Parent company not liable beyond its shareholding (except in limited cases) | Parent company fully liable for all branch obligations | Liability depends on ownership and agreement terms | Subsidiary: Managing risk exposure and ensuring legal separation |
Managing a Subsidiary Company
Effective management of a subsidiary company involves:
- Developing unique operational strategies that cater to local market demands
- Ensuring clear communication between the parent and subsidiary
- Maintaining diligent financial reporting
- Implementing strong corporate governance practices
The governance structure of a subsidiary is defined in its Articles of Association, which may include provisions for parental oversight and the role of a company secretary.
Financial reporting
Financial reporting for subsidiaries involves preparing independent financial statements, allowing them to report their financial performance distinctly. Centralised data management enhances collaboration by providing a single source of truth, reducing errors, and streamlining reporting processes. The rate of corporation tax in the UK is between 19% to 25%, depending on the level of profits.
Corporate governance
A strong corporate governance framework is essential for ensuring that subsidiary operations align with the parent company’s standards and compliance requirements. Regular audits and maintaining accurate records help fulfil compliance obligations and avoid penalties, including the annual independent audit.
Utilising local talent
Hiring local employees enhances a subsidiary’s market understanding and operational effectiveness. Employing local talent provides valuable insights into market trends and cultural nuances, aiding better decision-making for subsidiary operations.
Although subsidiary company incorporation isn’t offered as a standalone service due to the manual compliance involved, we do assist clients who combine it with our accounting package. This approach allows businesses to manage both incorporation and ongoing compliance in one place, making it simpler to expand operations into the UK.
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Regulatory and Tax Considerations
Navigating regulatory and tax considerations is crucial for the successful operation of a subsidiary. Compliance with local regulations, preparing and filing annual accounts, and understanding specific tax obligations are essential steps.
Corporation tax
UK subsidiaries must self-assess their UK corporation tax liability based on taxable profits for each accounting period. Each subsidiary must file its own tax return and pay its tax separately, with rates varying based on profit levels. A UK company is liable to UK corporation tax on all its worldwide profits.
VAT registration
Subsidiaries in the UK must:
- Register for VAT if their taxable turnover exceeds £ 90,000 in the previous 12 months.
- Submit periodic VAT returns, typically on a quarterly basis.
- Adhere to the standard VAT rate of 20% for most goods and services.
Additionally, a UK subsidiary must register for corporation tax and may need to register for UK payroll tax.
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Common Challenges and Solutions
Establishing and managing a subsidiary undertaking comes with its own set of challenges, including legal and accounting complexities and navigating bureaucracy and compliance.
Legal and accounting complexity
Setting up a subsidiary involves various legal and accounting complexities, including compliance, reporting, and governance challenges. Centralised data platforms help minimise risks by reducing inaccuracies and redundancies.
Bureaucracy and compliance
Navigating the bureaucratic and compliance landscape is critical for the smooth operation of a subsidiary. Establishing effective corporate governance ensures ongoing compliance with corporate law and regulations, which can vary significantly by jurisdiction. Understanding and managing these aspects ensures legal operation and helps avoid penalties for subsidiaries.
Summary
Setting up and managing a subsidiary company offers numerous benefits, including product diversification, market expansion, risk management, tax advantages, and operational flexibility. Creating subsidiaries enables brand management, allowing an incorporated company to diversify its offerings and target different audiences. Becoming a subsidiary provides access to the parent company's resources for capital investments, research, and operational funding.