Differences in setting up a local subsidiary office and a branch office of a foreign corporation (Tax 1)

  1. The differences in setting up a local subsidiary office and a branch office of a foreign corporation are the following:
  1. As to its creation, a local  subsidiary involves incorporation under Philippine laws. On the other hand, doing business through a branch office involves the securing by the foreign corporation of a license to do business in the Philippines but it does not acquire separate juridical entity.
  • As to juridical personality, By incorporation, the domestic subsidiary acquires a juridical personality that is separate and distinct from that of its parent company. (Sec. 2, Corporation Code). Unlike a domestic subsidiary, a branch office does not acquire a separate juridical personality but becomes merely an extension of its parent company. (Sec. 123, Corporation Code)
  • As to liability of the parent company, in local subsidiary, the parent company shall not be liable for the obligations of the domestic subsidiary beyond its subscription to the subsidiary’s authorized capital stock, unless there are circumstances that warrant the piercing of the veil of corporate fiction, such as its use for the perpetration of fraud. While in a branch office, the parent company shall be liable for all of the obligations that the branch office may incur.
  • As to tax treatment and  implications, the subsidiary becomes a domestic corporation while the parent company remains a non-resident foreign corporation. (Sec. 22 (C) and (I), Tax Code). The domestic corporation is subject to tax based on its taxable income from all sources, i.e., within and without the Philippines, at the corporate tax rate of 32%. (Sec. 27 (A), Tax Code) Its parent company, the non-resident foreign corporation, on the other hand, is subject to tax based on its gross income from sources within the Philippines at the same tax rate. (Sec. 28 (B) (1), Tax Code).

Meanwhile, the foreign company upon obtaining a license to do business through a branch office becomes a resident foreign corporation (Sec. 22, (H), Tax Code) with respect to the transactions that are effectively connected with its business in the Philippines.

A branch office is subject to tax based on its taxable income from sources within the Philippines at the rate of 32%. (Sec. 28 (A) (1), Tax Code) Branch profit remittances to the parent company, if they are effectively connected with its business in the Philippines (considered as income earned as a resident foreign corporation), are subject to the branch profit remittance tax of 15%.

Other income that is not effectively connected with the business of the branch office (considered as income earned as a non-resident foreign corporation) may either be subject to the provisions of the applicable tax treaty, if any, or taxed at the gross amount at the rate of 32%.

Related Articles:

Requirements to establish a representative office in the Philippines

The distinctions between Regional Operating Headquarters (ROHQ) and Regional Headquarters (RHQ)



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