Foreign subsidiaries: Overview, definition, and example
What are foreign subsidiaries?
A foreign subsidiary is a company that is controlled by another company (called the parent company) but operates in a different country. The parent company typically owns a majority of the shares in the foreign subsidiary, giving it control over the subsidiary's operations, decisions, and business activities. Foreign subsidiaries allow companies to expand their reach into international markets while maintaining control over their foreign operations.
For example, if a U.S.-based tech company sets up a branch in Germany and owns more than 50% of the shares, that German branch would be considered a foreign subsidiary of the U.S. parent company.
Why are foreign subsidiaries important?
Foreign subsidiaries are important because they allow companies to enter new markets and expand globally while keeping their existing operations intact. Having a subsidiary in another country can help a company reduce risk by diversifying its business interests, access new customer bases, and take advantage of different regulatory, tax, and labor environments.
For businesses, having foreign subsidiaries also provides a legal and financial framework for operating in other countries without having to establish a completely separate entity. It helps companies comply with local laws while benefiting from global growth.
Understanding foreign subsidiaries through an example
Imagine a large automobile manufacturer based in Japan, such as Toyota, that owns a subsidiary in Canada. Toyota's Canadian subsidiary operates as a separate entity but is controlled by Toyota’s headquarters in Japan. The subsidiary designs, manufactures, and sells vehicles in Canada while adhering to local regulations, such as Canadian safety and environmental standards. However, its overall strategic decisions, such as pricing or product development, are influenced by the parent company’s guidance.
In another example, a U.S.-based food company might open a foreign subsidiary in Mexico to take advantage of lower production costs and to expand its market presence. The subsidiary would be responsible for manufacturing and selling the food products in Mexico while still being controlled by the U.S. parent company.
Example of foreign subsidiaries clause
Here’s how a foreign subsidiaries clause might look in an agreement:
“The Parent Company shall establish and maintain a foreign subsidiary in [insert country] to operate under the same governance as the Parent Company, ensuring compliance with local regulations and applicable laws.”
Conclusion
Foreign subsidiaries are companies controlled by a parent company but located in different countries. They allow businesses to expand internationally while maintaining control over their operations. Through foreign subsidiaries, companies can access new markets, reduce risks, and comply with international laws, making them an essential strategy for global expansion.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.