The moment of internationalization of a company that sees Brazil as an opportunity for expansion can provide countless questions and strategic decisions. When evaluating bringing investments to Brazil, it is essential to understand the differences between the investment possibilities, which may be in a subsidiary, branch, or company with foreign capital.
We prepared this article to clarify these points. Check out!
What is a subsidiary?
The subsidiary is, from a legal point of view, a separate company from the parent company. Therefore, every administrative and operational view (it is worth mentioning, from a legal perspective) is separated from the main one. That is, they have their own name, CNPJ (Brazilian Employer Identification Number), and market positioning. However, this link implies a relationship where the large company and a medium or small company is controlled by the larger one.
Furthermore, from the perspective of what a subsidiary is, we have two different modalities: the subsidiary and the wholly owned subsidiary. The only difference between the two is, basically, that the wholly-owned subsidiary must, obligatorily, be a SA (similar to a joint-stock company), with all of its shareholdings controlled by a single partner (or company). A company in the wholly-owned subsidiary model is constituted in three scenarios:
- With the acquisition of all its shares: in this scenario, the complete acquisition of a company’s share accounts is constituted. Afterward, it is necessary to change the by-laws of the acquired company, clearly establishing the new conditions of the operation.
- Incorporation of shares: a company absorbs all the shares of another, which implies the payment of its share capital, which makes the larger company the owner of the smaller company.
- Through public deed: here, a new company is created that will be the subsidiary of its creator. It is usually a bureaucratic and highly complex process.
There are numerous advantages to establishing a subsidiary. We can cite:
- The capacity of expansion of international companies, which by acquiring subsidiaries, may reduce competition in certain markets and expand their operations.
- Decrease in expenses when starting a business;
- The financial attraction of the subsidiary with contributions from the parent company;
- Possibility of tax advantages depending on the location of the business;
How can a subsidiary contribute to the internationalization process?
The purchase of a company to convert it into a subsidiary in another country has a fundamental role in accelerating the entry into a new market. Since the acquired company already has an operational, cultural, and legal compliance structure already established. Another detail is the possibility of maintaining the brand if it is already recognized and has market identification. All of this allows for gains in strategic needs such as sales and distribution or expansion/migration of production plants.
What is a Branch?
A branch is an establishment that is connected to a head office or headquarters, has directive powers, however, there are no executive or deliberative powers. This means: it is a company that performs the same activities as the head office, has its own management process, but does not have executive independence for decision-making and administrative perspectives in the entire brand and organization.
The acts performed by a branch have legal validity in the case of a company as a whole. It is important to emphasize that a branch does not have the same meaning and purpose as a franchise. While the branch is a company subordinate to the parent company, the franchise is a representation of brands and products with completely independent administration.
Therefore, the objective when establishing a branch in a new country should be to meet the demand of the target or localities, being physically closer to this market. We can understand how the main advantages of a branch office:
- Reach a new target audience;
- Standardize the operation and operational templates;
- Consolidate the brand through internationalization and service to new markets;
- Expansion of business and brand reach.
In general, companies use the branch as a strategy for expanding the business and the brand. Therefore, for large and consolidated companies, the expansion through a filiation is, in a way, simpler from the point of view of projection and presentation of the brand.
The main differences between subsidiaries and a branch?
From a legal point of view, a subsidiary company that is linked to a parent company must report to the head office to carry out its operations, while the subsidiaries have their control carried out by the controlling company or majority holding company (which holds the majority of the shares).
The branch, on the other hand, carries out the same business and activities as the head office, while the subsidiary does not need to follow the same operation, industry, or service orientation. Speaking of expenses and accounts, branch offices may or may not be shared with headquarters, while subsidiaries, as an extension of headquarters, keep their expenses separate.
Finally, the head office has extended responsibilities towards the branches for legal and financial matters, bearing all tax duties and obligations, while the subsidiaries must operate independently and with full responsibility for their actions. Therefore, when a subsidiary presents negative results (which imply the company’s bankruptcy, for example) it can receive foreign investments, be sold, or closed. Meanwhile, for branches, they can only be closed, as they have a direct connection.
Companies with foreign capital
Organizations with foreign capital receive investments from individuals or legal entities not resident in Brazil. Due to exchange rates, interest rates, and financing formats, seeking resources outside Brazil is an understandable and intelligent strategy for growth.
International investors hold part of the companies and receive profits from these organizations, which may or may not be reinvested. When Brazilian companies receive foreign financial contributions, these amounts must be registered with the Central Bank within 30 days.
The main difference between a foreign-owned company and a subsidiary is that the subsidiary cannot have the majority of its capital owned by foreigners. For foreign capital companies, the capital can be integral.
What are the necessary precautions when opening a subsidiary or branch in Brazil?
Bureaucracy is often a frequent aspect when we talk about the internationalization of companies. In the case of opening or acquiring subsidiaries, it is essential to have a partner that contextualizes and checks the needs of Brazilian laws, avoiding problems from the opening process and definition of legal representatives and administrators, in addition to problems in terms of tax and accounting.