The UK is a globally renowned business hub for many foreign companies wishing to expand their business. This is due to a variety of factors such as the UK’s highly skilled workforce, geographic location, its strong and transparent legal system, and its advanced financial system. The UK is ranked eighth by the World Bank (out of 190 economies) for ‘ease of doing business’, which means that the UK regulatory environment is more conducive to the starting and operation of a local firm in comparison with most other countries.
Businesses can operate under a variety of legal forms in the UK. Namely, as an incorporated entity (e.g. company or limited liability partnership), unincorporated entity (e.g. sole trader or general partnership) or UK establishment. In this newsletter, we will focus on private limited companies and UK establishments, as these are the most common legal forms adopted by overseas companies setting up business in the UK.
What are private limited companies (subsidiaries)?
Private limited companies are UK-incorporated entities that have separate legal personalities from their overseas parent companies. They are often referred to as a ‘subsidiary’ or ‘local company’ of their overseas parent company, which is the majority or sole shareholder. For the remainder of this newsletter, we will refer to such private limited companies as ‘subsidiaries’, as this is the term commonly used in this context.
What are UK establishments?
UK establishments do not have separate legal personalities as they are the same legal entity as the overseas company. In order to register a UK establishment there must be some degree of physical presence in the UK, such as a place of business or branch, where the overseas company carries on business.
What are the advantages of setting up a subsidiary versus a UK establishment?
1) Separate legal identity
As subsidiaries have separate legal personalities, the overseas parent company would not be held responsible for their debts and liabilities. On the other hand, overseas parent companies are responsible for their UK establishments, as they are the same legal entity.
2) A contracting party
Subsidiaries can themselves act as contracting parties, which can make it easier to obtain third-party approvals (e.g. regulatory approvals) and licences, as well as to engage in real estate transactions. For UK establishments, the overseas company would be the contracting party, which may require that their contracts are governed by parent law (i.e. the law of the country in which the overseas company has been incorporated). Overseas companies can be more difficult to bring legal proceedings or force judgments, against. As a result, UK customers and third parties may be less willing to deal with UK establishments. For example, it may be more difficult to set up a business bank account for a newly established UK establishment.
3) Fewer public disclosures
Overseas companies with UK subsidiaries may benefit from the fact that less information is required to be made public about them in the UK.
Financial information and other details (such as information about directors) are required to be filed with respect to UK subsidiaries rather than in relation to their overseas parent companies. On the other hand, UK establishments are required to file accounts of their overseas companies every year, which means that the accounts of the overseas company would be made publicly available via the Companies House website.
What are the advantages of setting up a UK establishment versus a subsidiary?
1) Lighter governance obligations
In comparison with subsidiaries, UK establishments do not have corporate governance obligations and directors’ duties under English law. While subsidiaries require their own boards of directors and must hold their own board and shareholders’ meetings, these obligations do not apply to UK establishments.
2) No accounts to prepare or audits
Although UK establishments are required to file accounts of their overseas companies (as noted above), they do not need to prepare or audit their own accounts (i.e. in relation to their business in the UK). Subsidiaries however do need to prepare their own accounts, and depending on their turnover they must also have them audited.
3) Lower maintenance costs
As there are fewer ongoing filing requirements for UK establishments under UK company law, UK establishments have lower maintenance costs compared with subsidiaries.
What are the ongoing requirements for subsidiaries and UK establishments?
Following incorporation, both subsidiaries and UK establishments are required to submit accounts to Companies House, notify Companies House of any changes, and submit corporation tax and VAT returns to HM Revenue & Customs (this requirement may not apply to certain UK establishments). They are also both subject to disclosure requirements, such as the need to include the company’s registered office address and registration number on their business letters, emails and websites.
Additionally, as noted above, directors of subsidiaries are subject to directors’ duties under English law. Therefore, they are required to follow company rules (as stipulated by the articles of association), keep statutory records, and disclose to other directors any transactions in which they have an interest, amongst other obligations.
How 3CS can help
It is advisable to seek legal (and tax) advice prior to setting up a company in the UK or registering a UK establishment to make sure that the most suitable option is selected. Please note that the above information is not to be confused with the Register of Overseas Entities, which is explained in further detail in one of our past newsletters.
If you require further information or need help with any corporate or commercial matter, including incorporating a UK establishment or subsidiary, or ensuring ongoing compliance with filing requirements, please get in touch with your usual 3CS contact.