A subsidiary may have subsidiaries

Subsidiary and spin-off: corporate law explained in simple terms

 

Subsidiary: definition

A subsidiary is a company that is dependent on a parent company. She will too subsidiary company, Subsidiary company, Nesting company or in English subsidiary company called. Although no specific legal form is specified for a subsidiary, the legal forms of GmbH, KG or AG are usually chosen for the establishment. In general, a natural person (e.g. as an e. K.) or a partnership is not perceived as usual for a subsidiary, but there are group structures that also include partnerships or natural persons as subsidiaries. The legal basis for the subsidiary can be found in Section 290 (1) sentence 1 of the German Commercial Code (HGB).

Establishment and structure of a subsidiary

From a legal point of view, a subsidiary is an independent company that is, however, economically dependent. There is no subsidiary without a parent company that exercises control. This is done through a Domination Agreement. It defines how the legal relationship between the parent and subsidiary is specifically designed.

Furthermore takes place at most of the subsidiaries Profit transfer agreement Application: With this additional contract, the subsidiary undertakes to transfer its profits to the controlling company. The dependent company operates in the interests of the controlling parent company after the conclusion of a domination and profit and loss transfer agreement.

The only exception where control remains with the subsidiary are Joint ventures: Here several companies come together to form a cooperation.

Even though the parent company already has a ten percent stake in the other company, the subsidiary is almost always majority owned by the parent company. If the parent company holds 100 percent of the shares, it is referred to as a wholly-owned subsidiary. This proportion constellation is the most common.

Spin-off of a subsidiary

When starting a business, the issue of a subsidiary usually plays a minor role. That is why the business plan does not usually contain any information on setting up a subsidiary. This is mostly due to the fact that most founders do not think about such a possibility when developing the business plan or strive for self-employment primarily to secure a livelihood. Hardly any founder plans in advance to set up a large group of parent companies and subsidiaries. After the successful establishment of a company, however, it often makes sense for a well-developed and large company to transfer a certain part of the company to a subsidiary - this process is called Spin-off designated.

What is the difference between subsidiary, branch and permanent establishment?

While the subsidiary is economically independent from the parent company, a branch legally not classified as self-employed. This forms the decisive criterion for the differentiation from the subsidiary. Legally, a branch always remains a part of the main branch, even if it appears in the actual organization as an independent company. Whether entrepreneurs can set up a branch at all depends on the structure of their company under corporate law: Further branches are only possible for merchants and trading companies.

Another term that may be confused with a subsidiary is that of the Permanent establishment. A permanent establishment is an opportunity for entrepreneurs who are not registered in the commercial register to expand their business. Small businesses and shareholders in a GbR fall into this category. A permanent establishment is extensively dependent on the main company and cannot do business in any way without it.

 

Definition: what is a parent company?

A parent company is a legally independent company that exercises a controlling influence on at least one dependent company. Other names are Parent company, parent, Parent company or Parent company. The dominant influence of the parent company is mostly based on capital participation. The parent company can have any legal form, but under group law is bound to the legal forms AG, KGaA (limited partnership for shares) or GmbH. In theory, a partnership is also possible as the parent company if it holds a majority stake in another company.

In general, the following applies: the parent company leads, subsidiaries and daughters of these companies are managed. The influence of the parent company can be both indirect and direct.
The parent company forms a group with one or more subsidiaries and, if necessary, further branched grandchildren. Another name is holding.

Relationship between subsidiary and parent company

As already mentioned, there is a control relationship between the parent company and the subsidiary. Since the whole, i.e. all subsidiaries and the parent company, must be considered in corporate law, the term holding company is always used here. A holding company describes the big picture and can act in a wide variety of ways.

In short, a subsidiary is legally independent, but economically dependent on the parent company - the practical design of this relationship between the two companies can, however, vary widely. Each holding structure can therefore be individually defined: the parent company can be operationally active with the subsidiary itself, or it can limit itself to administrative, coordinating and controlling activities. There are four different variants of the holding company:

  • Operational holding: The parent company is operational itself, the daughters are very heavily influenced by the mother.
  • Management holding: Decision-making and controlling are given to all daughters by the mother. This means that the strategic control or the control of the flow of capital within the holding company is specified by the parent company.
  • Organizational holding: The holding structure serves the internal organization, subsidiaries are each responsible for a different business area.
  • Financial holding: This holding variant is only used for asset management.
    Beteiligungs-Holding: The parent company takes on the role of partner, the subsidiaries are responsible for day-to-day operations.

The transactions of the parent and subsidiary companies are netted in the course of consolidation in the course of the consolidated financial statements. This means that claims and liabilities between the companies are offset against each other.

 

What is a sister company?

A sister company is a company that has the same parent company as another and is at the same “level”. In addition, sister companies are linked by their capital because both were founded from the capital of the parent company.

 

Spin-off: Why set up a subsidiary?

The most common reason to set up a subsidiary is to save tax on exit. Thanks to large tax savings, almost all of the subsidiary's sales proceeds can flow directly to the parent company. You can read more about the tax advantages of the holding company in this article.

In addition, the spin-off takes place for two different reasons, both of which come under the heading of Affiliation to be understood are:

  • Outsourcing affiliation: Existing activities are outsourced (outsourcing, expansion abroad)
  • Associated Affiliation: Existing capacities will be expanded (affiliation)

A subsidiary is often founded when the mother wants to expand her business and the new line of business no longer fits the core area and / or the original business purpose. This type of spin-off is called Outsourcing designated.

In larger corporate structures, individual areas of activity are often separated from one another by establishing several subsidiaries. This gives separate business areas more transparency with clear responsibilities. Also for Expansions in or abroad Subsidiaries are often set up.

The purchase of another company can also lead to a holding company: With the takeover, the new company becomes part of an existing group affiliated. In this way, your own market power can be increased and synergy effects can be used.

The independence as a subsidiary can, however, also take place with the aim of selling it later in whole or in part. A part of the business can be sold much better if it is a separate legal entity.

 

Subsidiaries and Liability

Although the affiliated parent companies and subsidiaries are viewed as a whole in group law, this is not necessarily the case with regard to liability: If there are economic problems in the subsidiary, these do not completely affect the parent company. The parent company retains control, but economic problems such as bankruptcy remain with the subsidiary. In order to guarantee the protection of creditors, there are extensive mechanisms in the relationship between the parent company and the subsidiary, which are intended to prevent the shareholders of the parent company from being able to reject all responsibility for the subsidiary's liabilities.

Is the parent company liable for the subsidiary?

Both case law and literature deal with the question of whether and, if so, to what extent the parent company is liable for the subsidiary if the latter is a corporation. As a rule, there is always the principle of separation, which states: The parent company is not liable for its daughters and vice versa. Due to the limitation of liability, the liability claim is only limited to the corporate assets of the company concerned.

Nevertheless, there are various interpretations in group law according to which the affiliated companies are viewed as a whole. Liability is always a complex issue at subsidiaries and depends on several factors, such as:

  • Legal forms of the individual companies in the holding structure
  • Individual contractual agreements that have been made
  • Cash flows between companies
  • Conduct between companies

In principle, a parent company can survive even if the subsidiary goes bankrupt, but the reverse is not always true: If the parent company goes bankrupt, the subsidiary often does not survive.

 

Loss compensation and loss absorption by the parent company

If losses occur at a subsidiary, claims exist against the parent company. This loss compensation claim regulates the compensation of losses by the parent company: After the conclusion of a domination and profit and loss transfer agreement, the controlling company is obliged to compensate the subsidiary's losses and, after its termination, to guarantee its creditors security. The loss compensation claim is based on Section 302 of the German Stock Corporation Act (AktG). A possible annual deficit of the subsidiary must also be compensated by the parent company. Claims become statute-barred ten years after the domination or profit transfer agreement has ended. The key date is the deletion from the commercial register.

Advantages and disadvantages of a subsidiary

advantagesdisadvantage
  • Promoting innovation
  • Greater flexibility by separating the shops
  • Greater competitiveness
  • More even distribution of risk
  • Better distribution of the tax burden
  • Use of tax advantages (choice of a different seat than the parent company, intra-group transfer prices)
  • Combination of start-up and existing structures, management experience, financial strength and relationships
  • Risk of conflicts of interest between parent and subsidiary
  • High financial and organizational effort until the first signs of success
  • Long phase until ROI (return on investment)
  • The top management of the parent company must clearly support the subsidiary and have the appropriate skills
  • Risks at foreign subsidiaries in times of political and economic instability

The information published on our site is all written and checked by experts with the greatest care. However, we cannot guarantee that it is correct, as laws and regulations are subject to constant change. Therefore, always consult a technical expert in a specific case - we will be happy to put you in touch.

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