An overseas group setting up in the UK has two realistic options: register a branch — formally, a UK establishment of the overseas company — or incorporate a UK subsidiary. The tax difference between them is smaller than most people expect. The difference in liability, disclosure and how the business is perceived by British customers and banks is considerably larger, and it is usually what decides the answer.
The structural difference
A branch is not a separate entity. It is the overseas company operating in the UK, so the parent carries the contracts, the debts and the legal exposure directly. A subsidiary is a UK company with its own legal personality, its own directors and limited liability — the parent's risk is, in the ordinary case, confined to the capital it puts in and any guarantees it gives.
That distinction drives almost everything else. Customers contract with a different counterparty; employees are employed by a different entity; a lender takes security over different assets; and an eventual sale of the UK business is a share sale in one case and an asset transfer in the other.
Disclosure: the point that changes minds
An overseas company that opens a UK establishment must register it at Companies House within one month, and thereafter must file the overseas parent's own accounts on the UK register. For a private group, that is often decisive: the whole group's financial position becomes publicly available in the UK, to competitors and customers alike, simply because it opened an office in London.
A UK subsidiary files only its own accounts — and if it qualifies as small, it files abbreviated information. The parent's numbers stay where they were. For groups that value confidentiality, this single difference outweighs most of the tax analysis.
Tax: closer than the folklore suggests
A branch is taxed in the UK on the profits attributable to its permanent establishment; a subsidiary is taxed on its own profits. The rates are not simply the same for both. A UK subsidiary pays the 25% main rate, or 19% where profits are below £50,000 with marginal relief between £50,000 and £250,000, those thresholds divided by the number of associated companies worldwide. A non-UK resident company trading through a UK permanent establishment is excluded from the small profits rate — unless a non-discrimination article in the relevant double tax treaty applies, which for treaty-resident parents it frequently does. So the honest answer is that a branch may pay 25% on profits a subsidiary would have taxed at 19%, and whether it does turns on the treaty. Both must register for PAYE if they employ people here and for VAT if they make taxable supplies above the threshold.
Three genuine differences are worth weighing:
- Loss relief in the home country. Early-stage UK losses in a branch may be usable against the parent's profits in its own jurisdiction, depending entirely on that country's rules. A subsidiary's losses stay in the UK — carried forward against its own future profits, or surrendered by group relief to other UK group companies where there are any, which for a first UK entity there usually are not. For a venture expected to lose money for two or three years, this is frequently the deciding tax point;
- Profit attribution versus transfer pricing. A branch must attribute profits to the permanent establishment as though it were a separate enterprise, including an attribution of free capital — an exercise that is genuinely difficult and routinely challenged. A subsidiary deals instead with transfer pricing on intra-group transactions, which is better understood and better documented in most groups;
- Getting money home. The UK imposes no withholding tax on dividends, so profits leave a subsidiary cleanly. Branch profits are remitted without a dividend at all. Interest and royalties can carry withholding in both structures, subject to treaty relief — this is not a point of difference so much as one that has to be planned either way.
The old assumption that a branch is the tax-efficient answer and a subsidiary the respectable one has not been true for some years. Start from the commercial requirements and let the tax refine the choice.
Credibility, banking and staff
The practical friction favours the subsidiary. UK banks open accounts for UK companies more readily than for foreign entities; large customers and public bodies are more comfortable contracting with a UK entity governed by English law; landlords ask fewer questions; and candidates are more comfortable being employed by a company with a Companies House number they recognise. A branch can do all of these things, but each takes longer and involves more explanation.
Against that, a branch is faster and cheaper to establish, avoids a separate audit and separate statutory accounts in the early years, and is much simpler to close if the UK venture does not work out. For a genuine testing exercise — one employee, one customer, twelve months to find out whether the market exists — that simplicity has real value.
How the decision usually goes
A reasonable default: incorporate a subsidiary where you expect to trade with UK customers under UK contracts, employ staff, take on premises or raise finance locally, and where the group's own accounts are not something you would publish voluntarily. Use a branch where the UK presence is genuinely exploratory, where home-country loss relief is worth more than limited liability in the first years, or where the regulatory position requires the parent to be the contracting entity.
Either way, a permanent establishment can arise without anyone deciding to create one. A salesperson habitually concluding contracts in the UK, or a fixed place of business used for more than preparatory activity, can create a taxable presence and a filing obligation for a group that believed it had neither — which is the version of this question that arrives as a problem rather than a choice.
Acumon sets up and runs both structures through UK subsidiaries for international groups, with international tax advice on the attribution and treaty questions, company formation, and the statutory accounts and filings that follow. If the UK venture is still at the business-plan stage, this is a decision worth twenty minutes now and a restructuring exercise later.