Key Differences and Similarities Between a Subsidiary (LLC) and Branch Office in Saudi Arabia
For foreign businesses entering Saudi Arabia, opting for a business structure aligned with the desired scale plays a pivotal role in defining the business growth trajectory, given its direct impact on several compliance areas, such as activation and taxation.
When establishing a new company, whether it's a branch office or a new subsidiary, it's crucial to take into account the incorporation requirements and characteristics of each entity type. This guide examines the various facets of branch offices and subsidiaries to help determine the optimal business structure that’s fit for the company’s activities and growth goals.
Establishing a Saudi Arabian Subsidiary Versus a Branch Office
Legal Status and Independence
- Branch Office: A branch office is an extension of a foreign parent company and not a separate legal entity, so the parent company is legally bound to cover the branch's financial liabilities. It operates under the parent company’s name and carries out the same activities. Any new decisions made by the branch office require the parent company to send a notarized and authenticated letter in paper format rather than electronically.
- Subsidiary: A subsidiary is a distinct legal entity, typically structured as a Limited Liability Company (LLC), that’s formed in Saudi Arabia. Although the subsidiary is owned by the parent company, it operates independently and maintains its own legal identity.
*The parent’s liability is only limited to its investment in the subsidiary.
Ownership Structure
Branch Office: The foreign parent company can maintain 100% ownership, though there can be some restrictions when it comes to conducting certain activities across some sectors. Branch offices are typically limited to activities like contracting, consulting, or professional services.
Subsidiary: A subsidiary can be wholly owned by the foreign parent or established as a joint venture (JV) with local partners. This structure provides more flexibility for various business activities.
Capital Requirements
Branch Office: There is no minimum capital requirement for a branch office, but financial guarantees may be needed based on the types of activities it engages in.
Subsidiary: While minimum capital requirements vary based on the business type and ownership structure, a wholly foreign-owned LLC might need a higher minimum capital threshold compared to a joint venture with a Saudi partner.
Subsidiaries and branch offices can exactly gauge the estimated costs related to the business setup in Saudi Arabia using AstroLabs’ cost calculator.
Registration Process
Branch Office: The registration process requires obtaining a license from the Ministry of Investment of Saudi Arabia (MISA) and registering with the Ministry of Commerce (MoC). The parent company’s documents must be duly attested and translated into Arabic.
Subsidiary: This incorporation process typically involves securing approval from MISA, drafting and notarizing the Articles of Association (AoA), and registering with MoC, leading to the issuance of a Commercial Registration (CR) certificate. Subsidiaries also need to register with the Zakat, Tax, and Customs Authority (ZATCA).
Operational Scope
Branch Office: Branch offices are limited to the activities specified in their MISA license and can’t engage in commercial trading or manufacturing unless permitted.
Subsidiary: In contrast, a subsidiary has a broader operational scope, including trading, and manufacturing, among other services, depending on its license.
Taxation and Compliance
Branch Office: Profits are taxed at a flat rate on non-Saudi shareholders' shares, with the parent company responsible for compliance and reporting.
Parent companies headquartered in countries that concluded double tax treaties with Saudi Arabia may benefit from reduced corporate tax rates levied on the branch office and potentially eliminated withholding taxes.
Subsidiary: A subsidiary is subject to corporate income tax and Zakat regulations, requiring it to maintain its own financial records and file tax returns independently. Subsidiary companies can benefit from tax breaks and other government incentives.
Incorporation Timeline
Branch Office: The incorporation process for a branch office generally takes 2 to 3 months. This accounts for the steps required to obtain the necessary licenses and registrations.
Subsidiary: Incorporating a Saudi Arabian subsidiary typically takes 2 to 4 months. The extended timeframe accounts for drafting the Articles of Association, obtaining approvals, and completing the registration process.
How Can Foreign Businesses Decide on the Right Business Structure?
When deciding on a specific business structure, it is important to consult with legal experts as a foreign company to be able to successfully navigate the setup process while considering sector-specific regulations.
For context, appointing a local director for a branch office or subsidiary in Saudi Arabia is not always considered a requirement, but it is generally advisable to move for practical reasons. A local director can help facilitate effective communication with local authorities and ensure compliance with the country's ever-evolving regulations. Certain requirements in this regard can vary based on the legal structure of the entity and the sector wherein it operates.
As part of its comprehensive suite of services, AstroLabs has a dedicated team of experts trained to handle legal inquiries to help foreign businesses quickly adapt to the regulatory landscape and meet compliance requirements. The support offered by the AstroLabs’ team is grounded in its years-long expertise and extensive understanding of the Saudi market and its regulations, combined with long-standing connections and close engagements with local authorities and ministries.
By understanding the varied aspects of setting up a business in Saudi Arabia and undertaking the necessary due diligence to select the right legal entity, foreign companies can foster smooth operations in the Kingdom, thereby attaining long-standing success in the region's fastest-growing economy.
