What the Parent Company Must Watch for When Setting Up a Foreign Subsidiary

When a company sets up a subsidiary or branch abroad, this creates a set of obligations not only for the new entity but for the parent company as well.

• Authorisation and decision-making: The decision to incorporate abroad should pass properly through the parent company's own internal approval mechanism (a board or shareholders' resolution), and that resolution should be translated and certified in the form the authorities in the country of incorporation may require.
• Power of representation: It should be clearly determined who will carry out the incorporation formalities abroad, and under what power of attorney; the scope and validity period of that power of attorney should comply with the procedural rules of the country of incorporation.
• Capital and fund transfers: The capital transferred from the parent company to the newly formed company must be carried out in line with the parent company's own capital movement and reporting obligations in its home country.
• Trademark and know-how use: If the new company will use the parent company's trademark, software or know-how, this use should be governed by a separate licence agreement — otherwise uncertainty arises over intellectual property rights.
• Consolidation and reporting: How the new company will be reflected in the parent company's own financial statements, transfer pricing, and documentation of intra-group transactions should be planned from the outset.
• Local advisor: Working with a local advisor familiar with the regulations of the country of incorporation speeds up the formation process and helps ensure a structure that does not conflict with the parent company's obligations in its own country.

The process of incorporating abroad requires the simultaneous assessment not only of the law of the country where the new company is being formed, but also of the law of the country where the parent company is based.