When businesses operate across borders, the legal structure they choose determines far more than ownership on paper. It affects liability, taxation, regulatory exposure, banking access, and how authorities interpret the business’s real activities.
“Setting up a business abroad” often implies incorporation, but incorporation is only one of several legal structures available. Each structure carries different legal and operational consequences, and the wrong choice can create long-term complications that are difficult to reverse.
This article explains the most common legal structures used in international business and the considerations that typically influence their use.
Why Legal Structure Matters in International Business
Legal structure defines how a business is recognised by law in a particular jurisdiction. In an international context, this recognition extends beyond local company law and interacts with tax authorities, regulators, and financial institutions in multiple countries.
A structure that appears efficient from a purely legal standpoint may introduce unexpected tax exposure, compliance obligations, or banking challenges once cross-border activity begins.
Choosing an appropriate structure is therefore not a procedural decision, but a foundational one.
Separate Legal Entities (Subsidiaries)
A subsidiary is a separate legal entity incorporated in a foreign jurisdiction and owned, wholly or partially, by another company.
From a legal perspective, subsidiaries are distinct from their parent companies. This separation often limits liability and allows operations to be organised within a defined legal framework.
Common characteristics include:
- Independent legal personality
- Local regulatory and filing obligations
- Potential tax residency in the country of incorporation
- Requirement for directors, shareholders, and registered offices
Subsidiaries are commonly used where a business intends to establish a long-term or substantial presence in a foreign market. However, they also involve ongoing compliance and governance responsibilities that should not be underestimated.
Branches and Permanent Establishments
A branch is not a separate legal entity. Instead, it represents an extension of an existing company operating in another jurisdiction.
While branches can appear simpler than subsidiaries, they often carry higher exposure because liabilities incurred by the branch are generally liabilities of the parent company.
In many jurisdictions, branch activities may also create a permanent establishment, triggering local tax obligations even without formal incorporation.
Key considerations include:
- Direct liability for the parent company
- Local tax exposure based on activity rather than incorporation
- Reporting obligations in both jurisdictions
- Increased scrutiny from tax authorities
Branches are typically used for limited or transitional activities rather than long-term standalone operations.
Holding Companies and Intermediate Structures
Holding companies are entities established primarily to own shares in other companies rather than conduct active operations.
In international business, holding structures are often used to:
- Organise group ownership
- Centralise management or investment
- Facilitate regional expansion
- Separate operational risk from ownership
While holding companies can serve legitimate commercial purposes, they are also subject to increasing scrutiny, particularly where they lack genuine activity or decision-making authority.
Modern regulatory frameworks often assess whether holding entities have sufficient substance and economic purpose beyond ownership alone.
Representative and Liaison Offices
Representative or liaison offices are limited-purpose presences that allow businesses to maintain visibility or conduct non-commercial activities in a foreign jurisdiction.
Typically, these offices may:
- Conduct market research
- Engage in promotional activities
- Coordinate communication
They are usually prohibited from generating revenue or entering into contracts locally.
Although representative offices appear low-risk, exceeding their permitted scope can unintentionally create tax or regulatory exposure. As a result, their activities must be clearly defined and monitored.
Structural Choice and Tax Residency
Legal structure and tax residency are closely linked but not identical.
A company’s tax residency may be determined by factors such as:
- Place of incorporation
- Location of central management and control
- Where key decisions are made
It is possible for a company incorporated in one jurisdiction to be considered tax resident in another, depending on how it is managed. This distinction is critical in international structures and is often misunderstood.
The relationship between structure and tax residency is explored further in our article on tax residency for companies.
Compliance and Reporting Implications
Each legal structure carries its own compliance obligations. These may include:
- Annual filings and financial statements
- Regulatory disclosures
- Substance and reporting requirements
- Cross-border information sharing
Failure to meet these obligations can undermine the legitimacy of the structure and increase regulatory risk.
International businesses must therefore consider not only how a structure is formed, but how it will be maintained over time.
Interaction With Banking and Financial Institutions
Banks and payment providers assess legal structures as part of their risk evaluation process.
Factors commonly reviewed include:
- Ownership and control
- Transparency of group structure
- Jurisdictional exposure
- Nature of business activities
Some structures, while legally valid, may face practical difficulties when seeking banking access. Aligning legal form with operational reality and documentation expectations is essential.
This interaction is discussed in more detail in our article on how international business banking works.
Common Structural Misunderstandings
Several misconceptions frequently arise when businesses consider international legal structures:
- That subsidiaries automatically isolate all risk
- That branches are always simpler or cheaper
- That holding companies reduce compliance obligations
- That structure alone determines tax outcomes
In practice, structure is only one element of a broader international framework that includes tax, compliance, and operational considerations.
How Legal Structures Fit Into International Operations
Legal structures should support, not dictate, how a business operates internationally.
Effective structures tend to:
- Reflect actual business activity
- Align with management and control
- Meet regulatory expectations
- Remain sustainable over time
Businesses that prioritise form over substance often encounter challenges as their international operations grow.
Conclusion
International businesses rely on a range of legal structures to operate across borders, each with distinct implications for liability, taxation, compliance, and banking.
Understanding these structures — and their limitations — is essential before establishing a presence abroad. No single structure is universally appropriate; suitability depends on commercial intent, operational reality, and regulatory context.
Clear understanding at this stage helps prevent costly restructuring later.
Disclaimer
This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice.
