Branch or company?

Branch or company?

It’s the classic decision for international businesses expanding abroad: should you set up branches of existing companies, or establish local subsidiaries?

This question is especially pertinent when considering whether to set up a branch or a company in Zug.

The answer is often dictated by individual business circumstances, but to help you decide, here are some of the differences between the competing options in relation to entities in Zug:

• Board of directors: A branch does not have its own board of directors and its manager or managers usually have complete authority to bind the company (not just the branch) in accordance with the authorities registered in the (Zug) commercial registry. A company will have its own board with signature powers registered for its officers.
• Profit allocation: Branch profits are allocated under treaties, or by tax authority practice, between the branch and its head office. The profits of a company are taxable only in the jurisdiction(s) where it has permanent establishment (although tax administrations are increasingly focusing on proper transfer pricing principles between group companies).
• Withholding tax: There is no Swiss withholding tax on payments upstream from a branch to its head office. Dividends paid from a Swiss company to its parent attract 35% withholding tax – subject to double taxation relief.
• Branches have to establish their existence as a matter of fact (for example, by showing office lease contracts) rather than as a matter of law. This can impose a higher administrative burden.
• A branch is not bankruptcy-remote from its head office. It is part of a single legal entity, whereas a company can continue to run even if its parent company is in financial difficulties.
• Branch structures can be more expensive to set up and operate since corporate management is required in two jurisdictions with two audits, tax filings, etc.
• In certain cases, losses incurred in branch operations can be offset against head office profits.
• There is no Swiss stamp duty requirement for capital issued by Swiss branches.
• The applicable double taxation treaty for branches is set by the residence of its head office, whereas a Zug company will be able to use the Swiss DTA (double taxation agreement) network.