When deciding to move a business abroad, it is important to understand the main differences between an affiliate company and a branch in terms of power of direction and liability.
Affiliate companies (subsidiaries) may assume the legal form of a:
- Private limited liability companies (Lda.) with two or more partners;
- Single-member limited liability companies (Unipessoal, Lda.) held solely by one partner;
- Private limited liability companies by shares (S.A.), with a minimum of five shareholders.
Subsidiaries are independent legal entities and are therefore legally distinct from the parent company.
The share capital is held mostly by the parent companies, who exercise a dominant influence, either because they hold a majority stake in the share capital or because they have more than half of the votes or may appoint more than half of the members of the management body.
Affiliates are subject to Portuguese tax laws and regulations, but the parent entity’s liability is limited to its investment in the share capital of the affiliate company.
In some cases, affiliates only provide services to the parent entity (intra-group transactions) under a service provision agreement (e.g. a development centre), in which case an adequate tax setup can be devised.
Branches, however, are not independent legal entities, being only an extension of the foreign entity. Thus, these develop the same economic activity as the foreign entity, who is fully liable in the case of debt or non-compliance by the branch.
The advantage of the branch is the free flow of capital between the branch and the head office, which is not deemed as profit distribution, but as an intra-corporate transaction.
The branch can be named after the parent entity, but the name must include the expression “Representação Permanente” (permanent representation) or “Sucursal” (branch).
For further information or assistance with company incorporations and with the setup of subsidiaries and branches, please contact us at geral@sbpslegal.com.