Detailed Differences and Specific Tax Distinctions Between a Foreign-Invested Subsidiary and a Foreign-Invested Branch

When many foreign-invested enterprises enter China, they must choose between establishing a foreign-invested subsidiary and a foreign-invested branch. These two structures differ significantly in terms of legal status, liability, tax treatment, fund flows, establishment procedures, and other practical matters. Below is a detailed, practice-oriented comparison.

I. Core Differences Between a Foreign-Invested Subsidiary and a Foreign-Invested Branch

Item	Foreign-Invested Subsidiary	Foreign-Invested Branch
Legal status	Independent legal entity	Non-independent legal entity
Shareholder	Overseas parent company	Chinese subsidiary of the overseas parent company
Registered capital	Required	Not required
Legal liability	Assumed independently by the subsidiary	Fully assumed by the parent company
Independent accounting	Yes	May be independent or non-independent
Tax status	Independent taxpayer	Taxed together with the head office
Business scope	Full business operations	Must be consistent with the head office
Risk isolation	Yes	No
Complexity of establishment	More complex	Relatively simpler

Simply put:
A subsidiary = a complete company
A branch = an extension of the head office

II. Foreign-Invested Subsidiary

The most common form of a foreign-invested subsidiary is a:

Wholly Foreign-Owned Enterprise (WFOE)

Structure:

Overseas company
↓
China subsidiary

Characteristics of a Subsidiary

1. Independent legal entity

A subsidiary is a complete Chinese company:

• It has its own business license
• It has its own assets
• It has its own liabilities

If the subsidiary incurs debts, the parent company is generally not liable.

2. Can operate independently

A subsidiary can:

• sign contracts
• hire employees
• issue invoices
• engage in import and export
• obtain financing

Its operations are highly flexible.

3. Can distribute profits

After the subsidiary becomes profitable, it may:
distribute profits → remit them back to the overseas parent company

Typical tax rates:

• Dividend withholding tax: 10%
• If the parent company is a Hong Kong company: 5% (if the applicable tax treaty requirements are met)

4. Tax independence

A subsidiary is generally required to pay:

• Corporate Income Tax (CIT): 25%
• Value-Added Tax (VAT): 13% / 9% / 6%

This is generally the same as for Chinese domestic companies.

III. Foreign-Invested Branch

A foreign-invested branch is essentially:
the China operating office of an overseas company

Structure:

Overseas parent company
↓
China subsidiary
↓
China branch

Characteristics of a Branch

1. No legal person status

A branch:

• is not an independent company

Its legal liabilities are fully borne by the parent company.

If the branch incurs debts, creditors may pursue the parent company directly.

2. No registered capital required

To establish a branch:

• no registered capital is required

Funds may be directly allocated by the parent company.

3. Restrictions on business scope

A branch’s business scope:

• must be fully consistent with that of the parent company
• cannot be expanded independently

4. More complex tax treatment

A branch generally needs to pay in China:

• Corporate Income Tax
• Value-Added Tax

However, there are three methods for calculating its taxes.

Three Taxation Methods for a Branch

1. Independent accounting

The branch keeps its own books and pays tax based on its profits.

• Corporate Income Tax: 25%

In this case, the treatment is similar to that of a subsidiary.

2. Non-independent accounting

The branch’s profits are consolidated into those of the parent company.

The tax authority may then:

• assess a deemed profit margin

A common range is:

• 10%–30%

IV. Differences in Fund Remittance

This is one of the most important distinctions between the two structures.

Fund remittance by a subsidiary

Method:

• profit distribution

Process:

• audit
• dividend resolution
• payment of dividend withholding tax
• bank remittance

Tax rate:

• 5% or 10%

Fund remittance by a branch

A branch is not an independent legal entity.

Therefore:

• there is no concept of dividends

Funds remitted back to headquarters are usually treated as:

• profit remittance

For tax purposes, this may be regarded as:

• branch profit tax

In some cases, the tax rate may be:

• 10%

V. Differences in Establishment Procedures

Foreign-invested subsidiary

Procedure:

1. Company registration
2. MOFCOM filing
3. Foreign exchange registration
4. Bank account opening
5. Tax registration

Timeframe:

• 1–2 months

Foreign-invested branch

Procedure:

1. Business registration
2. Tax registration
3. Bank account opening

Timeframe:

• 2–4 weeks

VI. Differences in Risk Exposure

Risks of a subsidiary

Risk is generally limited to the China subsidiary itself; the parent company is relatively protected.

Risks of a branch

All risk rests with the parent company.

For example:

• if the China branch incurs debts,
• the China parent company must bear liability.

VII. Actual Commercial Usage

In practice:
90% of foreign-invested enterprises choose a:

subsidiary

Reasons:

• risk isolation
• clearer tax treatment
• easier financing
• ability to conduct equity financing

A branch is more suitable when a foreign-invested subsidiary wants to expand into other cities in China. In such cases, it may consider establishing a foreign-invested branch, because an overseas parent company cannot directly establish a foreign-invested branch in China.

VIII. One-Sentence Summary

A subsidiary = an independent company, with risk isolation and profit distribution
A branch = an extension of the parent company, with shared risk and direct remittance of funds back to headquarters

The above is a detailed comparison of the differences and specific tax distinctions between a foreign-invested subsidiary and a foreign-invested branch, for reference.