What is a Subsidiary Company?

A subsidiary company is a company that is controlled by another company, known as the parent company (or holding company). Control is usually established through owning more than 50% of the voting shares, but it can also arise through other means of dominant influence.

Definition Under the Companies Act 2006

Section 1159 of the Companies Act 2006 defines a subsidiary. Company A is a subsidiary of Company B if Company B:

• Holds a majority of the voting rights in Company A, or
• Is a member of Company A and has the right to appoint or remove a majority of its board of directors , or
• Is a member of Company A and controls alone, pursuant to an agreement with other members, a majority of the voting rights

A wholly-owned subsidiary is one where 100% of the shares are held by the parent company (or by another wholly-owned subsidiary of the parent).

Types of Control

Why Companies Use Subsidiaries

Setting Up a Subsidiary

A parent company can create a subsidiary by:

1. Incorporating a new company at Companies House with the parent as the sole shareholder
2. Acquiring a majority stake in an existing company through a share purchase

Registration Requirements

The subsidiary is a separate company and must:

• Have its own registered office
• Have its own directors (who may also be directors of the parent)
• File its own confirmation statement and accounts
• Maintain its own statutory books
• Register for its own taxes (corporation tax, VAT, PAYE if it has employees)

Consolidated (Group) Accounts

A parent company that has subsidiaries must generally prepare consolidated financial statements that combine the financial results of the parent and all its subsidiaries as if they were a single entity.

Exemptions from Consolidation

Small groups are exempt from preparing consolidated accounts if the group meets at least two of the following conditions (on a net or gross basis):

A parent company also does not need to prepare group accounts if it is itself a subsidiary of a larger group that prepares consolidated accounts (intermediate parent exemption).

What Consolidated Accounts Show

Tax Grouping

Subsidiaries within a group can benefit from several UK tax provisions:

Group Relief

Companies in a 75% group (parent holds at least 75% of the subsidiary’s ordinary share capital) can transfer trading losses between group members. A loss-making subsidiary can surrender its losses to a profitable parent (or sibling), reducing the group’s overall corporation tax bill.

Capital Gains Group

Companies in a 75% group (with additional conditions) can transfer assets between group members without triggering a capital gains tax charge. The receiving company takes over the transferring company’s base cost.

VAT Grouping

Companies under common control can register as a VAT group, meaning:

• Inter-company supplies within the group are disregarded for VAT purposes
• One VAT return is filed for the entire group
• Each member is jointly and severally liable for the group’s VAT obligations

Parent Company Obligations

The parent company must:

• Disclose the existence of subsidiaries in its own accounts
• Prepare consolidated accounts (unless exempt)
• Record its investment in subsidiaries at cost or fair value in the parent’s individual accounts
• Declare People with Significant Control relationships where applicable

Subsidiary Directors and Governance

A subsidiary has its own board of directors, but in practice:

• The parent often appoints the subsidiary’s directors
• The parent may set the subsidiary’s strategy and budget
• Directors of the subsidiary still owe their statutory duties to the subsidiary (not the parent)
• A director must act in the subsidiary’s best interests, which may occasionally conflict with the parent’s wishes

Accounting for the Investment

In the parent company’s individual accounts:

In the consolidated accounts, the investment is replaced by the subsidiary’s individual assets and liabilities.

Subsidiary vs Branch