Subsidiary

What it means

A subsidiary is a separate legal entity controlled by another company, its parent company. Control most often comes from a majority of voting rights, but it can also arise from the right to appoint the statutory body or from a control agreement.

The most common form is an s. r. o. wholly owned by the parent. Although another company owns it, it has its own IČO, its own books and its own tax liability and answers for its debts only with its own assets; the parent is not automatically liable for them.

Several subsidiaries under one parent form a group or holding structure. Once the size criteria are exceeded, the parent must prepare consolidated financial statements for the whole group.

How it works in practice

Subsidiary and parent are related parties. All dealings between them, services, loans, rent or licences, must be priced at market rates under the transfer pricing rules, otherwise the tax office taxes the difference.

Dividends a subsidiary pays to a Slovak parent are generally not taxed. Profit can thus be moved up into the holding without further tax and invested in another subsidiary, which is one of the main reasons entrepreneurs set up groups.

Group companies may share a director, bookkeeping and cash pooling. For VAT they may opt for group registration, under which supplies between them are not taxed but the group is jointly liable for the tax.

What to watch out for

The subsidiary’s independence is real, and its director is responsible for its interests, not the parent’s. If on the parent’s instruction the director makes a deal that harms the subsidiary, such as taking away its order or lending its money without security, the director is personally liable for the damage.

For a subsidiary’s loans banks often ask the parent or the owner to act as guarantor. This undoes the separation of risk for which the subsidiary was set up, and trouble in the subsidiary puts the whole group at risk. We therefore record every guarantee within the group and disclose it in the notes.