Key Takeaways

  • An indirect subsidiary is a company controlled by a parent through one or more intermediate subsidiaries rather than direct ownership.
  • Subsidiaries can be structured for tax efficiency, regulatory compliance, or strategic growth in international markets.
  • Laws in some jurisdictions raise questions about how indirect ownership is recognized when determining parent–subsidiary relationships.
  • Real-world cases, such as Silver Star Properties REIT’s indirect subsidiary bankruptcy filing, highlight the risks and financial consequences of complex ownership structures.
  • Understanding the difference between direct subsidiaries and indirect subsidiaries is crucial for investors, compliance officers, and corporate planners.

It is not uncommon for one company to either completely or partially own shares in another company. When a company owns enough stock in another corporation or enough of a controlling interest in another entity to influence the way it conducts business, that other company is called a subsidiary. The company with the controlling interest is called the parent company. The parent company can have as many subsidiaries as it likes, whereas a subsidiary can only have one parent company. A subsidiary can be another corporation, a limited liability company (LLC), or even a partnership or sole proprietorship.

When a parent company owns more than one subsidiary, those entities are defined for tax purposes as “entities under common control.” There are two conditions for this definition to apply:

  • The parent company has a controlling interest (either wholly/directly or indirectly) in all of the entities.
  • The parent company has a controlling interest (either wholly/directly or indirectly) in at least one of the companies it owns, and no other company has a controlling interest in any of the companies the parent company has an interest in.

What Is a Subsidiary?

In order to be a subsidiary, another corporation must own more than 50 percent of its stock. If it’s a wholly-owned/direct subsidiary, then another company owns 100 percent of its stock. Regardless of the percentage of ownership, a subsidiary must be a separate entity and not merely a division of a company operating under a separate name.

Parent companies tend to be large corporations that have more than one subsidiary. The degree of control the parent company exerts can vary. It often depends on the level of trust the parent company has in the management team of the subsidiary. However, in the case of a wholly owned/direct subsidiary, which has no minority shareholders and stock shares are not traded publicly, the day-to-day operation of the subsidiary is likely to be managed

Types of Subsidiaries

Subsidiaries are generally categorized based on the degree and structure of ownership:

  • Wholly Owned Subsidiary – The parent owns 100% of the subsidiary’s shares, retaining total control.
  • Majority-Owned Subsidiary – The parent owns more than 50% but less than 100% of the shares, with minority shareholders also having rights.
  • Joint Venture Subsidiary – Two or more entities share ownership, often for strategic projects.
  • Indirect Subsidiary – The parent’s control comes through another subsidiary or intermediate company.

This classification helps clarify how corporate groups are structured and how decisions are made across multiple entities.

What Is an Indirect Subsidiary?

The significant factor in determining whether a subsidiary of a company is an indirect subsidiary is that, while the parent company does not have complete control over the subsidiary (as in the case of a wholly owned/direct subsidiary), it does have enough interest in the company to affect the operation of the subsidiary. A good example of an indirect subsidiary is what may occur in a joint venture when one of the companies in the business arrangement has more than a 50 percent interest in the new company that is formed.

Legal Recognition of Indirect Subsidiaries

The recognition of an indirect subsidiary can vary by jurisdiction. For example, under Vietnam’s Enterprise Law 2020, questions have been raised about whether indirect ownership or control should be considered when determining a parent company’s legal status. This uncertainty has implications for compliance, corporate governance, and shareholder rights.

In many countries, indirect subsidiaries are acknowledged as part of a group structure if the parent company exerts significant influence or ultimate control, even without direct shareholding. Investors and regulators often look at beneficial ownership and control tests, not just direct equity percentages, when defining relationships within corporate groups.

How Indirect Subsidiaries Are Formed

An indirect subsidiary usually arises in multi-tiered corporate structures. For example, a U.S. parent company might own a holding company in Europe, which in turn owns a local operating company in Asia. The Asian company is considered an indirect subsidiary of the U.S. parent.

Indirect subsidiaries can also result from:

  • Mergers and acquisitions, where the acquired company is held through a regional holding entity.
  • Cross-border expansion, where local laws prohibit direct foreign ownership.
  • Tax planning, where intermediate entities help optimize international tax obligations.

Why Corporations Own Wholly Owned/Direct Subsidiaries

There are several reasons companies have wholly owned/direct subsidiaries:

  • If a company wants to set up a business in a foreign country, it might be simpler to purchase an existing subsidiary than go through the often onerous procedures of creating a new subsidiary in that country. In addition, the subsidiary may have already a management team in place that is familiar with the way business is conducted in that country or already have a client base.
  • A company can easily acquire subsidiaries that exist in markets where the parent company wants to do business and quickly begin operations.
  • A company can create subsidiaries that will support the operations of the parent corporation without interference by outside interests.

Risks and Challenges of Indirect Subsidiaries

While indirect subsidiaries offer flexibility, they also present challenges:

  • Legal Risks: In disputes, courts and regulators may scrutinize whether the parent exercises actual control. Lack of clarity can expose parent companies to liability.
  • Financial Risks: If an indirect subsidiary faces insolvency, the financial health of the parent and related companies may be impacted, as seen in Silver Star Properties REIT’s indirect subsidiary bankruptcy petition, which raised investor concerns and potential arbitration claims.
  • Transparency Issues: Complex ownership layers can obscure accountability, making it harder for regulators and investors to evaluate the company’s true financial position.
  • Tax Compliance: Multi-layered structures may trigger heightened scrutiny from tax authorities investigating profit shifting or transfer pricing.

Risks and Challenges of Subsidiaries

While subsidiaries provide benefits, they also introduce challenges:

  • Regulatory compliance – Each subsidiary must meet the legal requirements of its jurisdiction, including reporting and licensing.
  • Management complexity – Coordinating operations across multiple subsidiaries can increase administrative costs.
  • Liability risks – Although separate legal entities, subsidiaries may expose the parent to reputational or financial risks if poorly managed.
  • Minority shareholder disputes – In subsidiaries that are not wholly owned, conflicts may arise over governance or profit distribution.

Why Corporations Own Indirect Subsidiaries

On the surface, it would appear that the advantages of a parent company having complete control over its subsidiary, as is the case in a wholly owned/direct subsidiary, would outweigh settling for only a majority ownership in a subsidiary. However, there are occasions where it benefits a company to have an indirect subsidiary.

  • A company may want to set up operations in another country, and the laws of that country prohibit the existence of wholly owned/direct subsidiaries.
  • The parent company may want to have the ability to attract partners that have unique talents or experience that can benefit the operation of the subsidiary.
  • The parent company may want to raise capital by offering shares in the indirect subsidiary to outside interests.

If you are planning to invest in a publicly traded company, it’s wise to take the time to understand their corporate structure to determine the role subsidiaries play in their operation.

Strategic Benefits of Indirect Subsidiaries

Corporations may prefer indirect subsidiaries for strategic reasons:

  • Market Entry: Countries sometimes restrict foreign companies from wholly owning domestic businesses. Using an indirect subsidiary with a local partner can overcome this barrier.
  • Liability Shielding: By inserting an additional ownership layer, parent companies can reduce direct exposure to legal claims.
  • Capital Raising: Offering partial ownership in an indirect subsidiary can attract investors without diluting the parent company’s control over its core operations.
  • Operational Flexibility: Different subsidiaries can focus on distinct markets or products, giving the parent diversified revenue streams and risk distribution.

Examples of Indirect Subsidiary Structures

Indirect subsidiaries are common in multinational corporations:

  • Example 1: A U.S. parent company owns 100% of Subsidiary A, which in turn owns 60% of Subsidiary B. Subsidiary B is the indirect subsidiary of the U.S. parent.
  • Example 2: In joint ventures, one company may hold a controlling interest in a venture through another subsidiary rather than directly.
  • Example 3: Investment entities, such as real estate investment trusts (REITs), often structure holdings through multiple subsidiaries to isolate liability or comply with local laws.

These examples show that indirect subsidiaries can exist across industries, including technology, real estate, and financial services.

Legal and Tax Implications of Indirect Subsidiaries

Indirect subsidiaries raise unique legal and tax considerations. From a legal standpoint, courts and regulators often treat indirect subsidiaries as part of the parent’s broader corporate group, especially when assessing liability or compliance. For tax purposes, ownership chains can determine whether entities are consolidated for reporting, eligible for intercompany exemptions, or subject to foreign withholding taxes.

Key points include:

  • Consolidation rules – Tax authorities may require financial statements of indirect subsidiaries to be combined with the parent.
  • Transfer pricing – Transactions between parent, direct, and indirect subsidiaries must comply with fair market value requirements.
  • Cross-border rules – Indirect ownership can affect treaty benefits and eligibility for reduced tax rates.

Frequently Asked Questions

  1. What is the difference between a direct and an indirect subsidiary?
    A direct subsidiary is owned outright by the parent company, while an indirect subsidiary is owned through one or more intermediate entities.
  2. Do indirect subsidiaries have separate legal status?
    Yes, indirect subsidiaries remain legally independent entities, even though ultimate control may rest with the parent company.
  3. Can an indirect subsidiary impact a parent company’s liability?
    Yes. In insolvency or fraud cases, regulators may hold the parent accountable if it exerts significant control, as shown in recent bankruptcy examples.
  4. Why do companies prefer indirect subsidiaries in foreign markets?
    They allow compliance with local ownership laws, enable partnerships with domestic firms, and help mitigate legal and tax risks.
  5. Are indirect subsidiaries common in investment structures?
    Yes. They are frequently used in REITs, private equity, and multinational corporations to manage risk and attract capital investors.

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