How to transfer money between your parent company and your subsidiary?

When transferring funds between your different corporate entities, you will need to decide from a legal perspective what the funding structure is. Here are the most common arrangements:

Debt

When you structure the cash as a loan to the subsidiary, it’s treated as debt. This is generally the most flexible option and you can document this with a very simple loan agreement. Debt is the most common arrangement that we come across.

Pros:

• Flexible cash extraction: Loans are easy to repay, so a UK subsidiary could easily repay the money without there being a lot of admin. 
• Interest deductibility: If the US parent charged the UK subsidiary interest, interest is tax-deductible for the UK subsidiary, reducing your profits (and any corporation tax payable). 
• Downside protection: In some cases, if the UK subsidiary faced any financial challenges, the loan can be written off, providing potential tax benefits to the US parent. 

Cons:

• Transfer pricing compliance: All loans must be at arm’s length (meaning you imagine what the interest rate would be if the loan was given to another company in similar circumstances. You will need to provide a ‘market rate’ of interest, which can accrue as a debt to the parent company but won’t need to be paid as a cash transfer necessarily.

Equity

Alternatively, you can inject money into a UK subsidiary as equity, where money is exchanged for new additional shares in the entity.

Pros:

• Lack of debt: The balance sheet of the UK subsidiary will not have any debt on the balance sheet which can be relevant for some counterparties (banks, employees, etc).
• Maintain ownership: This is unlikely to be relevant but if some shareholders owned equity directly in the subsidiary but not in the parent, then using equity would likely increase your ownership stake, voting rights & control of the subsidiary.

Cons:

• More admin: If the subsidiary is profitable and you want to withdraw the cash, you need to follow formal processes for issuing dividends which involve board meetings, issuing dividend vouchers and when shares are issued, you will have to file SH01s with Companies House.
• Profit requirement for dividends: Dividends can only be paid out of accumulated profits, so if the subsidiary is loss-making, it can be difficult for the parent entity to withdraw the cash.

Payment for Services

This is a less common route that startups take. A parent could pay directly for the subsidiary's services. Some large Multinationals will use this for moving profits around different tax jurisdictions, but is less common in early stage businesses.

Pros:

• Higher UK revenue: The UK subsidiary will be increasing its revenue by providing services to the US parent. This could move profits from the US to the UK and depending on size could be tax advantageous or disadvantageous.
• Deductible expense for the parent: The parent company would be paying for services from the UK subsidiary which reduces its profits.
• Low-ish initial admin: This can be as simple as sharing invoicing or a basic contract between the entities, which may need less documentation than other options.

Cons:

• Transfer pricing admin: Transfer pricing is a complicated area and is expensive to get advice on. Fundamentally, to consider this in your early stages, there should likely be a material benefit. You will have to ensure that all of the contracts meet arm's length pricing standards.
• No direct cash extraction: This is as simple as a contract between two companies. The money can't be taken back unless it is in the contract and likely if you want to add more money into the subsidiary or extract more money later on, you'll probably need to consider some debt or equity agreement.
• Potential VAT implications of revenue: Adding revenue from services may push the subsidiary over the VAT registration threshold, requiring you to register for VAT and charge VAT on applicable goods and services.