DISTINCTION BETWEEN SUBSIDIARY & BRANCH OF A FOREIGN CORPORATION 1. As to legal personality and attribution of income:

SUBSIDIARY: It has an entity separate and distinct from its stockholders. It can deal with its foreign parent company, provided that the transactions are at arm's length.

There would be no attribution of the income of the subsidiary to the foreign parent company because of the separate entity concept.

BRANCH OF A FOREIGN CORPORATION: is merely an extension of the foreign head office. Because of the single entity concept, the transactions and income of the Philippine branch may be attributed to the foreign head office.

2. Creation of permanent Establishment:A subsidiary is generally not treated as a permanent establishment of the foreign parent company, provided that the transactions between them are at arm's length.

A Philippine branch is a permanent establishment; hence, treated as a resident foreign corporation subject to Philippine income tax on net income from sources within the Philippines.

3. Basis of Income TaxationA subsidiary is taxable on worldwide income at 30% of its net taxable income.

A branch is taxable on its income from sources within the Philippines at 30% of its net taxable income. There are exempt branches (e.g., regional area headquarters and representative offices) and special branches subject to preferential tax rates of 10%.

4. Stockholder’s extent of liabilityThe stockholder of a subsidiary is liable only to the extent of his/its subscription in such corporation. Shares of stock of the corporation are issued to its stockholders.

The foreign head office is liable for the liabilities of the Philippine branch; hence, the assets of the head office may still be reached by creditors of the Philippine branch. No shares of stock are issued by the Philippine branch to its head office.