Subsidiary in the Corporate World Explained

What is the corporate world?

The corporate world refers to the sphere in which companies and corporations operate. It covers, inter alia, the operations, management, and ethics of companies and corporations.  

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What is a subsidiary?

In the corporate world, a subsidiary refers to a company that is fully or partially owned by another company, which is called the parent company or the holding company. A company is required to own more than 50% of another company’s shares to become its holding or parent company. If a company owns 100% of a subsidiary company, it is referred to as a ‘wholly-owned subsidiary.’ Put differently, a holding or parent company is the majority shareholder of the subsidiary with the same rights as all the other shareholders. Typically, there are two strategies that can be used by a company to become a parent company:

• Acquiring another company by buying more than 50% of its shares.
• Creating another company of which the parent company holds more than 50% of the newly founded company’s shares.

 

Is there a difference between a holding company and a parent company?

Both a parent company and a holding company have a controlling interest in a subsidiary (or subsidiaries) and own more than 50% of the subsidiary’s shares. Generally, holding companies do not perform day-to-day business activities, existing solely to exercise control over its subsidiary/subsidiaries (= to hold its subsidiary and to acquire and own assets). Parent companies are companies that own other companies (subsidiaries) and simultaneously conduct their own business operations.  

Is there a difference between an affiliated company, an associated company, and a subsidiary?

Yes, there is. As mentioned, a subsidiary is owned by a parent company or holding company. An associated company is a company in which a parent company has a minority stake or non-controlling interest, meaning ownership or interest of less than 50%. An affiliated company, commonly called an affiliate, also has a parent company that owns less than 50% of the shares of the affiliated company. The parent company operates separately from its affiliate. Two companies may also be affiliates if they are controlled by the same parent company.  

Definitions in the Companies Act of South Africa related to a subsidiary

The following definitions in the Companies Act (Act 71 of 2008), hereafter referred to as the Act, explain the essence of a subsidiary and its relationship with other companies.

• A group of companies is defined as ‘two or more companies that share a holding company or subsidiary relationship.’[1]

 

• A holding company ‘in relation to a subsidiary, means a juristic person or undertaking that controls the subsidiary.’

 

• Section 3 of the Act determines that a company is:

 

• ‘a subsidiary of another juristic person if that juristic person, one or more other subsidiaries of that juristic person, or one or more nominees of that juristic person or any of its subsidiaries, alone or in any combination -

is or are directly or indirectly able to exercise, or control the exercise of, a majority of the general voting rights associated with issued securities of that company, whether pursuant to a shareholder agreement or otherwise, or has or have the right to appoint or elect, or control the appointment or election of, directors of that company who control a majority of the votes at the meeting of the board’ [of directors], or  

• ‘a wholly-owned subsidiary of another juristic person if all the general voting rights associated with issued securities of the company are held or controlled, alone or in any combination, by persons’ [as mentioned in the paragraph above about a subsidiary].

(Juristic person refers to an entity, such as a company, which has legal rights, obligations, and responsibilities in the same way as a natural person.)  

Is a subsidiary allowed to acquire shares of its holding company?

In terms of section 48 of the Act, a subsidiary may acquire shares of its holding company, subject to the following conditions:

• The acquired shares must not, in aggregate, exceed 10% of any class of shares issued by the holding company.
• No voting rights attached to those shares may be exercised by the subsidiary.
• The company that has acquired the shares ‘remains a subsidiary of the company whose shares it holds.’

 

Rights of an auditor of a holding company regarding its subsidiary

In terms of section 93 of the Act, an auditor of a holding company has the right to obtain all current and former financial statements of any subsidiary of that holding company. In addition, directors or officers of the holding company or subsidiary are obliged to provide ‘any information and explanations’ regarding the particular financial statements, accounting records, books, and documents of the subsidiary as deemed ‘necessary for the performance of the auditor’s duties.’  

The interrelationship between a subsidiary and its holding or parent company

A holding or parent company’s majority ownership gives considerable control over and influences with a subsidiary. This enables the holding or parent company to appoint the board of directors of the subsidiary, exercising control in its decisions. A holding company can create a subsidiary to achieve specific strategic objectives - especially when a wholly-owned subsidiary is involved. Furthermore, a parent company can acquire a subsidiary to strengthen its operating abilities, providing diversified risk, additional assets in various forms, and tax benefits. A subsidiary operates as a separate and distinct legal entity from its parent/holding company. For instance:

• The board of directors of the subsidiary has the authority to manage and direct the affairs of the subsidiary.
• The subsidiary can take legal actions separately from its parent company. For example, the subsidiary can sue and be sued.
• The subsidiary takes responsibility for its own obligations and actions. Usually, a holding or parent company is protected from losses accrued by its subsidiary, exempted from legal actions taken against the subsidiary. However, if a subsidiary goes bankrupt, a parent company may be held accountable if it can be proven that the parent company and subsidiary are effectively one and the same.
• The subsidiary runs its own day-to-day operations.

Subsidiaries are allowed to have their own subsidiaries, affiliates, associated companies, and strategic partners. For example, Prosus, a subsidiary of Naspers, has more than 60 other companies, like AutoTrader and Tencent, under its umbrella.  

Advantages and disadvantages of subsidiaries

A subsidiary structure encompasses advantages as well as disadvantages.

Advantages

• Tax benefits

A parent company can lawfully reduce tax liabilities through deductions allowed by the tax authority of a government. A tax liability from the profit made by one subsidiary can be offset by losses incurred by other subsidiaries.

• Reduction of risk

The subsidiary structure mitigates risk because it consists of separate legal entities. Normally, a parent company is not automatically accountable for losses incurred by a subsidiary.

• Increased efficiency and diversification

At times, a subsidiary enables its parent company to improve its operational efficiency by using the subsidiary to experiment with different manufacturing techniques or types of products.  

Disadvantages

• Additional legal work and costs

Acquiring or creating a subsidiary requires a lot of legal paperwork, implicating extra legal costs.

• Liability for a subsidiary’s financial obligations

On occasions, a parent company may be liable for corporate malfeasance or criminal actions by its subsidiary. If required to guarantee loans of the subsidiary, the parent company is subjected to potential financial losses.

• The conflict between parent company and subsidiary

Legally, directors of a subsidiary are required to manage the affairs of the subsidiary, acting in the best interest of the company of which they are directors. Tension may arise if the subsidiary’s directors take decisions that would be in conflict with the intentions and strategic direction of the parent or holding company. Additionally, a subsidiary is required to remain independent to some degree, implicating that transactions between the parent company and its subsidiary have to be conducted at ‘arms-length.’ This means that the parent company may not possess all the control it wants.

• Complicated and complex financial statements

To consolidate (combine) the financial accounts of the parent company and its subsidiary/subsidiaries into one set of financial statements can be complicated and expensive.  

Subsidiary Financials and Consolidated Financial Statements

A subsidiary is required to prepare and provide annual financial statements to be approved by the board of directors of the subsidiary and presented to the first shareholders meeting after the approval of the board. In a group of companies, the parent company will consolidate (combine) its own and the subsidiaries’ financial statements into one set of financial statements, referred to as the consolidated financial statements. International Financial Reporting Standard (IFRS) 10 defines consolidated financial statements as follows: ‘The financial statements of a group in which the assets, liabilities, equity, income, expenses, and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.’[2] The consolidated financial statements of a group of companies allow shareholders, management, and other stakeholders to review the financial figures and financial health of the group as a whole. Excerpts from IFRS 10 regarding consolidated financial statements:

• Overview

IFRS 10 requires entities to consolidate entities it controls and describes the requirements for the preparation and presentation of consolidated financial statements.

• Objective

The objective of IFRS 10 is to set up principles for the presentation and preparation of consolidated financial statements. IFRS 10 determines, inter alia, the following principles:

• Defines the principle of control and establishes control as the basis for consolidation.
• Sets out how to apply the principle of control to identify whether an investor controls an investee.

IFRS 10 defines control of an investee as: ‘An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.’   (An investee is the business entity in which the parent entity has made an investment.)

• Sets out the accounting requirements for the preparation of consolidated financial statements.
• Accounting requirements

A parent company is obliged to use ‘uniform accounting policies for like transactions and other events in similar circumstances.’ IFRS 10:4(a) specifies that if a parent company meets four specific conditions, it is not required to present consolidated financial statements. For instance. [If] ‘it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other owners, including those not otherwise entitled to vote, have been informed about, and do not object to, the parent not presenting consolidated financial statements.’ When a parent company consolidates the financial statements, it is required to:

• ‘Combine like items of assets, liabilities, equity, income, expenses, and cash flows of the parent with those of the subsidiaries.’
• ‘Offset (eliminate) the carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each subsidiary.’
• ‘Eliminate in full intragroup assets and liabilities, equity, income, expenses, and cash flows relating to transactions between entities of the group.’

 

A practical example of a subsidiary structure

Naspers is one of the most prominent companies in South Africa and globally. As of October 21, 2026, Naspers was number four on the Top 100 JSE list of companies by market capitalisation, commonly referred to as a market cap. According to companiesmarketcap.com, as of October 2026, Naspers has a market capitalisation of $75.13 billion, making Naspers the 226^th most valuable company by market cap. As the holding company of the Naspers group of companies, Naspers has the following subsidiaries:

• Prosus

As of October 2026, Naspers owns 56.92% of Prosus. According to the website of Prosus, ‘the Prosus Group is organised into seven business areas: Classifieds, Payments & Fintech, EdTech, Food delivery, Etail, Ventures and Travel.’ The group also holds ‘sizeable investments in listed Social and Internet assets Tencent and Mail.ru.’ Prosus has more than 60 entities (in South Africa and globally) under its umbrella.  

• Media24

Media24 is a wholly-owned subsidiary of Naspers. According to Naspers, ‘Media24 is Africa’s leading media group, with a sizeable presence in digital and traditional publishing and publications, distribution and financial data.’  

• Takealot

Takealot is also a wholly-owned subsidiary of Naspers. It is described as ‘South Africa’s largest e-commerce retailer.’   [1] Accentuations in quotations from the Companies Act are by the article writer. [2] Accentuations in quotations from IFRS 10 are by the article writer.

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