Branch vs Freedom of Services: when each is the right EU passporting model

Both flow from the home authorisation; both are legitimate ways to operate cross-border in the EU; one is rarely the right answer if you picked it for the wrong reason. Freedom of Services lets you reach customers in another member state without a physical establishment. Freedom of Establishment — typically through a branch — places people, premises and a regulated presence on the ground. The choice changes your tax, supervisory, AML and operational reality, and is rarely revisited once made. This piece walks through what each model actually is, when each fits, and the decision factors that matter.

1. The two models, in legal terms

Both are rights guaranteed by the EU Treaty (Articles 49 and 56 TFEU) and operationalised through the sectoral directives:

• Freedom of Services (FoS) — the right of a regulated firm authorised in one EU member state to provide services into another member state without establishing a physical presence there. The home regulator authorises; the host regulator is notified.
• Freedom of Establishment (FoE) — typically operationalised as a branch — the right of the same firm to set up an establishment (branch, agency, office) in another member state. The home authorisation extends; the host regulator receives a more detailed notification.

For payment institutions and EMIs, the regimes sit in EMD2 / PSD2 (Articles 28–30 EMD2 and the equivalent in PSD2). For investment firms, MiFID II Articles 34–35. The mechanics are similar across sectors.

2. Freedom of Services in practice

Operational characteristics:

• No physical establishment — no office, no resident staff specifically attributable to the host state
• No host-state corporate vehicle — you operate as the home-state legal entity
• Home-state supervision — your home regulator (BdE, DNB, ACPR, Banca d’Italia, BaFin, CSSF, etc.) remains the prudential supervisor
• Host-state conduct rules — the host’s consumer-protection, AML and reporting rules apply to your local activity. This is the part most often underestimated.
• AML representative — host-state activity at meaningful volume usually triggers an obligation to designate an in-country AML representative; see our AML representative across the EU piece
• Notification typically completed in 1–3 months at the host side

3. Freedom of Establishment — the branch model

A branch is a regulated establishment of the home-state entity in the host state. It is not a separate legal entity; it is part of the home-state firm with a local presence:

• Physical presence — premises, resident staff, often a local managing director or branch head
• Host-state regulated presence — the branch is registered locally and is subject to host-state supervision on conduct matters; the home regulator retains prudential supervision
• Host-state reporting — branches typically file local statistical, AML and conduct returns alongside the home-state filings
• Local AML representative — required by default for branches, often a senior staff member resident in the host state
• Notification process is more involved — typically 3–6 months including business-plan, governance map, branch manager fit-and-proper, premises confirmation

4. The third option — a host-state subsidiary

Distinct from FoS and from a branch. A subsidiary is a separately authorised legal entity in the host state, with its own licence from the host regulator. It is not a passporting model — it is starting again. Some firms choose a subsidiary for jurisdictional or commercial reasons (separate corporate identity, separate capital, ringfencing). The trade-off is a duplicate authorisation cycle and ongoing supervisory cost. See where to base your EMI for the home-state choice itself.

5. Side-by-side comparison

6. When FoS is the right answer

• Your activity in the host state is digital, low-touch and remote — typical for online onboarding, app-based products, B2B integrations.
• Your customer base in the host state is moderate and does not require local presence to acquire or service.
• You want a single, lean prudential and reporting footprint at the home regulator.
• You can meet host-state conduct, AML and consumer-protection rules from the home base, with an in-country AML representative if needed.

Most fintech-payments cross-border activity in the EU starts as FoS. It is the lowest-friction model and works well for the common digital-product business model.

7. When a branch is the right answer

• You need physical presence — staff who meet customers, premises that take payments in person, local relationship management.
• Host-state regulators or counterparties expect a local establishment — often the case in larger national markets (Germany, France, Italy) for institutional B2B work.
• Local payment-system access requires a host-state operational presence — particularly relevant for direct settlement-system access in the post-PSD3 environment (see our PSD3 tracker).
• Material commercial volume justifies the supervisory and tax footprint.

The decision is rarely “FoS forever”. Many firms operate FoS first, accumulate evidence of fit and customer demand, then upgrade to a branch in the markets where it matters.

8. When a subsidiary is the right answer

• Local-licensing optionality — when a subsidiary’s local capital and governance are easier to defend than centralised home-state ones.
• Specific national-market requirements — some sectoral activities, particularly regulated lending or specific investment-services categories, are hard to serve through a branch.
• Strategic ringfencing — group-level decisions about isolating a specific business line in a separate corporate vehicle.

Subsidiaries multiply the operational footprint: separate licence, separate prudential capital, separate AML programme, separate reporting catalogue, separate audit. The case has to clear that bar.

9. Tax — the often-underestimated dimension

FoS generally does not create a tax footprint in the host state for the activity carried on under it. A branch creates a permanent establishment subject to host-state corporate income tax on the profits attributable to it, plus local payroll and indirect taxes. A subsidiary is separately tax-resident in the host state. The choice has lasting tax consequences — coordinate with tax counsel before selecting the model, not after notification.

10. Reversing the choice

Switching from a branch to FoS is a wind-down and re-notification — not free, but doable in a few months. Switching from a subsidiary to a branch (or vice versa) is meaningfully more complex; subsidiary wind-down involves the host regulator, customer transfer, and possibly local employment and tax events. Plan as if the choice is durable.

11. FAQ

12. What to do, today

• For each EU market you are entering or scaling, classify the entry as FoS, branch, or subsidiary — and document the rationale.
• Sequence: notify under FoS first if the model fits; reassess at a defined volume or commercial threshold; consider a branch upgrade only when the trigger fires.
• Coordinate the tax assessment alongside the supervisory choice. Tax outcomes are durable.
• For each jurisdiction in scope, line up the AML representative in parallel with the supervisory notification.
• Build the local-reporting catalogue (statistical, AML, conduct, payments) before activity starts; avoid post-hoc registrations.

Related: Where to base your EMI · AML representative across the EU · How to launch Dutch IBANs