A foreign subsidiary is incorporated under the laws of the country it operates in and therefore operates as a separate legal entity from the parent company. Being a separate legal entity means it is independent maintaining its own accounts and therefore in case of any litigations or liability, the subsidiary takes full responsibility and does not involve the parent company. The financial structure of the subsidiary encompasses the equity plus the short term and long term liabilities which facilitate the financing of the assets of the subsidiary. Given that the subsidiary operates independently, then its own financial structure will become relevant when the parent firm is not responsible for the financial obligations of the subsidiary.

This concept is known as subsidiary autonomy which indicates the extent to which a subsidiary can make strategic decisions without headquarters' involvement. When the parent company is not responsible for the obligations of the subsidiary and may allow for it to default, then the independent financial structure becomes relevant as it empowers the subsidiary to choose its own financial structure in order to reduce the risk of default and the associated financing costs.