I'm not sure of the details (and IANAL), but generally the profits do go back into the parent non-profit organisation. If the subsidiary is 100% controlled by the parent, then you can't do the tax exempt donation thing (but there may still be a point in having the subsidiary, whose activities won't be restricted to those of a tax exempt non-profit). However, if things are arranged so the parent doesn't have total control, then the money going back can indeed be considered a donation. There's plenty of info available by googling - http://www.kdv.com/nonprofit-articles/subsidiary.html was something I just found, for example.