Partnerships

Business handshake

Partnership

Partnership is a legal relationship between two or more persons who carry on a business with the objective of making profit and sharing it between them.

How is profit made by the partnership taxed?

It would be dependent on the partners. This is because, partnerships are not an entity in law. This means that the partnership does not pay income tax based on the income earned by the partnership. Alternatively, each partner is taxed on his or its share of the income from the partnership. If the partner is an individual, their share of income from the partnership is taxed based on their personal income tax rate. For partners who are companies, its share of income from the partnership is taxed on the tax rate for companies.

However, even though the partnership does not require to pay tax, it still has to file an annual income tax return, as evidence, to proof all income earned by the partnership and deductions claimed for expenses incurred in carrying on the partnership business.

 

Limited Liability Partnership

Limited Liability Partnership (LLP) is a business structure that allows businesses to operate and function as a partnership while giving it the status of a separate legal person. LLP is regarded in law as “bodes corporate” which is formed by being registered under the LLP Act.

Is an LLP required to pay tax?

LLPs taxes are treated similarly as partnerships. This includes partners who are individuals pay their share of income from the LLP based on their personal income tax rate, while partners who are companies pay their share of income based on the tax rate for companies.

Are LLPs losses and capital allowances able to be offset against other sources of income?

The amount of a partner’s share of capital allowance and trade loss from the LLP that can by offset against his other sources of income (known as “relevant deduction”) for a year of assessment, including all of his relevant deduction allowed in all past years of assessment will be restricted. The total offset must not exceed each partner’s contributed capital as at the end of the basis period relating to the current year of assessment.

What are the procedures when filing for an LLP?

For income tax purposes, the filing procedure of an LLP is like that of a partnership. The first named partner has to report the capital contribution of the partners in the tax return for the purposes of applying the relevant deduction restriction.

 

Limited Partnership

Limited Partnership (LP) is a business structure that allows businesses to operate and function as a partnership without a separate legal personality from the partners. It has to consist of at least one general partner who has unlimited liability and one limited partner who enjoys limited liability.

Is an LP required to pay tax?

LPs, just like LLPs, will not be liable to tax at the entity level. This means that partners who are individuals pay their share of income from the LLP based on their personal income tax rate, while partners who are companies pay their share of income based on the tax rate for companies.

Income tax treatment of LPs

The limited partners of an LP are treated in the same way as partners of an LLP for income tax purposes. Hence, the deductibility of a limited partner’s share of an LP’s trade loss and industrial building allowance or capital allowance is also subject to the same relevant deduction restriction rules applicable to partners of LLPs. Correspondingly, if the limited partner’s cumulative relevant deductions were to exceed his capital contribution due to a reduction in his capital contribution, the excess is taken as income chargeable with tax to him.

However, general partners of an LP are treated in the same manner as the partners of a general partnership for income tax purposes. Hence, the relevant deduction restriction rules as above do not apply to such partners.

 

 

 

 

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