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Partnerships and Limited Liability Partnerships (LLPs) Taxation
A partnership is a legal relationship between two or more persons who carry out a business with the objective of making profit and sharing the profit between/among them.
Tax Liability of Partnerships and Partners
As a partnership is not an entity in law, the partnership does not pay income tax on the income earned by the partnership. Instead, each partner will be taxed on his or its share of the income from the partnership.
Filing Procedures for Partnerships
While the partnership does not pay tax, the partnership is still required to file an annual income tax return to show all income earned by the partnership and deductions claimed for expenses incurred in carrying on the partnership business.
Limited Liability Partnerships (LLPs)
A 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 will be regarded in law as “bodies corporate” which is formed by being registered under the LLP Act.
Tax Liability of LLP and LLP Partners
For income tax purposes, an LLP will be treated as a partnership and not as a separate legal entity. This means that an LLP will not be liable to tax at the entity level. Instead, each partner will be taxed on his or its share of the income from the LLP.
Where the partner is an individual, his share of income from the LLP will be taxed based on his personal income tax rate . Where a partner is a company, its share of income from the LLP will be taxed at the tax rate for companies.
Deduction Restriction Rules
There is restriction on the amount of a partner’s share of capital allowance and trade loss from the LLP that can be offset against his other sources of income (referred to as “relevant deduction”) for a year of assessment, together with all of his relevant deduction allowed in all past years of assessment (referred to as “past relevant deduction”). The total offset shall not exceed each partner’s contributed capital as at the end of the basis period relating to the current year of assessment.
Filing Procedure for LLPs
For income tax purposes, the filing procedure of an LLP is similar to that of a partnership. The precedent partner reports the capital contribution of the partners in the tax return for the purposes of applying the relevant deduction restriction.
Contributed capital of a partner of an LLP is the sum of:
- The amount which the partner has contributed to the LLP (in cash or in kind but not including any loan by him to the LLP) as capital, and has not , directly , been drawn out or received by him (whether as a distribution or a loan or otherwise); and
- The amount of profits or gains of the trade, business, profession or vocation derived by the LLP from any past year of assessment to which the partner is entitled (whether as a distribution or a loan or otherwise) but which he has not received.
For contributions-in-kind in the form of real property, shares and securities or intellectual property (where value is more than $500,000), the partner is required to submit an independent valuation report together with his income tax return.
Reduction of Contributed Capital
The amount of the contributed capital of a partner of an LLP will be reduced if he makes a withdrawal (whether as a distribution or a loan or otherwise) of:
- The capital he had previously contributed to the LLP; or
- Any portion of his share of the profits or gains of the trade, business, profession or vocation derived by the LLP in respect of past years which he had previously not withdrawn.
If such a reduction occurs in any YA and it results in the partner’s past relevant deduction exceeding his reduced contributed capital as at the end of the basis period relating to the YA, the excess shall be deemed to be the income of the partner chargeable with tax under section 10(1)(g) of the Income Tax Act for this YA.
Any amount of this deemed trade loss in excess of his share of income from the LLP for this YA can be carried forward to subsequent YA for off-set against his future income from the LLP.
Advantages of companies over LLPs
LLPs are required to keep track of the contributed capital by each partner. For tax reporting, there is a need to file a partnership tax return Form P and each individual partner has to file his personal tax return. It can be administratively more costly. Tax compliance fees may be higher when compared to Company tax services. The tax filing process is further complicated when there is a change in the partnership. An LLP may admit new partner(s) or its existing partner(s) may withdraw from the LLP due to retirement, death or other reasons. Proper treatment and assignment of capital allowances claims have to be ascertained for new and leaving partners. Adjustments have to be made to unabsorbed capital allowances and losses.
On the other hand, the claim of unabsorbed losses and capital allowances is more straightforward for a company. Capital allowances and losses are not restricted by contributed capital and there is no requirement to track the contributed capital by each shareholder/director.
LLPs may also face issues when doing business overseas. It may be difficult to obtain a tax resident certificate as LLPs are taxed on individual partner basis. IRAS will not issue a certification of the tax resident status of an LLP for the purposes of an Agreement for the Avoidance of Double Taxation between Singapore and another country. This is because an LLP is not a separate legal person for income tax purposes. However, upon request by any partner of an LLP who is a tax resident of Singapore, IRAS may issue a certificate of his tax residence status for this purpose. Matters are made worse when a LLP is made up by resident and non-resident partners. Obtaining a tax residency certificate for a company is as simple as filling up an application.
In summary, for cost saving in the long run and easier tax reporting, you may want to consider to set up a company instead of a LLP.