What is a partnership?
A 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.
Will there be any tax on the partnership?
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. Where the partner is an individual, his share of income from the partnership will be taxed based on his personal income tax rate. Where a partner is a company, its share of income from the partnership will be taxed at the tax rate for companies.
While the partnership does not pay tax, it still has 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.
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Limited Liability Partnership (LLP)
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.
Is an LLP required to pay tax
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.
Can LLP losses and capital allowances 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 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") will be restricted. 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. [Refer to Diagram 1.1]
What is the filing procedure of an LLP
For income tax purposes, the filing procedure of an LLP is similar to that of a partnership. However, an LLP which has incurred business loss will be required to submit a Capital Contribution Form (485KB) for the Year of Assessment in which the loss is incurred, and subsequent Years of Assessment whether it makes a profit or loss. The Capital Contribution Form is for the precedent partner to declare the contributed capital of the partners.
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Limited Partnership (LP)
LP is a business structure that allows businesses to operate and function as a partnership without a separate legal personality from the partners. It must 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
Similar to an LLP, an LP 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 LP. 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.
Income tax treatment of LPs
The limited partners of an LP are treated in the same manner as the 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 (“IBA/CA”) is also subject to the same relevant deduction restriction rules applicable to partners of LLPs. Similarly, 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 deemed income chargeable with tax to him. [Refer to Diagram 1.1]
The general partners of an LP, on the other hand, 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.
What is the filing procedure of an LP
The filing procedure of an LP is similar to that of an LLP. This means an LP which has incurred business loss will be required to submit a Capital Contribution Form (485KB) for the Year of Assessment in which the loss is incurred, and subsequent Years of Assessment whether it makes a profit or loss. The capital contribution of both limited and general partners should be declared in his form.
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What is Contributed Capital?
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 contribution 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.
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 YAs for offset against his future income from the LLP.
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