Partnership / Limited Liability Partnership (LLP) / Limited Partnership (LP)

Definition, tax obligations and filing procedures of different types of partnerships.

Partnerships

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.

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 .

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. For details, see Contributed Capital (below).

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.

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. LP must consist of at least one general partner who has unlimited liability and one limited partner who enjoys limited liability.

Tax Liability of LPs and LP Partners

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 .

Deduction Restriction Rules and Limited Partners

The limited partners of an LP are treated in the same manner as the partners of an LLP for income tax purposes.

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. For details, see Contributed Capital (below).

Deduction Restriction Rules and General Partners

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.

Filing Procedure for LPs

The  filing procedure  of an LP is similar to that of an LLP. An LP is required to report the capital contribution of the partners in its income tax return. The capital contribution of general partners of the LP should also be declared.

Contributed Capital

Contributed capital of a partner of an LLP is the sum of:

  1. 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
  2. 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. 

Contributions-in-Kind

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:

  1. The capital he had previously contributed to the LLP; or
  2. 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.

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