Definition, tax obligations and filing procedures of different types of partnerships.
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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/her share of the income from the partnership.
Where the partner is an individual, the partner's share of income from the partnership will be taxed based on the individual income tax rate. Where the partner is a company, the partner's share of income from the partnership will be taxed at the corporate income tax rate.
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/her share of the income from the LLP.
Where the partner is an individual, the partner's share of income from the LLP will be taxed based on the individual income tax rate. Where the partner is a company, the partner's share of income from the LLP will be taxed at the corporate income tax rate.
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/her 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 more details, please refer to Contributed capital.
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. For more details, please refer to Responsibilities of precedent partners.
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 whose liability is capped at the amount of his agreed investment in the LP.
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/her share of the income from the LP.
Where the partner is an individual, the partner's share of income from the LLP will be taxed based on his/her individual income tax rate. Where the partner is a company, the partner's share of income from the LLP will be taxed at the corporate income tax rate.
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/her capital contribution, the excess is deemed income chargeable with tax to him/her. For more details, please refer to Contributed capital.
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. For more details, please refer to Responsibilities of precedent partners.
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 the partner to the LLP) as capital, and has not, directly, been drawn out or received by him/her (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/she 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/her income tax return.
Reduction of contributed capital
The amount of the contributed capital of a partner of an LLP will be reduced if he/she makes a withdrawal (whether as a distribution or a loan or otherwise) of:
- The capital he/she had previously contributed to the LLP; or
- Any portion of his/her share of the profits or gains of the trade, business, profession or vocation derived by the LLP in respect of past years which he/she had previously not withdrawn.
If such a reduction occurs in any YA and it results in the partner's past relevant deduction exceeding his/her 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 the partner's share of income from the LLP for this YA can be carried forward to subsequent YA for off-set against his/her future income from the LLP.