|! INCOME TAX ON PARTNERSHIPS 1 Atty. C. Llamado ‘Purposes ofthe income tax, partnerships are classified into: i (4) Partership not subject to income tox; and | (0) Parsership subject to income tax. | ‘A. Partnetships Not Subject to Income Tax ‘The following partnerships are not subject to income tax: 1. General Professional Partnership (“GPP”) ~ A partnership formed by persons for the sole purpose of exercising their common profession, n0 part of the income of whch s deve fom nggingin wade orbusiess | ‘Note: Because of the exemption of GPPs fiom the income tax, income ‘payments to them by their clients are exempt from creditable wibholding tax (RMC No, 3-2012), | 2. A joint venture or consortium formed for the purpose of (@) undertaking construction projects; or | (engaging in petroleum, coal, geothermal, and other energy dperations [Pursuant o an operating or consortium agreement under a service contract with the government. Filing of Return Exempt partnerships are required to file an anual information retum (BIR Form No, 1702 EX), However, the purpose is to furnish information as to the share ‘each partner shall report and include in his personal income tax Tax Liability of Partners in Exempt Partnership (@ Persons engaging in business as pariners in a GPP shall be liable for income tax only in their separate and individual capacities. "To be exempt, the joint veatureconsortum itself an all the co-enturersiconsotian members must ‘licensed as general contractors by the Philippine Contractors Accretion Board (PCAB) af the pm. JVs involving forcign contactors may ako be excmpt if (0) the frcign contactor is covered by 8 ‘esi cense as contracts by the PCAB; and () project is ceifid by the appropriate goverment fice tha the constuction project i «foreign finaoed or iterations. fanded project in which iernatonl bidding is lowed.October 2019 (b)Each partner shall report as gross income his distributive share, actually of ‘onstructively received, inthe net income of the partnership (Sec. 26, NIRC). | ‘The share ofa partner in the net profit ofthe partnership shall be taxable tothe partner, whether distributed or not. But where the result of the partnership operation is a loss, the loss will be divided among the partners in the same proportion as the net income, or 38 provided in the parinership agreement. may then his share in (€) The share of a partner shall be subject to creditable withholding tax of 10% if the current year’s income payments to the partner total 720,000 or below, or 15% if the same exceeds P720,000. (@) For purposes of computing the distributive share of the partners, the net income of the partnership shali be computed in the same manner as a corporation ‘The distributable net income of the GPP may be determined by claiming either emized Deductions or OSD: (©)However, the partners comprising the GPP ‘deductions fiom their distributive hates in the net income ofthe GPP. ‘The a GPP are al iLof the 8% income tax rate ‘option since their distributive share from the GPP is already net of casts and expenses, If a partner also derives other income fom trade, business, or practice of Profession apart and distint ftom his share in the net income of the GPP, the deduction that can be claimed ffom this other income would either be the Itemized Deduetions or OSD, ‘Note: Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax ibility as partners in an exempt partnershipOctober 2019 B, Partnerships Subject to Income Tax Al other partnerships, except those mentioned above (item A, no matter how ‘created or organized, are considered corporations subject to corporate income tax. Alling of Tax Return Taxable partnerships, like ordinary corporations, are required to file quarterly ‘income tax retums for the first, second, and third quarters, and an annual retum. ‘based on their accounting periods. Tax Labitty of Partners in a Taxable Partnership Final Tax Partner ie Tax Base Citizen or Resident Alien | 10% Dividend or Share in the distributable after tax net income of the partnership NRAETB 20% ‘Dividend or Share in the distributable NRANETB 25% Dividend or Share in the distributable after tax net income of the partnership after tax nel income of the partnership | [Note: The shere of an individual in the joint account, ora joint venture ‘of consortium taxable as @ corporation, ‘which he is a member or eo-venture, is also subject to this final tax. Tax Llabillty of Corporate Co-Venturers in a Taxable Joint Venture (JV) net income after tax of an association, a of Co-Venturer Final Tax Rate ‘Tax Base [= | - Soe a 2 fer is tax spring. 30% FT ifthe is no tx springOctober 2019 CO-OWNERSHIP For income tax purposes, co-ownership may arise in the following cases: |. When two or more heirs or beneficiaries i ivi °° inherit an undivided property from @ 2, When a donor makes a gift of an undivided property in favor of two or more donees. 1. When Co-ownership Is Not Subject to Income Tax Generally, the activities of the co-owners are usually limited to the preservation of the co-ownership property and the collection of the income thereffom. In such a case, the co-ownership, as such entity, is not subject to income tax. ‘of Co-owners in Exempt Co-ownership ‘The co-owmers in an exempt co-ownership shall be liable for income tax only in their separate and individual capacities. The co-owners shall report and include in their respective personal income tax returns their shares of the net income of the co-ownership Il, When Co-ownership Is Subject to Income Tax 1) When a co-ownership is formed or established voluntarily, or upon agreement of the parties, what was likely constituted is a business partnership. OR 2) When the income of the co-ownership is invested by the co-owners in business or other income-producing properties, the co-owners in effect constituted themselves into a business partnership. Tn either case, the co-ownership will be subject to income tax as a corporation.