May 2020 INCOME TAX OF PARTNERSHIPS Atty. C, Llamado For purposes of the income tax, partnerships are classified into: (a) Partnership not subject to income tax; and (b) Partnership subject to income tax. A. Partnerships Not Subject to Income Tax ‘The following partnerships are not subject fo income tax: 1. General Professional Partnership (“GPP”) — A partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in trade or business. Note: Because of the exemption of GPPs from the income tax, income payments to them by their clients are exempt from creditable withholding tax.! 2. A joint venture or consortium formed for the purpose of (a) undertaking construction projects; or (b) engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. Filing of Return Exempt partnerships are required to file an annual information return (BIR Form No. 1702 EX). However, the purpose is to furnish information as to the share each partner shalll report and include in his personal income tax return. Tax Liability of Partners in Exempt Partnership (a) Persons engaging in business as partners in a GPP shall be liable for income tax only in their separate and individual capacitis ! RMC No. 3-2012. * To be exempt, the joint venture/consortium itself and all the co-venturers/eonsortium members must be licensed us general contractors by the Philippine Contractors Accreditation Board (PCAB) of the pri. JVs involving foreign contractors may also be exempt if (a) the foreign contractor is covered by a Special license as a contractor by the PCAB; and (b) project is certified by the appropriate government office that the construction project is a foreign-financed or intemationally-funded project in which international bidding is allowed.May 2020 (b)Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership” The share of a partner in the net profits of the partnership shall be taxable to the 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 as provided in the partnership agreement. Each individual partner may then take up his share in the loss in his income tax return as a. deductible loss. (©) The share of a partner shall be subject to a creditable withholding tax of 10% if the current year’s income payments to the partner total P720,000 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 shall be computed in the same manner as & corporation. The distributable net income of the GPP may be determined by claiming either Itemized Deductions or OSD. (©) However, the partners comprising the GPP can_no_longer_claim further deductions from thé butive shares in the net income of the GPP. ‘The partners of a GPP are also not allowed to avail of the 8% income tax rate option since their distributive share from the GPP is already net of costs and expenses. If a partner also derives other income from trade, business, or practice of profession apart and distinct from his share in the net income of the GPP, the deduction that can be claimed from this other income would either be the Itemized Deductions or OSD. Note: Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax liability as partners in an exempt partnership. > Sec. 26, NIRC.May 2020 B. Partnerships Subject to Income Tax (item A), no matter how All other partnerships, except those mentioned above fe income tax. created or organized, are considered corporations subject to corporat Filing of Tax Return are required to file quarterly Taxable partnerships, like ordinary corporations, and an annual return income tax returns for the first, second, and third quarters, based on their accounting periods. Tax Liability of Partners in a Taxable Partnership Partner ee Tax Base Citizen or Resident Alien | 10% eee ao Hees wear | om eg bee meee earn eect Note: The share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation, of which he is a member or co-venturer, is also subject to this final tax. Tax Liability of Corporate Co-Venturers ina Taxable Joint Venture (JV) Co-Venturer Final Tax Rate Tax Base Dividend or Share in the distributable De Exempt | after tax net income of the JV REC Exempt Dividend or ‘Share in the distributable after tax net inoome of the IV Sete se! Dividend or Share in the distributable after tax net income of the IV “If there is tax sparing. 30% FT if there is no tax sparing.May 2020 CO-OWNERSHIP For income tax purposes, co-ownership may arise in the following cases: 1. When two or more heirs or beneficiaries inherit an undivided property from a decedent; or 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 therefrom. In such a case, the co-ownership, as such entity, is not subject to income tax. Tax Liability of Co-owners in Exempt Co-ownership The co-owners 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. In either case, the co-ownership will be subject to income tax as a corporation.