May 2021

INCOME TAX ON 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 to 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.1

2. A joint venture or consortium formed for the purpose of

(a) undertaking construction projects;2 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 shall report and include in his personal income tax return.

1
RMC No. 3-2012.
2
To be exempt, the joint venture/consortium itself and all the co-venturers/consortium members must
be licensed as general contractors by the Philippine Contractors Accreditation Board (PCAB) of the
DTI.

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 internationally-funded project in which
international bidding is allowed.

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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 capacities.

(b) Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.3

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.

(c) 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 ₱720,000 or below,
or 15% if the same exceeds ₱720,000.

(d) For purposes of computing the distributive share of the partners, the net income
of the partnership shall be computed in the same manner as a corporation.

The distributable net income of the GPP may be determined by claiming either
Itemized Deductions or OSD.

(e) However, the partners comprising the GPP can no longer claim further
deductions from their distributive 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.

3
Sec. 26, NIRC.
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May 2021

B. Partnerships Subject to Income Tax

All other partnerships, except those mentioned above (item A), no matter how
created or organized, are considered corporations subject to corporate income tax.

Filing of Tax Return

Taxable partnerships, like ordinary corporations, are required to file quarterly

income tax returns for the first, second, and third quarters, and an annual return
based on their accounting periods.

Tax Liability of Partners in a Taxable Partnership

Final Tax
Partner Tax Base
Rate
Citizen or Resident Dividend or Share in the distributable
10%
Alien after tax net income of the partnership
Dividend or Share in the distributable
NRAETB 20%
after tax net income of the partnership
Dividend or Share in the distributable
NRANETB 25%
after tax net income of the partnership

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 in a Taxable Joint Venture (JV)

Co-Venturer Final Tax Rate Tax Base

Dividend or Share in the distributable
DC Exempt
after tax net income of the JV
Dividend or Share in the distributable
RFC Exempt
after tax net income of the JV
Dividend or Share in the distributable
NRFC 15%4
after tax net income of the JV

4
If there is tax sparing. 30% FT if there is no tax sparing.
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May 2021

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.

I. 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.

II. 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.