TAXATION of

PARTNERSHIPS &
PARTNERS
Chapter 10
Kinds of Partnership
For purposes of income taxation

1. Exempt Partnerships
 Exempt from tax
 Required to file an income tax return
of their income for the purpose of
furnishing information as to the
share in the gains or profits which
each partner shall include in his tax
return
Example: General professional
partnership

 A GPP is one formed by

two or several persons for
the sole purpose of
exercising their common
profession of which no
part of income is derived
from engaging in any trade Belo Gozon Elma Parel
or business. Asuncion & Lucila Law Offices
Kinds of Partnership
For purposes of income taxation

2. Taxable Partnerships (all other

partnerships)
 Corporations subject to corporate tax

Corporate Taxation
 Filing of quarterly income tax return
 Rules on deductibility or non-deductibility
of expenditures incurred
 The tax rates

Example: Business partnerships &

unregistered partnerships
Tax Liability of
Partners inincome of a
1. Share in the net
general professional partnership
Partnership
Principle of constructive receipt
 the share in the net profits to which
any taxable partner would be entitled
to shall be taxable to him whether
distributed or otherwise (Sec. 26,
NIRC)
In determining his distributed share in the net
income of the partnership:
a. Each partner shall report as gross
income his distributive share, actually
or constructively received, in the net
income of the partnership (Sec. 26,
NIRC)
b. Income payments made periodically or
at the end of the taxable year by a
general professional partnership to the
partners, such as drawings, advances,
sharings, allowances, stipends, etc.
shall be subject to a creditable
withholding tax of fifteen percent
(15%), if the gross income in one
taxable year exceeds Php720,000; and
ten percent (10%) if otherwise
Tax Liability of
Partners
2. Share in the net inincome of taxable
partnerships
Partnership
The share of a citizen or resident alien
a)
individual partner in the distributable net
income after tax of a partnership is subject to
a final withholding tax of ten percent (10%)
whether distributed to the partners or not.
b) The share of a partner who is a nonresident
alien engaged in trade or business in the
Philippines in the distributable net income
after tax of a taxable partnership shall be
subject to a final withholding tax of twenty
percent (20%).
Optional standard deduction (OSD)
for general professional
partnerships and partners
General
Professional
Partnership

Computing distributive share: GPP = Corporation

• Itemized deduction
• In lieu, it can opt to avail of the optional
standard deduction allowed to corporation in
claiming the deduction in an amount not
exceeding forty percent (40%) of its gross
income
General professional partnership
avails of itemized deductions

Individual partners cannot avail of

deductions anymore in computing their
respective income tax
General Professional
Partnership avails of optional
standard deduction
It can no longer claim further deduction from their
share in the net income for the following reason:
 The partner’s distributive share in the general
professional partnership is treated as gross income
not his gross sales/receipts and the 40% optional
standard deduction allowed to individuals is
specifically mandated to be deducted not from his
gross income but from his gross sales/receipts; and
 The optional standard deduction bring in lieu of
the itemized deductions allowed in computing
taxable income will answer for both the items of
deduction allowed to the general professional
partnership and its partners (RR 2-2010).
Partner derives income apart from his
share in the net income of professional
partnership

He can claim either itemized or optional

deduction from such income but not to
include his share in the net income of the
general professional partnership.
Transactions between a
partner and the partnership
Gain or loss is recognized on the sale
of property by a partner to the
partnership, and the partnership
receives cost basis equal to the
amount of consideration paid in
exchange transaction.
Co-ownership

 Whenever the ownership of an undivided

thing or right belongs to different persons
(Art. 484, CCP)
 Exempt from tax if the activities of co-
owners are limited to the preservation of
the property and the collection of the
income therefrom.
Transformation of a co-ownership into a
partnership

To be considered a partnership, the partners

must have an unmistakable intention to
form it. Thus:
a. The mere sharing of gross returns does not
of itself establish a partnership, whether or
not the persons sharing them have a joint
or common right or interest in any property
from which the returns are divided (Art.
1769(3) ibid.)
Transformation of a co-ownership into a
partnership

b. Co-heirs who own inherited properties

which produce income should not
automatically be considered as partners of
an unregistered partnership or corporation
subject to tax if there is no contribution or
investment of additional capital to increase
or expand the inherited properties, merely
continuing the dedication of the property to
the use to which it had been put up by their
forebears (Obillos v. CIR).
Transformation of a co-ownership into a
partnership

c. A sale of co-ownership property at a profit

does not necessarily establish that
intention.
THANK YOU!

Chrisia Mae Soria

Azel Marie Ayco