TAXATION OF LLPS

[Dr. Sanjiv Agarwal]

LLP Act 2008 does not contain any provision governing taxation of LLPs.

However, based on the law of taxation in UK and US etc, for the purpose of income tax, all activities carried on by LLPs should have been treated as being carried on by its partners and not by LLP. The property of LLP should be treated as property of partners and taxed accordingly, i.e, any asset held by LLP should be treated as assets held by its partners. For taxation, the status of LLP as a corporate entity should be ignored and it should be treated as  partnership and partners taxed on then share of profit. For capital gain arising out of assets of LLPs, it should be considered as if assets are held by partners and the resultant gain arising out of transfer of assets be taxed in the hands of partners.  In this way, LLP would enjoy the pass through status of for income tax purposes.

UK and US have similar tax provisions for LLPs. In UK, profits of LLP are charged in the hands of partners and not the LLPs (Section 10 of UK's LLP Act).

In UK, the profits of the business of an LLP are  taxed as if the business were carried on by partners in partnership, rather than by a body corporate. This ensures that the commercial choice between using an LLP or a partnership is a tax neutral one.  The taxation clauses in the Act are expressed in broad terms so that the existing rules for partnerships and partners will, in general, simply apply to LLPs, "and members of LLPs, which are carrying on businesses, as if these were partnerships and partners respectively. The transfer of an existing business to an LLP will only be treated for tax purposes as giving rise to a cessation of the business of the partnership which is making the transfer if in otherwise identical circumstances a transfer between one partnership and another would do so. The transfer of assets between a partnership and an LLP will only give rise to chargeable gain or capital allowance consequences if, in otherwise identical circumstances, a transfer of assets between one partnership and another would so do. Similarly, Inland Revenue Statements of Practice and Extra Statutory Concessions will apply to LLPs and members of LLPs as they apply to partnerships and to partners.

 In US, LLPs enjoy the pass through status for the purpose of taxation. The profits or losses of the LLP pass through the business and are reported in each partner's individual returns. Thus LLPs are generally treated for tax purposes as a business carried on by the partners in a partnership, rather than as a body corporate.

In India, taxation of LLPs shall be governed by the Income Tax Act,1961. Accordingly , the Finance Act, 2009 has introduced the provisions regarding taxation aspects Limited  Liability Partnership. LLP will be treated as partnership firms for the purpose of Income Tax and will be taxed like a partnership firm.

Finance Act, 2009 has amended the definition of Firm and Partners as follows -

Firms shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability Partnership as defined in the Limited Liability Partnership Act 2008.

(a)  Partner shall have the meaning assigned to it in the Indian Partnership Act 1932 and shall include:
• Any person, being a minor, has been admitted to the benefits of partnership ; and
• A partner of a limited liability partnership as defined in the Limited Liability Partnership Act 2008.

( c) Partnership shall have the meaning assigned to it in the India Partnership Act 1932 and shall include a limited liability partnership as defined in the Limited Liability Partnership Act 2008.

In order for Limited Liability Partnership to be assessed as firm as Income Tax Act, it has to satisfy the following criteria-

(a) The LLP is evidenced by an instrument i.e. there is a written LLP Agreement.

(b) The individual shares of the partners are very clearly specified in the deed.

(c) A certified copy of LLP Agreement must accompany the return of income of the LLP of the previous year in which the partnership was formed.

(d)    If during a previous year, a change takes place in the constitution of the LLP or in the profit sharing ratio of the partners, a certified copy of the revised LLP Agreement shall be submitted along with the return of income of the previous years in question.

(e)    There should not be any failure on the part of the LLP while attending to notices given by the Income Tax Officer for completion of the assessment of the LLP.

LLP can claim the following deductions:-

(a) Interest paid to partners, provided such interest is authorised by the LLP Agreement.

(b) Any salary, bonus, commission, or remuneration (by whatever name called) to a partner will be allowed as a deduction if it is paid to a working partner who is an individual.

(c)  The remuneration paid to such working partner must be authorised by the LLP Agreement and the amount of remuneration must not exceed the given limits

So far as exemption of partners share income from LLP is concerned, section 10(2A) exempts the share income from the LLP in the hands of the partner. The share of a partner in the total income of a LLP separately assessed as such shall, be an amount which bears to the total income of the LLP the same proportion as the amount of his share in the profits of the LLP in accordance with the LLP Agreement bears to such profits.

The share of the partner in the income of the LLP is not included in computing his total income i.e. his share in the total income of the LLP shall be exempt from tax.

LLP and general partnership is being treated as equivalent (except for recovery purpose) in the Act, the conversion from a general partnership firm to an LLP will have no tax implication, if the rights and obligation of the partners remain the same after conversion and if there is no transfer of any asset or liability after conversion. If there is a violation of these conditions , the provision of capital gains will apply.

Discussions to this article

[Murali KG]

pl advise how the carried forward losses will be treated in the hands of an LLP which is formed by conversion of an existing Private Limited company

[Dr. Sanjiv Agarwal]

On Mr Murali's comment, it may be noted that the law has not been amended to take care of situations like this emerging out of conversion of company into a LLP. On safer side, it may be taken as not being allowed in absence of any clarity. Similarly, there will be an issue of MAT credit. That is the reason that conversions are not taking place.

[pinki singhal]

What is the status of LLP under Wealth Tax Act? How it will be taxed under Wealth Tax ACt?