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Local Compliance InformationCorporate Tax Special Taxation for Partnership Firms
1. Overview of Taxation for Partnership Firms
(1) The Definitions of the Terms
● ‘Partnership Firm' and ‘Partne
The conceptual component of ‘partnership firm' is a firm which consists of 2 or more than 2 partners (character of organization), running for profit and having the profit allocated (profitability) and being in nature of association or personal company (character of association).
And the ‘partner' means investors categorized into different types, i.e., a resident, non-resident, domestic corporation or foreign corporation who has invested in a partnership firm. Those are in different types of taxation structure (tax rate, classification of income, taxation method of global taxation, classified taxation, separate taxation, etc.)
● Allocation and Distribution
The terms of Allocation and Distribution should be used strictly separated as the taxation for partnership firms is to avoid the double taxation (or double deduction) on the actual distribution process after the taxation on income (or deficit deduction) was already made in the process of allocation.
① The term "Allocation" means an action to imputing the income, deficit, or similar of a partnership firm to the partners' income, deficit, or similar, regardless of whether or not any asset is actually distributed, at the end of each taxable year.
② ‘Distribution' " means an act of actually conveying an asset of a partnership firm to its partners.
● Calculation of Amount of Income or Deficit allocable to a partner group
The calculation of the amount of income or deficit by each partner group according to each tax law is to get rid of issues which occur from applying differently on the same income in nature from the partnership firm income for a resident, non-resident, domestic corporation or foreign corporation who has different taxation structure for each.
● Value of Equity Shares
The term “value of equity shares” is regarded as base amount for the taxable income computation, external value of equity shares as Outside Basis or Interest Basis. This means a book value of “equity shares in a partnership firm” held by partners for the purpose of taxation as “equity of shares of the partnership firm” of each partner. This amount is to be adjusted continuously as per the allocation of income amount or deficit amount in each business years. The adjusted value amount of the equity share become a basis for of taxable income computation at the time of transferring the equity shares in the partnership firm or distributing assets of the partnership firm or allocation of deficits.
* Transferring the equity shares: the taxable income (capital gains) is to be calculated as the transaction value exceeding value of equity shares
Distributing assets: the taxable income is to be calculated as the market value of the distributed assets exceeding the value of stakes held by the partner (distribution of the liquidation assets, the deficit presumed amount is the market value of the distribution assets exceeding the value of equity shares.)
Allocation of deficits: regarded as a Ceiling amount for the allocation of the deficit
(2) Overall Comments
The special taxation for partnership firms (Partnership Taxation) is simply to take the partnership firm as a pass-through unlike other normal firms. The partnership firm is not to be taxed on the generated income at the partnership level, instead, income generated by a partnership firm is imputed to each partner and taxed at the individual partner level each.
In case of normal firm, the corporate tax is to be imposed at the level of firm, and the other profits are paid to shareholders as dividend. The shareholder who is paid the dividend should include the dividend income in shareholder's gross income or amount of income, and pay income tax or corporate tax. At this time, the corporate tax imposed on the level of corporate taxation could be partially deducted at the level of shareholder. But under the special taxation for partnership firms applied, the tax burden is to be reduced as much as the unsolved amount of double taxation problem at the level of shareholder of normal firm because no tax is imposed at the level of corporate taxation.
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