Partnership taxation is the concept of taxing a
partnership business entity. Many jurisdictions regulate partnerships and the taxation thereof differently.
Common law
Many common law jurisdictions apply a concept called "flow through taxation" to partnerships. Partnerships are a
flow-through entity where the taxes are assessed at the entity level but which are applied to the partners of the partnership.
United States
Partnership taxation is codified as Subchapter K of Chapter 1 of the
U.S. Internal Revenue Code (Title 26 of the
United States Code
In the law of the United States, the Code of Laws of the United States of America (variously abbreviated to Code of Laws of the United States, United States Code, U.S. Code, U.S.C., or USC) is the official compilation and codification of the ...
).
Partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments ...
s are "flow-through" entities for
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
federal
income tax
An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
ation purposes. Flow-through taxation means that the entity does not pay taxes on its income. Instead, the owners of the entity pay tax on their "distributive share" of the entity's taxable income, even if no funds are distributed by the partnership to the owners. Federal tax law permits the owners of the entity to agree how the income of the entity will be allocated among them, but requires that this allocation reflect the economic reality of their business arrangement, as tested under complicated rules.
United Kingdom
In general, a partnership is treated under Section 111
Income and Corporation Taxes Act 1988
Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...
and Section 848
Income Tax (Trading and Other Income) Act 2005
The Income Tax (Trading and Other Income) Act 2005 (c 5) is an Act of the Parliament of the United Kingdom.
It restated certain legislation relating to income tax, with minor changes that were mainly intended "to clarify existing provisions, ma ...
as not having a 'separate and distinct' legal personality from its members. As a result, partners are assessed to either
UK corporation tax or
UK income tax
Taxation in the United Kingdom may involve payments to at least three different levels of government: central government ( HM Revenue & Customs), devolved governments and local government. Central government revenues come primarily from income ...
on their share of the profits and losses of the partnership
Following the case of Memec plc v CIR
0 TC 77 HM Revenue and Customs
HM Revenue and Customs (His Majesty's Revenue and Customs, or HMRC) is a non-ministerial government department, non-ministerial Departments of the United Kingdom Government, department of the His Majesty's Government, UK Government responsible fo ...
has issued guidance
List of Classifications of Foreign Entities for UK tax purposes
/ref> as to how interests of UK tax residents in foreign partnerships should be treated for UK tax purposes.
Hong Kong
Partnership taxation in Hong Kong
Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China (abbr. Hong Kong SAR or HKSAR), is a List of cities in China, city and Special administrative regions of China, special ...
is the taxation of the profits or losses generated by partnership business entities. First, these profits or losses of the partnership are assessed according to th
Hong Kong Inland Revenue Ordinance, Chapter 112, section 22.
After assessment, then said profits or losses flow through the partnership to the partners who are then taxed on their share of said profits or losses generated by the partnership without any taxes levied against the partnership.
Civil law
Many civil law jurisdictions directly tax the partnership entity.
Notes
See also
*Partnership
A partnership is an arrangement where parties, known as business partners, agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments ...
*Partnership accounting
When two or more individuals engage in enterprise as co-owners, the organization is known as a partnership. This form of organization is popular among personal service enterprises, as well as in the legal and public accounting professions. The imp ...
Business taxes
Partnerships
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