Partnership taxation is the concept of taxing a
partnership business entity. Many jurisdictions regulate partnerships and their taxation differently.
Common law
Many common law jurisdictions apply a concept called "flow through taxation" to partnerships. Partnerships are a
flow-through entity
A flow-through entity (FTE) is a legal entity where income "flows through" to investors or owners; that is, the income of the entity is treated as the income of the investors or owners. Flow-through entities are also known as pass-through entities ...
where the taxes are assessed at the entity level but 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
The United States Code (formally The Code of Laws of the United States of America) is the official Codification (law), codification of the general and permanent Law of the United States#Federal law, federal statutes of the United States. It ...
).
Partnership
A partnership is an agreement where parties agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations ...
s are "flow-through" entities for
United States
The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
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. Tax ...
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 and Section 848
Income Tax (Trading and Other Income) Act 2005
The Income Tax (Trading and Other Income) Act 2005 (c 5) is an Acts of Parliament in the United Kingdom, Act of the Parliament of the United Kingdom.
It restated certain legislation relating to income tax, with minor changes that were mainly int ...
as not having a 'separate and distinct' legal personality from its members. As a result, partners are assessed to either
UK corporation tax
: ''Throughout this article, the term "pound" and the £ symbol refer to the Pound sterling.''
Corporation tax in the United Kingdom is a corporate tax levied in on the Profit (economics), profits made by UK-resident Company (law), companies an ...
or
UK income tax 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
His Majesty's Revenue and Customs (commonly HM Revenue and Customs, or HMRC, and formerly Her Majesty's Revenue and Customs) is a department of the UK government responsible for the collection of taxes, the payment of some forms of stat ...
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)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...
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 agreement where parties agree to cooperate to advance their mutual interests. The partners in a partnership may be individuals, businesses, interest-based organizations, schools, governments or combinations. Organizations ...
* Partnership accounting
Business taxes
Partnerships
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