LIMITED LIABILITY PARTNERSHIP

TAXATION ISSUES

28- 04- 2010

LIMITED LIABILITY PARTNERSHIP

An Introduction
Limited Liability Partnership Act, 2008 Came Into Existence By Way Of Notification On 31st March, 2009. Conversion Of Companies & Firms Into LLPs Was Notified On 22nd May, 2009 And Is Effective On 31st May, 2009 Taxation Of LLP Was Notified On 22nd July, 2009

LIMITED LIABILITY PARTNERSHIP MEANING

LLP Is An Alternative Corporate
Business Vehicle Which Combines The Benefits Of Both The Company And A Partnership Where The Liability Of Its Partners Is Limited Paving Way For Superior Professional Expertise In An Organized And Flexible Structure

LIMITED LIABILITY PARTNERSHIP FEATURES

Body Corporate With A Distinct Legal Entity Separate From That Of Its Partners
Having Perpetual Succession And A Common Seal Any Change In Its Partners Will Not Effect The Existence, Rights Or Liabilities Of The LLP Provides Benefits Of Limited Liability But Offers The Flexibility To Form The Internal Structure

No Partner Is Liable On Account Of The Independent Or Un-authorized Actions Of Other Partners

LIMITED LIABILITY PARTNERSHIP: ADVANTAGES

Separate legal entity Lesser Cost of Formation Lesser Number of Compliances No Requirement of any Minimum Capital Contribution No Restrictions as to Maximum Number of Partners Professionals like CS / CA / CWA / Lawyers can form Multi-disciplinary Professional LLP Personal Assets of the Partners are not exposed except in case of fraud Taxation Benefits

LLP vs. Other Form of Businesses

A Comparative Analysis

Particulars Partnership Company

Governing Law Partnership Act, 1932 Companies Act, 1956

LLP
Limited Liability Act, 2008 Body Corporate having a Separate Legal Entity

Body Corporate

Not a Body Corporate, does not have a separate Legal Entity

Body Corporate having a Separate Legal Entity

Registration

Registration is Optional

Registrar of Companies

Registrar of Companies; LLP Office

Particulars Partnership Company

Composition Minimum: 2 Partners Maximum: 10 in case of Banking Business
20 in case of other business

LLP
Minimum: 2 Partners Maximum: No Limit

Minimum: 2 Members Maximum: 50 Members

Charter Document

Partnership Deed

Memorandum & Articles of Association

LLP Agreement

Particulars Partnership Company

Minimum Number of Directors/ Designated Partners No Concept of Designated Partners/ Directors Minimum: 2 Directors, not necessarily be an Indian Must Obtain DIN Management Partners Board of Directors

LLP
Minimum: 2 Designated Partners, One must be an Indian Must Obtain DPIN Partners/ Designated Partners Yes

Common Seal None

Yes

Particulars Partnership
Perpetual Succession No

Company LLP
Yes Yes Yes Yes

Annual Return No to be filed with Registrar Ownership of Assets Partners have Joint Ownership of all the Assets belonging to Partnership firm

Members have Ownership of Assets

LLP is Independent of its Members and has Ownership of Assets

Particulars Partnership Company LLP

Audit of Accounts Audit of Accounts as per the Income Tax Act Audit of Accounts as per the Companies Act, 1956 All LLP except for those having Turnover less than Rs.40 Lacs or Rs.25 Lacs Contribution in any Financial Year are required to get their Accounts Audited Annually as per the Provisions of LLP Act 2008

Particulars Partnership Company

Transfer of Shares Not Transferable Ownership Is easily Transferable by way of Transfer of Shares Flat rate of 30% Plus Education Cess

LLP
Transferability governed by LLP Agreement

Tax Liability

Flat rate of 30% Plus Education Cess

Flat rate of 30% Plus Education Cess

Particulars Partnership Company LLP

Liability of Partners/ Members Unlimited. Partners are severally and jointly liable For actions of other partners and the firm and liability extend to Their personal assets Generally Limited to The amount Required to be paid up on Each share Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by the partner

TAXATION ASPECTS OF LLP

TAXATION OPTIONS AVAILABLE FOR LLPS

Pass Through Status

i.e. Partners will be liable to Pay Tax on their Share of LLP Profits

Profit will Be Taxed in the hands of the LLP i.e. Partners will not be liable to Pay Tax on their Share of LLP Profits

TAX TREATMENT OF LLPS IN DIFFERENT COUNTRIES

In USA, LPPs are taxed as per Pass Through System and are treated as Tax Transparent Entity
In Singapore, LPPs are treated as Partnership and Income from LLP is not Chargeable with Tax at the Entity Level

In UK, LPP Act, 2000 Provides for Taxation of LLP as a General Partnership
In Japan, LPPs are exempt from Entity Level Income Tax

TAX TREATMENT OF LLPS IN DIFFERENT COUNTRIES

In USA, LLP itself pays No Taxes but it must file Annual Information Return LLPs are Taxable as per Pass through Taxation System and are treated as a Tax Transparent Entity If an LLP wishes to Taxed as a Corporation, it must elect such Treatment under IRS Proposed Regulations If LLP treated as a Corporation, the Income is sometimes called the Corporate double-tax

Tax Treatment Of LLPs In Different Countries Contd.

In UK, LLP Act, 2000 provides for Taxation of LLPs like a General Partnership, members of an LLP are treated for the purposes of Income Tax and Capital Gain Tax and in case Members are Companies then they are made liable to Corporation Tax under the Corporation Tax Rules The Assets of the LLP shall be treated as the Assets held by the members as partners for the Taxation Purposes which ensures that Members, rather than the LLP itself will be Individually Liable to Tax on their Share of Profits

Tax Treatment Of LLPs In Different Countries Contd.

In Singapore, LLPs are treated as a Partnership and Income from an LLP is not Chargeable with Tax at the Entity Level, Instead the Partners are Chargeable with Tax on their Share of Profits, If the Partner is an Individual, Income is Taxed as per his Personal Income Tax Rate whereas if the Partner is a Company (referred to as Corporate Partner), Income will be Taxed as per the Rate of Tax for Companies.

In Japan, like a Minpou Kumiai, the name by which a General Partnership is referred, a LLP is also exempt from the Entity Level Income Tax. Instead, each Member is directly subject to Income Tax

TAX TREATMENT

OF
LLPs IN INDIA

Taxation Aspect: LLPs In India

Remuneration to Partners to be taxed as Income from Business & Profession No Surcharge to be Levied on Income Tax Minimum Alternate Tax not Applicable on LLPs No Dividend Distribution Tax Designated Partners will be liable to sign and file the Income Tax Return, if unavoidable reasons if any, any Partner can sign the Return

Taxation Aspect: LLPs In India

Assignment of Interest in LLP by any Partner to other shall be Liable to Tax Intangible Contribution shall be Taxable but not at the time of introduction in LLP but only at the time of transfer, cessation and winding up of LLP No Capital Gain on Conversion of Partnership into LLP, if the right and obligation of the Partners remain the same after conversion and there is no transfer of any Asset or Liability after Conversion Not Eligible for Presumptive Taxation

Taxation Aspect: LLPs In India

LLPs shall be treated as Partnership Firms for the Purpose of Income Tax Tax Liability at a 30% Flat Tax Rate + 3% Education Cess is applicable on LLPs Budget 2009-10 has amended the definition of Firm, Partners and Partnership, these shall have the same meaning as assigned to it in the Indian Partnership Act, 1932 but in addition shall include the terms as defined in the LLP Act, 2008 Profit will be taxed in the hands of the LLP and not in the hands of the Partners

Taxation Aspect: LLPs In India

Interest on Contribution Allowed provided the same is authorized by the LLP Agreement Deduction against the Interest on Contribution can be availed if conditions of Section 184 and 40(b) of the Income Tax Act are satisfied. Deduction is allowed if any Salary, Bonus Commission or Remuneration is paid to a Working Partner who is an Individual Remuneration paid to a Working Partner is Allowed if the same is Authorized by the LLP Agreement and it does not Exceeds the Prescribed Limits

Taxation Aspect: LLPs In India

Ceiling as to Remuneration Payable to Working Partners and Interest Payable to Partners
LLP Act, 2008 has not Prescribed any Limitation on Payment of Remuneration but the same must be authorized by the LLP Agreement The Income Tax Act under Section 40(b) Disallows Remuneration, Interest etc. received by such Partners if the same Exceeds the Ceiling Prescribed under the Section

Taxation Aspect: LLPs In India

Limits Of Remuneration To Partners
Income Tax Act Prescribes the Ceiling Limit upto which any Payment of Salary, Bonus, Commission or Remuneration will be allowed as Deduction for Income of LLP. The Limits are outlined below:
On First Rs. 3,00,000 of Book Profit or in case of Loss On the Balance of Book Profit Rs. 1,50,000 or at the rate of 90% of the Book Profit, whichever is more At the rate of 60%

Taxation Aspect: LLPs In India

Eligibility (Section 184) for an LLP to be assessed as a firm under income tax
LLPs shall be evidenced by a written LLP Agreement clearly specifying the Individual Shares of the Partners
A Certified Copy of LLP Agreement must accompany the Return of Income of the LLP If during the Previous Year any Change in Agreement has taken place, a Certified Copy of the Revised Agreement shall be submitted along with the Return of Income There should not be failure on the part of the LLP while attending to Notices given by the Income tax Officer for Completion of Assessment of the LLP

STEPS FOR COMPUTATION OF TAX

Find the Firms Income under different Heads of Income, ignoring exemptions Income From House Property Profit & Gains of Business & Profession Income from Other Sources

STEP 1
Capital Gains

STEP 2

The Payment of Remuneration and Interest to Partners is deductible if conditions of sec. 184 & 40(b) are satisfied Make Adjustments of brought forward losses and obtain Gross Total Income

STEP 3

STEP 4

Make deduction and obtain Net Income

Steps for Computation of Taxable Income

Find out the Firms Income under Different Heads of Income, ignoring the Prescribed Exemptions. The Heads of Income are:
Income from House Property Profit and Gains of Business or Profession Capital Gains Income from other sources including interest on securities, winning from Lotteries, races, puzzles, etc. (Salary Income Head is not included)

Taxation Aspect: LLPs In India

The Payment of Remuneration and Interest to Partners is deductible if conditions of Section 184 and section 40(b) of the Income Tax Act are satisfied. Any Salary, Bonus, Commission or Remuneration which is due to or received by Partners is Allowed as a deduction from Income of the Partnership Firm and the same is Taxable in the hands of the Partners

Taxation Aspect: LLPs In India

Steps for Computation of Taxable Income Contd
Make Adjustment on Account of brought forward Losses/ disallowances of In Interests, Salary etc. paid by firm to its Partners. The Total Income so Obtained is the Gross Total Income
From the Gross Total Income, make the Prescribed Deductions and the balancing amount is the Net Income of the Firm.

Taxation Aspect: LLPs In India

Assessment of Partners of LLP
Sec 10(2A) of the Income Tax Act, exempts the Share Income of the Partner from the LLP in the hands of the Partner, i.e. it is not included in Computing his Total Income If Conditions of Section 184 and 40(b) of the Act are satisfied, then any Interest, Salary, Bonus, Commission or Remuneration paid/payable by the LLP to the Partners is Taxable in the hands of Partners; to the extent these are allowed as deduction in the hands of the LLP

Taxation Aspect: LLPs In India

Assessment of Partners of LLP
Remuneration to Partner not to be treated as Salary as the Provision of Tax Deduction at Source(TDS) for Salary (Section 192 is not applicable to the Remuneration received by the Partner from the LLP Remuneration and Interest received by a Partner from his LLP shall be chargeable as Profits and gains of Business U/s 28(v) of the Income Tax Act

Taxation Aspect: LLPs In India

Presumptive Taxation

LLPS ARE NOT COVERED UNDER THE PRESUMPTIVE TAXATION AS IT HAS BEEN EXCLUDED FROM THE DEFINITION OF THE ELIGIBLE ASSESSEE

Eligible Assessee

(i) An Individual, Hindu Undivided Family or a Partnership Firm, who is a Resident, but not a Limited Liability Partnership Firm as defined under Clause (n) of Sub Section 2 of the LLP Act, 2008; and

(ii)Who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any Provisions of Chapter VIA under the Heading CDeduction in respect of certain Incomes in the relevant A.Y.

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP

As per the Union Budget 2010-11, Conversion of a Private Company or Unlisted Public company into an LLP to be Exempt from Capital Gain Tax if the following conditions are satisfied:
The Total Sales, Turnover or Gross Receipts of the Company do not exceed Rs. 60 Lacs in any of the immediate three Previous years

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP
All Assets & Liabilities of the Company become the Assets and Liabilities of the LLP All The Shareholders of the company become Partners of the LLP in the same Proportion as their Shareholding in the company

The Shareholders shall receive Share in Profit and Capital Contribution in the LLP

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP
The Erstwhile Shareholders of the Company continue to receive a minimum of 50% of the Profits of LLP for a period of 5 yrs from the date of conversion

No amount is paid, either directly or indirectly, to any partner out of Accumulated Profit of the company for a period of 3 yrs from the date of conversion

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP

If the Stipulated Conditions are not Complied with:

The Profit or Gains on Conversion and Benefits of Losses set off by LLP to be taxable for LLP if the conditions are not complied with The Accumulated Loss and Unabsorbed Depreciation of the Company will be deemed to be Income of the LLP if the conditions are not complied with

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP

The Cost of Acquisition of Capital Assets for the LLP is to be the Cost to the Company plus the Cost of Improvement, if any, by the LLP or the Company
The Credit in respect of MAT Paid by the Company is not available to the LLP

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP

The Actual Cost of Block of Assets for the LLP is to be the Written Down Value for the Company on the Date of Conversion. The Depreciation on Capital Assets is to Apportioned between the Company and LLP as per the number of days in use

Taxation Aspect: LLPs In India

Conversion of A Company into an LLP

The Five Year Amortization for Expenditure on Voluntary Retirement Scheme eligible to the Company to be Claimed by the LLP for Unamortized Installments

BRIEF ANALYSIS:
Recent Amendments Limited Liability Partnership

Brief Analysis
THERE WILL BE AN Increase in Cost of Conversion for Companies that have Capital Assets including Immovable Property

MAT Credit not being made available to LLP is not justified

Under Indirect Taxes, carry forward on CENVAT or set-off not consumed may not be available

Brief Analysis
Conversion of Companies involves other issues such as Stamp Duty, State Taxes, Service Tax, IEC Code, Bank Borrowings, Central Excise etc.

The Limit of turnover being within the limit of Rs. 60 Lacs for the past 3 years will disentitle a number of Companies from exemption of Capital Gain Tax

Brief Analysis
The Proposed Amendment will be useful for those companies which are Investment companies or which have Income from House Property, Capital Gains and Income from other sources irrespective of the amount of such Income can take advantage of conversion