CHAPTER 10 TAXATION OF PARTNERSHIPS
Partnership is a contract whereby 2 or more persons bind themselves to contribute money, property, or
industry to a common fund with the intention to divide profits among themselves.
Cases where a public instrument is necessary to be recorded in the Office of the SEC:
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Immovable property/real rights are contributed
Capital of P3,000 or more (recorded in the Office of the SEC)
Kinds of Partnership
a. Based on liability of partners
1. General – general partners whose liability for partnership obligations is not limited to their
contributions but extends to their separate property
2. Limited – formed by 1 or more general and limited partners; liability of limited partners is
limited only to the extent of their contributions in the partnership
b. Based on its nature/purposes
1. GPP
2. Business partnership/general co-partnership – may be GP/LP
Classification for Tax Purposes
A. Partnership not subject to income tax
1. GPP – for the sole purpose of exercising common profession
 Income payments to them are exempt from the application of the expanded
withholding tax system because they have no income tax against which the withheld
tax will be credited.
 Is subject to applicable business tax
2. A joint venture/consortium formed for the purpose of
a. Undertaking construction projects
1. Exemption was given to assist local contractors in achieving competitiveness
with foreign contractors.
2. Exempt from IT when the ff. conditions are all complied with:
a. It should be for the undertaking of a construction project.
b. It should involve the joining or pooling of resources by licensed local
contractors (licensed by the PCAB of DTI)
c. JV itself must be licensed by the PCAB of DTI
d. Local contractors are engaged in the construction business
3. JVs involving foreign contractors. Provided that:
o Foreign contractor is covered by a special license as a contractor by the
PCAB of the DTI
o Construction project is certified by the appropriate govt. office that the
project is a foreign-financed/internationally-funded project and that
international bidding is allowed under the Bilateral Agreement (entered by
the PH govt. and the foreign/international financing institution)
NOTES:
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Is subject to applicable business tax
A JV formed for the purpose of undertaking construction of school classrooms is not
considered a taxable corporation.
Mere suppliers of goods, services or capital to a construction project are not taxexempt.
If requirements for exemption are not followed, such is subject to 2% CWT.
b. Engaging in petroleum, coal, geothermal, and other energy operations pursuant to an
operating/consortium agreement under a service contract with the govt.
 The members to a tax-exempt JV shall each be responsible in reporting and paying the
appropriate IT on their respective shares in the profit of the JV
Filing of Return
Still required to file annual ITR for the purpose of furnishing info. as to the share each partner shall
report and include in his personal ITR.
Tax liability of Partners in Exempt Partnership
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Partners engaging in business in a GPP shall be liable for IT only in their separate and
individual capacities.
Each partner shall report as GI his distributive share, actually/constructively received, in
the NI of the partnership.
Where it is at loss, the loss will be divided among partners in the same proportion as the
NI. Each partner may take up his share in the loss in his ITR.
The share of a partner shall be subject to CWT of:
o 10% - if P720,000 or less
o 15% - exceeds P720,000
NI of a partnership shall be computed in the same manner as a corporation.
The distributable NI may be determined by claiming either Itemized Deductions or OSD:
1. The partners comprising GPP can no longer claim further deductions.
Deduction can be claimed from other income derived from
trade/business either ID/OSD.
2. Partners of a GPP are not allowed to avail the 8% ITR option since their
distributive share is already net of costs and expenses.
B. Partnership subject to income tax – all other partnerships except those mentioned above.
Filing of Tax Return
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Required to file quarterly ITR and an annual return
A business partnership is subject to IT as a corporation.
Tax Liability of Partners in a Taxable Partnerships
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Share in the distributable after-tax NI of a partnership – subject to 10% FT
NOTES:
1. Share of a non-resident alien engaged in trade/business (except GPP) –
subject to 20% FT
2. Share of a non-resident alien not engaged in trade/business (except GPP) –
subject to 25% FT
3. The share of a partner in the NI of a partnership subject to IT is not returnable
in the partner’s personal ITR. Instead, it is subject to FT on dividends. Unlike
partners in GPP, they shall report such share as GI.
Co-ownership
May arise in the ff. cases:
1. When 2 or more heirs/beneficiaries inherit an undivided property from a decedent
2. When a donor makes a gift of an undivided property to 2 or more donees.
Generally, activities are limited to:
1. Preservation of the co-ownership property
2. Collection of the income therefrom
In such case, it is not subject to IT.
Tax liability of co-owners in exempt co-ownership
Liable for IT only in their separate/individual capacities
When co-ownership is subject to IT
When the income of the co-ownership is invested by the co-owners in business/other income-producing
properties (in effect constituted themselves into a business partnership)
Undivided inherited property
When such remain undivided for more than 10 years and no attempt was ever made to divide among
the co-heirs/no administration proceedings/not held in trust, the property should be considered as
owned by an unregistered partnership and income derived from such shall be subject to IT.