Planning to build a business with like-minded entrepreneurs or professionals in the Philippines? Forming a partnership — whether for a commercial venture or among professionals in the same field — can be a strategic way to combine resources, skills, and shared goals.
Before you move forward, it is very important that you understand how partnerships are taxed in the Philippines. Tax rules vary depending on the type of partnership, so taking time to research applicable tax treatment can help you stay compliant and avoid costly surprises down the road. In this blog, we’ll look into the taxation for partnerships and general professional partnerships (GPPs) in the Philippines.
What is a Partnership Business?
Generally, a partnership is a business structure that constitutes a legal agreement between two or more individuals (or even corporate entities), known as partners, to collectively contribute financial, material, and labor assets into a shared pool for the business establishment and operations, distributing and sharing the profits and losses among them.
General Tax Rules and Rates for Partnerships in the Philippines
In the Philippines, corporate income taxes are imposed on the domestic corporations in respect of income earned anywhere in the world. In contrast, non-resident foreign corporations are subject to income tax only on their Philippine-sourced income.
From a tax perspective, partnerships, no matter how created or organized, are generally treated as corporations for Philippine income tax purposes. However, exempted from this rule are general professional partnerships (GPPs) and joint ventures or consortiums formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the government (Section 22, NIRC).
Corporate Income Tax (CIT)
Corporations, including partnerships, are generally subject to a 25% income tax (effective July 1, 2020, as amended by Section 6 of the CREATE Law) on taxable income from all sources, with a minimum corporate income tax (MCIT) of 2%. However, a lower 20% rate may apply to those whose net taxable income does not exceed PHP 5 million and whose total assets do not exceed PHP 100 million (excluding land). Registered business enterprises under the enhanced deductions regime are also taxed at 20% on income from registered activities.
Value-Added Tax (VAT)
In addition to income tax, value-added tax (VAT) is imposed by the national government at the general rate of 12% of gross sales of goods or properties, gross receipts on sale of services, and imports. Certain sales and imports, however, are subject to either zero-percent VAT or are VAT exempt. Corporations and partnerships with annual sales over PHP 3 million require VAT registration.
Excise Tax
Certain goods manufactured or produced (e.g., distilled spirits, tobacco products, mineral products, petroleum products, sweetened beverages) in the Philippines for domestic sale or consumption or for any other disposition, or that are imported, are subject to excise tax. Under the TRAIN Law, for example, gasoline carries an excise tax of PHP 10 per liter, while sweetened beverages are taxed at PHP 6 to PHP 12 per liter depending on the type of the sweetener (e.g., purely caloric sweeteners or high fructose corn syrup).
Local Business Tax
Local government units (LGUs), i.e., provinces, cities, and municipalities, also impose local business taxes and fees on corporations, partnerships, and individuals residing or carrying on business within their jurisdiction. Tax rates vary based on the respective local tax codes, and are typically fixed amounts or percentages of gross sales or receipts, which often range from 0.5% to 3%, as authorized by the Local Government Code (LGC) of 1991 (R.A. 7160), as amended.
Other Passive Income Taxes
Domestic corporations and partnerships in the Philippines are also subject to various final taxes: a 20% rate on interest from deposits, deposit substitutes, trust funds, and royalties; 15% on interest from expanded foreign currency deposits and capital gains from the sale of non-traded shares; 10% on certain foreign currency loan interest; and 6% on capital gains from the sale of non-business land or buildings.
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General Professional Partnerships (GPPs): A Different Tax Approach
To reiterate, the rule where partnerships take the same taxation as corporations does not apply to all forms of partnerships. Exempted from this are GPPs and joint ventures or consortiums formed for construction or energy projects under government service contracts.
By definition, a General Professional Partnership (GPP) is a type of partnership formed by two or more persons for the sole purpose of exercising their common profession (e.g., medicine, law, architecture, etc.), and in which no part of the income is derived from engaging in any trade or business.
Tax Treatment of Income Payments to GPPs and Partners
A general professional partnership (GPP) is not taxable for income tax purposes because it is only acting as a “pass-through” entity. Under Section 26 of the National Internal Revenue Code (NIRC) of 1997, income payments made to a GPP for professional services are not subject to income or withholding tax at the partnership level.
The individual partners are the ones liable for income tax on their distributive shares. Thus, they must report their distributive share of partnership net income as gross income. For purposes of computing the distributive share of the partners, the net income of the GPP is computed in the same manner as a corporation.
Itemized Deductions and Optional Standard Deduction (OSD)
GPPs may claim either the itemized deductions allowed under Section 34 of the NIRC or opt to avail of the Optional Standard Deduction (OSD) allowed for corporations in claiming the deductions in an amount not exceeding 40% of their gross income.
Consequently, partners comprising the GPP can no longer claim further deduction from their distributive share in the net income of the GPP and are not allowed to avail of the 8% income tax rate option since their distributive share from the GPP is already net of cost and expenses.
Withholding Tax on Payments to Partners
Pursuant to Section 2.57.2 (H) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-03, payments such as drawings, advances, sharings, allowances, or stipends made by the GPPs to partners are subject to Creditable Withholding Tax (CWT). The withholding tax rate is at 15% if annual payments to a partner exceed PHP 720,000, and lower at 10%, if otherwise (R.R. 11-2018; TRAIN Law).
Local Business and Professional Taxes
Partners of general professional partnerships (GPPs) are subject to taxes in their individual capacities. Provided that they are paying such professional taxes, they are no longer subject to local business taxes.
Other Passive Income Taxes
Tax exemptions of GPPs pertain only to their ordinary income. Thus, they are still subject to final withholding taxes on their other passive incomes, as well as capital gains tax (CGT).
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