Workshop on
Limited Liability Partnerships
LLP Tax issues
-Need for simple structure
Nidhi Maheshwari March 2012
Taxation of LLP in India
A brief overview
Indian tax law recognizes following entities as taxable persons
Company, Partnership firm, Association of Persons/Body of Individuals
Finance (No 2) Act, 2009 (FA 2009) Amendment - LLP to be taxed on the same basis as a general partnership (firm)
Firm definition amended to include an LLP Partner definition includes a partner of an LLP Partnership includes an LLP
Global approaches of LLP taxation Fiscally Transparent Entity e.g. UK, Russia etc. Separate Judicial Entity e.g. Belgium, Australia
Implications of taxation as firm
LLP is subject to tax in respect of its income Share from income from LLP is exempt in hands of partners
Residential status of LLP determined based on control and management test
LLP resident in India even if control & management of its affairs is partly in India
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Advantages of being taxed as a firm
Lower tax rate of 30.90% vis--vis 32.45% No DDT on its profit distributions Reconstitution of partnership No impact on carry forward of losses No deemed dividend taxation Wealth tax provision not applicable Remuneration paid to working partners deductible expenditure Interest on capital contribution deductible expenditure No MAT LLPs taxable under AMT
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Disadvantages of being taxed as a firm
May not qualify for tax holiday/incentive provisions when restricted to Company Certain presumptive tax provisions can be invoked only by a foreign company and do not apply to an LLP
Illustrative comparison between Company and LLP Incentives under Income-tax Act, 1961
200% weighted deduction on expenditure on in-house scientific research Investment linked tax deduction for laying / operating crosscountry natural gas or crude or petroleum oil pipeline network Profit linked tax deduction for developing, operating and maintaining infrastructure facility, business of ship, hotel* Tax neutral amalgamation / demerger of Companies possible Expenditure on amalgamation / demerger of Companies to be amortised in 5 years Carry forward of unabsorbed losses allowed in case of amalgamation / demerger of Companies meeting specified conditions
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Company
LLP
Other tax implications
Capital gains payable by the partner on transfer of capital asset Value recorded in the books of LLP will be sale consideration
Contribution to LLP
Distribution to Partners
Treated as generating taxable capital gains in the hands of the LLP FMV of property deemed to be sale consideration
Sale of LLP interest Associated Enterprise
LLP interest to be regarded as a capital asset Capital gains tax on transfer
10% or more interest in LLP
Valuation of LLP interest???
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Conversion to LLP
The Finance Act 2010 provided for tax neutrality on conversion of a private company or unlisted public company to a LLP
in the hands of company on transfer of a capital asset or intangible asset in the hands of shareholder on transfer of shares of private company or unlisted public company
Turnover/Total sales/gross receipts < INR 60 lakhs 50% of LLP profits to erstwhile shareholders for 5 years Conditions Transfer of all assets and liabilities to LLP Shareholding to be equal to profit sharing ratio
No paym e partners nt to fr accumu om lated profits for 3 years
cons No id partn eration to e rs e xc profi t sha ept r capit e & contr al ibutio n
Transfer of capital assets on transfer exempt subject to the following conditions
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Conversion to LLP
Credit for MAT paid by predecessor company not available to LLP
Cost of acquisition of right in LLP to be deemed to be the cost of acquisition of shares of predecessor company
Key Challenges
Actual cost of block of asset to be the WDV of the predecessor company
Depreciation to be apportioned between predecessor company and LLP in the ratio of number of days for which the asset used by each entity Carry forward of accumulated losses and unabsorbed deprecation of predecessor company
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
LLP taxation cross border issues
1
Entity Classification Would Would an an LLP LLP be be recognized recognized as as a a body body corporate corporate or or fiscally fiscally transparent transparent by by other other countries? countries? Whether Whether LLP LLP is is person person and and tax tax resident resident ? ? Will Will Indian Indian LLP LLP be be entitled entitled to to the the benefits benefits of of DTAA DTAA ? ? Who Who would would be be eligible eligible for for treaty treaty benefits benefits the the entity entity or or its its members? members?
How How would would the the nature nature of of income income derived derived by by the the partners partners be be characterised? characterised? Participation Participation exemption exemption in in home home country country Year Year of of Taxability Taxability -Credit -Credit to to Capital Capital Account Account or or on on Distribution? Distribution? Credit Credit for for underlying underlying taxes taxes paid paid by by LLP LLP in in India? India?
Taxation of profit Share of foreign partner
Interest Taxation of foreign partner
Income-tax Income-tax Act: Act: Business Business Income Income for for partner partner and and deduction deduction for for LLP LLP DTAA: DTAA: -- withholding withholding tax tax if if no no debt debt incurred incurred or or money money borrowed borrowed ? ? -- double double dip dip (if (if participation participation exemption exemption in in home home country) country) ? ?
Exit Tax
Similar Similar to to capital capital gain gain tax tax in in the the case case of of Companies Companies
7
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
LLP Taxation : Key Imperatives
Assessing need and fit for LLP Devising entry strategy for investment in LLP from a tax perspective
Evaluating overseas tax implications for LLP and its partners
Structuring tax efficient migration from company to LLP
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Questions
Answers
2011KPMG, an Indian Partnership and a member firm of the KPMG network of independent member 2012 firms KPMG, affiliated an Indian with KPMG Partnership International and a member Cooperative firm of (KPMG the KPMG International), network of independent a Swiss entity. member All rights firms reserved. affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Thank You
2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International").
Company vs. LLP A Comparison
Particulars
Profit before tax Less: Income-tax Profit after tax Less: Transfer to Reserves Less: Dividend distribution tax @16.22% Dividends / Profits available for distribution Total Tax
Back
Company
100.00 32.45 67.55 6.75 8.50 52.30 40.95
LLP
100.00 30.90 69.10 69.10 30.90
Ben ef 10.0 it of 5%
o efit Ben .8% 6 1 f
LLP Advantage substantial tax savings / increase in distributable profits
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
11
Company vs. LLP MAT vs. AMT
Particulars Profit Before Tax Less: Tax Adjustments / deduction Taxable Income Income tax on (B) Book Profit for MAT Income for AMT MAT on (A) AMT* on (B) Tax (higher of (C) and (D)) Profit after tax (A E) (E) (D) (B) (C) (A) Company 100 50 50 16.23 100 -20.01 20.01 79.99 LLP 100 50 50 15.45 -50 9.53 15.45 84.55
* AMT calculated on tax profits - LLPs having substantial book losses and unabsorbed depreciation may be deprived of the tax benefits in the year
Back
2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
12
