Ireland Publishes New Guidance on Partnerships

Irish Revenue issued a new Tax and Duty Manual “Taxation of Partnerships, Part 43-00-03”, which serves as an addition to Part 43 of the Taxes Consolidation Act 1997. The Manual outlines different types of partnerships, together with the main principles of their taxation and administration. Below are the key points of the guidance.

Definition of a Partnership

In Irish law, a partnership is defined as the relation which subsists between persons carrying on a business in common with a view to profit. As an unincorporated body of persons, it does not have a separate legal personality. It may an ongoing venture, a single venture or a series of unrelated ventures, but not the passive ownership of property.

Types of Partnerships

1) A general partnership is governed by the Partnership Act 1890. It does not have a restriction on the number of partners.

2) A limited partnership, governed by the Limited Partnerships Act 1907, is constituted pursuant to a limited partnership agreement entered into by one or more general partners and a number of limited partners. It may consist of no more than 20 persons, although this limit can be raised to 50 where the limited partnership is formed for the provision of investment and loan finance and ancillary facilities. There must be at least one general partner with unlimited liability. Limited partners must make a capital contribution to the partnership and their liability is limited up to that amount. Limited partners may not be a part of the management of the firm; if they opt to do so, they become a general partner. A limited partnership does not have a separate legal personality and is transparent for tax purposes. Limited partnerships must be registered with the CRO and are not subject to Central Bank regulation.

3) An Investment Limited Partnership, governed by the Investment Limited Partnership Act 1994, is created for investment in a collective investment fund. It is constituted pursuant to a limited partnership agreement entered into by one or more general partners and a number of limited partners. However, there is no limit on the number of limited partners. An ILP must be authorized by the Central Bank of Ireland and is a regulated fund vehicle.

Types of Partners

1) A general partner is the most common arrangement in a partnership. General partners have joint and several liability and may be entitled to a share of the profits or losses which are taxable in their own name.

2) A salaried partner is an employee and not partner within the meaning of the 1890 Act, whose salary should be taxed through PAYE.

3) A fixed share partner is a partner within the meaning of the 1890 Act and is taxed on their share of the profits or losses of the partnership.

4) A limited partner is a partner in a limited partnership under the 1907 Act who is not the general or active partner. The limited partner is not entitled to take any role in the management of the firm. The limited partner’s liability is limited to their capital contribution. A limited partner may become a general partner, and vice versa.

Formation of a Partnership and Partnership Agreements

In general, there is no legal requirement for partnerships to have a written agreement. In the absence of a legal agreement, section 24 of the 1890 Act instills some common terms that shall apply to the partnership, including:

– All profits are shared equally amongst partners and all partners must contribute to losses sustained by the partnership.

– Interest is payable to a partner who advances capital beyond the agreed subscription amount.

– Partnership books are to be kept at the place of business of the partnership and each partner has the right to inspect them.

A partnership may be governed by a written agreement under section 24 of the 1890 Act. However, section 19 of that Act also provides that both the statutory terms and a partnership agreement can be changed by consent of all partners (which may not be obligatorily express, but implied).

Property of Partnerships

Under section 209 of the 1890 Act, property brought in to or acquired by the partnership is partnership property and must be applied exclusively for the partnership business. It is presumed that:

i. property used by the partnership is partnership property, and

ii. property bought from partnership funds is partnership property,

unless it can be demonstrated otherwise.

Any property acquired or held by a partnership is held by the partners as tenants in common. They do not have direct ownership of the individual assets but instead, by virtue of sections 39 and 44 of the 1890 Act, they have a right to a proportion of the value of the partnership assets in line with their partnership share on dissolution.

Taxation of Partnerships

Limited partnerships, investment limited partnerships and general partnerships are generally treated the same for direct tax purposes. They are considered “tax transparent” for Irish direct tax purposes; therefore, the partnership is not subject to Irish profit tax on income or gains derived from its investments or on its net asset value. Instead, the partners themselves, rather than the partnership, are subject to tax on their share of the underlying income and gains of the partnership.

Calculation of profits. According to section 1008(3)(a)(iii) Taxes Consolidation Act (TCA) 1997, the full adjusted profits or losses of a partnership trade should be determined on the basis that the trade had been carried on by one and the same person. Therefore, the same addbacks/restrictions that apply for sole traders will apply to a partnership in arriving at the tax adjusted profit/loss.

The partnership agreement will set out the profit-sharing ratio to be used to apportion profits/losses between the individual partners. If there is no partnership agreement, the profits/losses are shared equally. The partners cannot deduct any personal expenses from their partnership profit allocation in their tax returns.

Capital allowances. Capital allowances of the partnership are known as a joint allowance. Each partner is entitled to their “appropriate share” of the capital allowances of the partnership trade, which is determined on the same basis as the profit-sharing ratio (section 1010(7) TCA 1997). Any balancing charge, referred to as a joint charge, is shared in the same manner. The unused allowances of all partners are aggregated, carried forward and allocated amongst all partners in future years in accordance with their agreed profit-sharing ratios.

Sole trader becoming a partner. When a sole trader also becomes a partner, the two businesses are treated as separate and distinct. The partner can only trade on behalf of the partnership when the partner represents that they are trading on behalf of that partnership. Any trade that is conducted in the partner’s own name only is part of a sole trader, and any income of a sole trader cannot be assigned to a partnership (except for medical partnerships).

Administration of Partnerships

Filing returns. Partnerships must file a Form 1 (Firms), which sets out the profits or losses of the partnership, any gains and any capital allowances, as well as each partner’s share of profits.

Appeals. If an inspector of the Tax Appeals Commission makes a determination as regards the total profits of the partnership and/or the joint capital allowances, they must give notice of same in writing to the precedent partner. Any partner may appeal the determination to the Tax Appeals Commission within 30 days of the date of the notice of determination.

Penalties. If the precedent partner fails to file the Form 1 (Firms), they may be subject to a fixed penalty in accordance with section 1052 TCA 1997. Individual partners are each responsible for their own tax returns, and should they fail to meet their obligations, or not discharge those obligations in the proper manner, they may be individually subject to tax, interest and penalties.

Tax and Duty Manual “Taxation of Partnerships, Part 43-00-03”Irish Revenue issued a new Tax and Duty Manual “Taxation of Partnerships, Part 43-00-03”, which serves as an addition to Part 43 of the Taxes Consolidation Act 1997. The Manual outlines different types of partnerships, together with the main principles of their taxation and administration. Below are the key points of the guidance.

Definition of a Partnership

In Irish law, a partnership is defined as the relation which subsists between persons carrying on a business in common with a view to profit. As an unincorporated body of persons, it does not have a separate legal personality. It may an ongoing venture, a single venture or a series of unrelated ventures, but not the passive ownership of property.

Types of Partnerships

1) A general partnership is governed by the Partnership Act 1890. It does not have a restriction on the number of partners.

2) A limited partnership, governed by the Limited Partnerships Act 1907, is constituted pursuant to a limited partnership agreement entered into by one or more general partners and a number of limited partners. It may consist of no more than 20 persons, although this limit can be raised to 50 where the limited partnership is formed for the provision of investment and loan finance and ancillary facilities. There must be at least one general partner with unlimited liability. Limited partners must make a capital contribution to the partnership and their liability is limited up to that amount. Limited partners may not be a part of the management of the firm; if they opt to do so, they become a general partner. A limited partnership does not have a separate legal personality and is transparent for tax purposes. Limited partnerships must be registered with the CRO and are not subject to Central Bank regulation.

3) An Investment Limited Partnership, governed by the Investment Limited Partnership Act 1994, is created for investment in a collective investment fund. It is constituted pursuant to a limited partnership agreement entered into by one or more general partners and a number of limited partners. However, there is no limit on the number of limited partners. An ILP must be authorized by the Central Bank of Ireland and is a regulated fund vehicle.

Types of Partners

1) A general partner is the most common arrangement in a partnership. General partners have joint and several liability and may be entitled to a share of the profits or losses which are taxable in their own name.

2) A salaried partner is an employee and not partner within the meaning of the 1890 Act, whose salary should be taxed through PAYE.

3) A fixed share partner is a partner within the meaning of the 1890 Act and is taxed on their share of the profits or losses of the partnership.

4) A limited partner is a partner in a limited partnership under the 1907 Act who is not the general or active partner. The limited partner is not entitled to take any role in the management of the firm. The limited partner’s liability is limited to their capital contribution. A limited partner may become a general partner, and vice versa.

Formation of a Partnership and Partnership Agreements

In general, there is no legal requirement for partnerships to have a written agreement. In the absence of a legal agreement, section 24 of the 1890 Act instills some common terms that shall apply to the partnership, including:

– All profits are shared equally amongst partners and all partners must contribute to losses sustained by the partnership.

– Interest is payable to a partner who advances capital beyond the agreed subscription amount.

– Partnership books are to be kept at the place of business of the partnership and each partner has the right to inspect them.

A partnership may be governed by a written agreement under section 24 of the 1890 Act. However, section 19 of that Act also provides that both the statutory terms and a partnership agreement can be changed by consent of all partners (which may not be obligatorily express, but implied).

Property of Partnerships

Under section 209 of the 1890 Act, property brought in to or acquired by the partnership is partnership property and must be applied exclusively for the partnership business. It is presumed that:

i. property used by the partnership is partnership property, and

ii. property bought from partnership funds is partnership property,

unless it can be demonstrated otherwise.

Any property acquired or held by a partnership is held by the partners as tenants in common. They do not have direct ownership of the individual assets but instead, by virtue of sections 39 and 44 of the 1890 Act, they have a right to a proportion of the value of the partnership assets in line with their partnership share on dissolution.

Taxation of Partnerships

Limited partnerships, investment limited partnerships and general partnerships are generally treated the same for direct tax purposes. They are considered “tax transparent” for Irish direct tax purposes; therefore, the partnership is not subject to Irish profit tax on income or gains derived from its investments or on its net asset value. Instead, the partners themselves, rather than the partnership, are subject to tax on their share of the underlying income and gains of the partnership.

Calculation of profits. According to section 1008(3)(a)(iii) Taxes Consolidation Act (TCA) 1997, the full adjusted profits or losses of a partnership trade should be determined on the basis that the trade had been carried on by one and the same person. Therefore, the same addbacks/restrictions that apply for sole traders will apply to a partnership in arriving at the tax adjusted profit/loss.

The partnership agreement will set out the profit-sharing ratio to be used to apportion profits/losses between the individual partners. If there is no partnership agreement, the profits/losses are shared equally. The partners cannot deduct any personal expenses from their partnership profit allocation in their tax returns.

Capital allowances. Capital allowances of the partnership are known as a joint allowance. Each partner is entitled to their “appropriate share” of the capital allowances of the partnership trade, which is determined on the same basis as the profit-sharing ratio (section 1010(7) TCA 1997). Any balancing charge, referred to as a joint charge, is shared in the same manner. The unused allowances of all partners are aggregated, carried forward and allocated amongst all partners in future years in accordance with their agreed profit-sharing ratios.

Sole trader becoming a partner. When a sole trader also becomes a partner, the two businesses are treated as separate and distinct. The partner can only trade on behalf of the partnership when the partner represents that they are trading on behalf of that partnership. Any trade that is conducted in the partner’s own name only is part of a sole trader, and any income of a sole trader cannot be assigned to a partnership (except for medical partnerships).

Administration of Partnerships

Filing returns. Partnerships must file a Form 1 (Firms), which sets out the profits or losses of the partnership, any gains and any capital allowances, as well as each partner’s share of profits.

Appeals. If an inspector of the Tax Appeals Commission makes a determination as regards the total profits of the partnership and/or the joint capital allowances, they must give notice of same in writing to the precedent partner. Any partner may appeal the determination to the Tax Appeals Commission within 30 days of the date of the notice of determination.

Penalties. If the precedent partner fails to file the Form 1 (Firms), they may be subject to a fixed penalty in accordance with section 1052 TCA 1997. Individual partners are each responsible for their own tax returns, and should they fail to meet their obligations, or not discharge those obligations in the proper manner, they may be individually subject to tax, interest and penalties.

Tax and Duty Manual “Taxation of Partnerships, Part 43-00-03”