Taxation of LLP. Nihar Jambusaria.

Transcription

1 Taxation of LLP Nihar Jambusaria

2 LLP Conversion V/s Firm of Firm Company V/s Company into into LLP and LLP and tax issues tax issues Topics for Discussion Formation of LLP in India Formation of LLP in India LLP V/s Firm V/s Company Conversion of Firm into LLP and tax issues Conversion of Company into LLP and tax issues

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4 The Government introduced Limited Liability Bill in 2006 in the Rajya Sabha on 15th December 2006 It was later referred to the Department Related Parliamentary Standing Committee on Finance for Examination and report Considering the recommendations, the Government finalized LLP Bill, 2008 and the bill was introduced in Rajya Sabha on 21st October, Bill was passed by the Rajya Sabha on 24th October 2008 Bill was passed by Lok Sabha on 12 December 2008 President gave assent to this bill on 7th January 2009 LLP Act, 2008 has come into force from LLP Rules 2009 and forms have been notified w.e.f

5 Merits of LLP Separate legal entity & body corporate; Low compliance burden & cost (more flexibility than company); Limited Liability of partners except in fraud; For Business Purposes partners are agent of LLP, not of other Partners; LLP is liable to the extent of its assets; Rights of partners can be assigned to a third party;

6 Contd.. No Minimum Contribution and withdrawal of capital with the decision of partners; Easy to exit/ winding up; Allows Multi-disciplinary professionals combination which provides; a. Level playing field against their international professional firm; b. Availability of solvency position in public domain increases the credit worthiness as compared to unregistered entity; and c. Taxation benefits as compared to company.

7 Formation of LLP Deciding the Partners & Designated Partners Obtaining DIN (DIN-1) for Designated Partner Identification Number Reservation of Name for LLP (Form-1) Filing of Incorporation Document (Form-2) + Form-17/18 in case of conversion. Certificate of Incorporation/ conversion. Filing of LLP Agreement (Form-3) Filing of Consent of partners/designated partners (Form-4)

8 Comparison PARTICULARS IN USA IN INDIA TYPE OF ENTITY PASS THROUGH ENTITY OR TRANSPARENT ENTITY TAXABALE ENTITY TAXABILITY OF PARTNERS YES NO TAXABILITY OF PARTNERSHIP NOT TAXABLE TAXABLE IN THE HANDS OF THE FIRM RETURN OF INCOME TO BE FILED FORM 1065 ITR 5

9 Annual Compliance of LLP Maintenance of proper Books of Account on cash basis or on accrual basis and according to the Double Entry System of Accounting. Maintained at registered office and to be preserved for at least 8 years. Audit is compulsory if turnover exceeds Rs.40 lakhs or contribution of LLP exceeds Rs.25 lakh (Rule 24 of LLP Rules, 2009). Form-11 (Filing of Annual Return) within 60 Days of closure of Financial Year. Form-8 (Filing of Statements of Accounts & Solvency) Within 30 days from the end of 6 months from the closure of Financial Year.

10 LLP v/s FIRM V/s Company

11 Particulars Partnership Limited Liability Partnership Company Legal Entity No separate entity Separate entity Separate Legal Entity Perpetual Succession Liability Not Applicable Liability of the partners is joint and several and it is unlimited Applicable Liability of partners is limited to their agreed contribution Compliance Low Moderate High Applicable Limited to the face value of shares they subscribed for

12 Particulars Partnership Limited Liability Partnership Company Taxation Lower Lower Higher Dividend Distribution tax Not Applicable Not Applicable Applicable NBFC Not eligible Not eligible Eligible Regulator Governance structure regulated by partnership deed. Governance Structure regulated by Agreement Governance Structure Regulated by the Companies Act, 2013

13 Particulars Partnership Limited Liability Partnership Company Partners limit Minimum 2 partners maximum 20 partners Information at Public Domain Minimum 2 partners maximum no limit NIL Lower Higher Minimum 2 shareholders maximum 50 (Pvt. Co); & Minimum 7 maximum no limit (public co.)

14 Click to edit Master text styles Second level Third level Fourth level Fifth level

15 RESTRUCTURING OF LLP s LLP Act - detailed framework for Compromise or arrangements of LLPs similar to S. 391 S. 394 in case of companies Types: Merger of 2 or more LLP s Compromise or arrangement between LLP and partners LLP Converted into Firm - considered later LLP Converted to Company - considered later Compromise or arrangements with creditors Demerger of LLP

16 CONVERSION OF A FIRM / PRIVATE LIMITED COMPANY / UNLISTED COMPANY TO LLP From the date of conversion : LLP name specified in the certificate of Registration. All the tangible and Intangible property of the Firm or Private Limited Company or Unlisted Company shall be transferred to the LLP and this property will become property of the LLP. Like wise all liabilities of these converted entities shall be the liability of the LLP. The Firm or the Company shall be deemed to be dissolved and removed from the records of the Registrar of Firms or Registrar of Companies.

17 MODES OF CONVERSION TO LLP Under the LLP Act OR Firm to LLP S. 55 read with 2nd Schedule Private Limited Company to LLP S. 56 read with 3rd Schedule Unlisted Public Company to LLP S. 57 read with 4th Schedule Compliant with provisions of S. 47(xiiib) Does not comply with S. 47(xiiib) Other Modes Commence business in LLP and close down business in Firm / Company Full or partial transfer of assets / business to LLP

18 Conversion of Company into LLP and tax issues

19 Capital Gains The Finance Act, 2010 has inserted a new clause (xiii b) in Section 47 which provides that any transfer of a Capital Asset or Intangible asset to LLP or any transfer of share or shares held in the company by a shareholder on conversion of a private company or unlisted company into an LLP in accordance with sections 56 & 57 of the limited liability partnership act, 2008 shall not be regarded as a transfer for the purpose of the capital gains tax, subject to the following conditions :

20 Contd.. The Conditions are: 1. All assets and liabilities of the company immediately before the conversion become the assets and liabilities of the LLP; 2. All the shareholders of the company immediately before the conversion become partners of the LLP. Their capital contribution and profit sharing ratio should be in the same proportion as their shareholding in the company as on the date of the conversion; 3. The shareholders of the company do not receive any consideration or benefit other than share in profit and capital contribution in the LLP; 4. The aggregate of the profit-sharing ratio of the erstwhile shareholders of the company in the LLP shall not be less than 50 percent of the profits of LLP at any time during the period of 5 years from the date of conversion;

21 Contd.. 5. The total sales, turnover or gross receipts in business of the company do not exceed 60 Lakhs rupees in any of the 3 previous years preceding the previous year in which conversion takes place; 6. No amount is paid, either directly or indirectly, to any partner out of the accumulated profit standing in the account of the company as on the date of conversion for a period of 3 years from the date of conversion..as per section 47A(4), where any of the conditions laid down in section 47(xiii b) [i.e. conditions (i) to (vi) above] are not complied with, the amount of capital gains arising from the transfer shall be deemed to be taxable capital gains of the successor LLP or the shareholders of the predecessor company in the previous year in which such non-compliance takes place

22 Alternate Minimum Tax Finance Act inserted new chapter XII-BA special Provisions relating to certain LLPs Clause 18 of Memorandum explains as under:.an LLP is treated as a firm for taxation, has following tax advantage over company under income tax Act 1. It is not subject to Minimum Alternate Tax 2. It is no subject to Dividend Distribution Tax; and 3. It is not subject to surcharge (but includes education cess) In order to preserve the tax base vis-à-vis profit linked deductions, it is proposed to insert new chapter XII-BA in the Income tax Act containing special provision relating to certain limited liability partnership

23 Advantages of conversion of Private companies to LLP: Dividend Distribution Tax(DDT): DDT is payable by resident companies on distribution of profits to its shareholders. As LLP is not a company, DDT would not be applicable on distribution of profits by an LLP. Carry forward/set-off of losses: The Finance Act, 2010 has amended section 72A of the Act by inserting new sub-section (6A) which provides that the accumulated business loss and unabsorbed depreciation of the predecessor company shall be allowed to be carried forward and set-off of by the successor LLP if all the above conditions [conditions (i) to (vi) above] in clause (xiiib) of section 47 are satisfied.

24 Contd Minimum Alternate Tax (MAT): Under section 115JB MAT is applicable only to companies. LLP s are not subject to MAT. Deemed Dividend Provisions of deemed dividend under section 2(22) (e) would not apply to LLP s. Wealth Tax Wealth Tax is applicable to Individual, HUF & Companies. Accordingly LLPs are not required to pay Wealth Tax.

25 Contd Interest on Capital Contribution A Partner is entitled to receive interest on his capital contributions (irrespective of whether LLP makes a profit or loss) if LLP agreement so provides. The interest is deductible in the hands of the LLP under section 40(b) subject to certain conditions; A shareholder of a private company is entitled to dividend only if the company makes a profit and further company has to pay %. Explanation to S share trading loss deemed as speculation Loss does not apply to LLP

26 Contd Benefit of amortization of VRS payments made by predecessor company Sub-section 4A in section 35DDA was inserted in Finance Act, 2010 which provides that, when a private company or unlisted public company is succeeded by a LLP, benefit of amortization of VRS payments shall, as far as may be, apply to the successor LLP, subject to satisfaction of conditions laid down under section 47(xiii b). However, no amendment has been made to section 10(10C) to provide tax exemption to employees of an LLP in respect of VRS payments received by them from employer LLP.

27 Disadvantages MAT Credit The Finance Act, 2010 has proposed to insert a new sub-section (7) in section 115JAA to provide that MAT credit of the predecessor company shall not be available to the successor company. Thus, If a private company which has MAT credit under section 115JAA converts to LLP, it shall lose the MAT credit.

28 LLP may not qualify for certain deductions : S. 35D Amortization of certain preliminary expenses S. 35DD expenditure in respect of amalgamation / demerger S. 35(2AB) weighted deduction for Scientific Research and Development Tax neutrality on amalgamation / demerger S. 47(vi), (via), (vib), (vid),(vii) S. 80-IA(4)(i) deduction on profits of infrastructure projects Entitled for deduction at lower rate S. 80-IB Residual Period - 25% vs. 30% No similar provision like those in S. 10AA(5), 80IB(12) for claiming deduction for the balance period in case amalgamation or demerger

29 Case Study: Operating Company converted into LLP Facts Indian Parent Co. India Parent Co. Profit distribution Operating Co which gets converted into LLP Operating company converted to LLP Indian parent is partner in LLP LLP distributes profits to partners Benefits No DDT Profits exempt in hands of Indian parent Issues Tax implications upon conversion of existing company into LLP. Compliance requirements for partnership treatment

30 Case Study: Holding Company converted into LLP Facts Indian Parent Co. India Parent Co. Profit distribution Conversion to LLP Indian Parent LLP Operating Co which gets converted into LLP Indian parent Co. converted to LLP LLP distributes profits to partners Benefits No DDT Profits would be taxable in the hands of LLP and exempt in hands of Indian parent Issues Tax implications upon conversion of existing company into LLP. Compliance requirements for partnership treatment

31 Cautions before converting Company to LLP Stamp duty is payable on conversion. Heavy penalties per day applicable in case of delayed filing. Raising money through public is not possible. Banks in rural areas generally do not recognise the LLP structure, though it is a body corporate. Lesser credit worthiness as compared to a company. Transfer of ownership is not as easy as in a company; alteration in agreement and filing of the same to the RoC is required. Admission of new member is difficult

32 Conversion of Firm into LLP and tax issues

33 There is no provision under the Act to specifically provide that conversion of a Partnership Firm to LLP dose not amount to transfer. However such a provision is inserted in Sec.-47 (xiiib) by Finance Act 2010 in the case of conversion of a Private / Unlisted Public Limited Company into an LLP. However the Explanatory Memorandum to Finance Bill 2009 provides that conversion of a General partnership to LLP will not have any tax implications if Rights and liabilities of partners remain the same after conversion and There is no transfer of assets or liabilities after conversion Also, Reliance was placed on para 5.6 of CBDT explanatory Circular 5/2010 dated 3rd June, 2010

34 Contd.. The concept of transfer is given under section 2(47) which is an inclusive definition. Unless there is a specific provision in the Act treating a non transfer as a transfer what can be taxed as Capital gains are only transactions involving actual transfers. It is possible to argue that conversion of a Firm into LLP does not result in a transfer within the meaning of section 2(47) nor there is any specific provision under section 45 to treat such a conversion as transfer. Reliance may be placed on the decision of Bombay High Court in the case of CIT vs Texspin Engineering and Manufacturing Works (2003) 263 ITR 345 [Bom]

35 Cautions before converting Firm to LLP Firm intending to avail benefit under section 44AD (will loose benefit of Presumptive Taxation since an LLP is not entitled to the benefit under Sec.44AD. There is a controversy as to whether a Firm having unabsorbed losses can Carry forward or Set off the losses in view of the provisions of Section 78(2). No express provision is brought in the Act, like Sec.-47(xiii) & (xiv) which deal with succession of a Firm to Company and Proprietorship to Company respectively. Firm s having unabsorbed Depreciation. Admission of minor No express provision in LLP Act. Stamp duty is payable on conversion,

36 Conclusion: From the taxation point of view, an LLP has certain distinct advantages. Though the LLP is a body corporate, certain unfavorable provisions applicable to a company such as Dividend Distribution Tax, Deemed Dividend, Wealth Tax, etc. are not applicable to an LLP, thereby placing the LLP in a more advantageous position. An LLP also has a distinct advantage of claiming interest up to 12% on capital and borrowings from partners irrespective of profit or loss. Further, to encourage small companies (private & unlisted) to convert themselves into LLPs, there are provisions to give immunity from capital gains tax by not treating conversion as transfer.

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