PwC Alert Limited Liability Partnerships A new business vehicle in town

Transcription

1 Issue 110 November 2013 PP 9741/10/2012 (031262) PwC Alert Limited Liability Partnerships A new business vehicle in town

2 The rapid pace of globalisation and competition has changed the dynamics of doing business. For businesses, it s a case of staying agile and relevant or risk losing out to other players if they don t evolve with the times. Increasingly, regulatory authorities are pressured to offer more business structure options to enable businesses to compete healthily in the marketplace. In line with this, Malaysia has introduced various new legal entities such as the limited liability partnership ("LLP") and business trust in the 2013 Budget. 2 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

3 The LLP made its appearance in the US in the 1980s, in the aftermath of the collapse of the real estate and energy industries in Texas. This collapse led to a wave of failures of banks, savings and loan facilities due to the huge claims against partners in businesses that were affected. LLPs were introduced to protect the innocent members of these partnerships from liabilities. Since then, use of this business vehicle has steadily grown across the globe. In Asia, the LLP has been introduced in various countries such as India, China, Singapore and Thailand. There could be advantages to using an LLP rather than a company in some instances. For example, an Indian LLP has an advantage compared to an Indian company as the LPP is not liable to pay Minimum Alternative Tax and Dividend Distribution Tax. For China, whilst the LLP has not been widely adopted yet, we understand that some special regions are promoting the pilot run of Qualified Foreign Limited Partnership to promote the financial services industry by extending the incentives to include LLPs. Malaysia gazetted the Limited Liability Partnership Act 2012 ( the LLP Act ) on 9 February 2012 and it came into operation on 26 December Relevant changes to the Income Tax Act, 1967 ( the ITA ) have been made to incorporate the tax treatment and requirements of an LLP. Let s take a closer look at some of the issues: What is an LLP? Registration requirements of an LLP Tax treatment of an LLP in Malaysia How does the Malaysian LLP compare to LLPs in the region? The growth of LLPs in Malaysia - now and going forward PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 3

4 What is an LLP? An LLP is a business vehicle where some, if not all partners (akin to shareholders in a company), have limited liability. Some countries require a general partner to have unlimited liability. Therefore, when setting up an LLP, it would be important to check what the requirements in that particular jurisdiction would be. In Malaysia, all partners in LLPs enjoy limited liabilities. LLPs like any other business vehicle are generally set up with profit-seeking motives. They reflect the structure and protection from unlimited liability a company has, whilst having the flexibility of compliance and decision making of a conventional partnership. Furthermore, an LLP has the added features of internal arrangements such as profit sharing through agreement between the partners. 4 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

5 Registration requirements of an LLP Registration of a new LLP An LLP may be registered by an application made to the Companies Commission of Malaysia ("CCM") by furnishing the following information: a. Name of the proposed LLP; b. General nature of the proposed business of the LLP; c. Proposed registered office of the LLP; d. Name and details of every person who is to be a partner of the LLP; e. Name and details of compliance officer(s) of the LLP; f. If the LLP is formed for the purposes of carrying on any professional practice, the application shall be accompanied by an approval letter from the governing body as specified in the third column of the First Schedule of the LLP Act; and g. Such other relevant information as may be specified by CCM. A registration of the LLP is required to be done by the Compliance Officer appointed by the LLP. PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 5

6 Conversion into an LLP The following eligibility criteria need to be fulfilled for conversion of a conventional partnership into an LLP: The LLP must have the same partners as the conventional partnership and no one else. At the date of application, the conventional partnership is solvent. In the case of a professional practice, an approval letter must be obtained from the governing body. An application to convert from a conventional partnership into an LLP may be made to CCM by furnishing the following information: a. A statement signed by all of its partners in a medium and form determined by CCM, which contains the following particulars: Comparison between company, partnership and LLP As a new business structure, an LLP in Malaysia still needs wider exposure to ensure its requirements are clearly understood as a suitable legal entity alternative/choice. We outline in the table (on the right) the registration and other requirements of an LLP compared to a company and partnership. i. The name and registration number of the conventional partnership; ii. The date in which the conventional partnership was registered under the Registration of Businesses Act 1956 or any other written law; and iii. That as at the date of the application, the conventional partnership appears to be able to pay its debts as they become due in the normal course of business. b. All other information required for the registration of a new LLP as mentioned in the earlier section on registering an LLP. 6 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

7 Company Partnership LLP Regulation Companies Act, 1965 Partnership Act, 1961 Regulatory Body CCM Registrar of Business The LLP Act CCM Name Convention Ends with Sdn Bhd (Private Limited) or Bhd (Limited) Any name may be approved by the Registrar of Business Ends with Perkongsian Liabiliti Terhad or PLT Nature of Business To be decided by the promoters To be decided by the partners To be decided by the partners (Note: There are certain specific requirements in terms of composition of partners and quantum of professional indemnity insurance cover for LLPs formed to carry on professional practice) Promoters/Members/ Partners To incorporate with a minimum of 2 individuals or body corporates, foreign or Malaysian To incorporate with a minimum of 2 partners To incorporate with a minimum of 2 individuals or body corporates Power of Company/ Nature of Business Memorandum of Association ("MA") Partnership agreement (if applicable) LLP Agreement Internal Regulations/ Internal Arrangement Articles of Association ("AA") N/A LLP Agreement Compliance Officer At least one qualified company secretary natural person resident in Malaysia N/A At least one compliance officer a natural person who is a Malaysian citizen or permanent resident, either a partner of the LLP or a person qualified as company secretary PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 7

8 Member s/partner s Liability Authorised and Paid Up Capital Accounting Records Audit Yearly Compliance Company Partnership LLP Limited by the amount of capital to be paid up at the time of winding up Unlimited Minimum RM2/- N/A N/A Must be kept in Malaysia for 7 years Accounts must be audited and tabled to the members / shareholders at the annual general meeting ("AGM") and thereafter for submission to CCM / Bursa Malaysia (for listed companies) Must hold an AGM every calendar year and within 15 months from the previous AGM or 6 months from the financial year end, whichever is earlier. Must lodge annual returns and audited accounts to CCM within 1 month from the date of the AGM Must be kept in Malaysia for 7 years N/A N/A Cessation Winding up or striking off Dissolution of Partnership Limited by capital contribution Must be kept in Malaysia for 7 years Not necessary unless it is provided in the LLP Agreement that auditors must be appointed Must lodge an annual declaration and solvency statement with CCM (the first within 18 months from the date of registration and thereafter, 90 days from the end of the financial year) Winding up or striking off The registration and other requirements of an LLP are very similar to that of a company. However, there is an option available to an LLP to not appoint an auditor to audit its accounts whereas the accounts of a company must be audited. 8 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

9 Tax treatment of an LLP in Malaysia An LLP is excluded from the definition of partnership under Section 2 of the ITA. Instead, it is treated as a separate taxable person for the purposes of the ITA. Income derived by the LLP will be taxed at the LLP level at a tax rate of 25% generally. An LLP with capital contribution of RM2.5 million or less will also enjoy a preferential tax rate of 20% on the first RM500,000 of the chargeable income. Partners are not liable to tax on their share of income from the LLP (whether distributed or not). The tax residence of an LLP in Malaysia is determined based on the place of management and control of its business or affairs exercised by its partners. In arriving at the adjusted income of an LLP, no deduction is allowed in respect of any remuneration or any similar payment paid to the partner of the LLP where such remuneration or payment is not specified or provided in the LLP Agreement made in accordance with Section 9 of the LLP Act. PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 9

10 A partnership or a company which converts into an LLP is allowed to carry forward its unabsorbed business losses and unabsorbed capital allowances to be utilised against the future income of the LLP. A compliance officer who is appointed by the partners of the LLP shall be responsible for doing all acts and things required under the LLP Act on behalf of the LLP. Where no compliance office is appointed, the partners of the LLP are jointly and severally liable. The tax compliance requirements imposed on other taxpayers (e.g. a company) would similarly apply to an LLP. Being new, there are ambiguities for LLPs in Malaysia in terms of: Tax neutrality for the transfer of assets on conversion into an LLP, in terms of transaction taxes such as real property gains tax and stamp duties; For conversion of a conventional partnership into an LLP, the tax treatment for the interest on loans that used to be deductible for partners in a conventional partnership; Transfer mechanism for items such as stock in trade and provision accounts; Recognition of Malaysian LLPs for double taxation agreement shelter, incentives, grants, etc. The draft guidelines on taxation of LLP are being finalised with the objective of addressing some of these areas of concerns/ uncertainties. 10 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

11 How does the Malaysian LLP compare to LLPs in the region? For comparative purposes, we have reviewed how LLPs are deployed in 3 neighbouring jurisdictions, i.e. Singapore, Thailand and India. Our review includes factors such as ease of setting up and management in these jurisdictions. Considerations Malaysia Singapore Thailand India Tax residency of LLP Based on the place management and control are exercised (similar to companies) As the Singapore tax authorities do not regard an LLP registered in Singapore as a taxable entity, it will not issue a certificate of residence to the LLP Based on the place of incorporation (similar to companies) Based on the place management and control are exercised (similar to companies) Tax treatment Income from an LLP is taxable at the LLP level Partners are not liable to tax on the distribution from the LLP Income from an LLP is not taxed at the LLP level. An LLP is treated as a fiscally transparent entity for tax purposes Partners are taxed on the distribution from the LLP Income from an LLP is taxable at the LLP level Distribution by the LLP is subject to a withholding tax of 10% Partners are taxed on the distribution from the LLP. However, the partners can claim credit for the tax paid by the LLP or treat withholding tax on the distribution as a final tax Income from an LLP will be taxed at the LLP level Partners are not liable to tax on the distribution from the LLP PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 11

12 Considerations Malaysia Singapore Thailand India Extent of financial disclosure The following 4 key financial indicators need to be disclosed in an annual declaration of an LLP: i. Total assets; ii. Total liabilities; iii. Revenue; and iv. Profit/(loss) An LLP in Singapore is not required to file its accounts in its annual declaration. The LLP must however, keep its books up-to-date so as to substantiate all the transactions and financial position of the LLP An LLP is required to file its financial statements in its annual declaration An LLP is required to lodge its audited accounts in its annual declaration Ease of setting up 2-5 working days upon online submission of complete documentation (based on our latest confirmation with CCM) Upon endorsement of application by all partners (within 3 days from submission of application) and payment of registration fee 1 week upon submission of complete documentation 3-4 weeks upon submission of complete documentation The tax residency and tax treatment of LLPs in Malaysia, Thailand and India are similar to that of a company, whereas for Singapore the LLP is treated as a fiscally transparent entity. LLPs in Singapore are not required to file their accounts. However, LLPs in Malaysia, Thailand and India are required to disclose their financials. It appears that LLPs in India take a longer time to be set up compared to LLPs in Malaysia, Thailand and Singapore. 12 Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

13 The growth of LLPs in Malaysia - now and going forward LLP registrations began on 5 February 2013 via CCM s My LLP portal. At the official launch of the LLPs on 21 February 2013, Datuk Seri Ismail Sabri Yaakob, Minister of Domestic Trade, Cooperatives and Consumerism told the media that 14 new businesses have registered as LLPs. His Ministry targeted there would be 200 new businesses registering as LLPs in Based on statistics as at 30 September 2013, the number of LLPs registered stand at 800. The take up rate for LLPs has grown at an exponential rate and exceeded the Government s original target by fourfold. It appears that the LLP vehicle has been well received by businesses and investors. The attraction factor could be the limitation of liability offered for businesses which used to operate under a partnership or sole proprietorship set up. As LLPs are in their first year of operations in Malaysia, it is still early days yet and it s left to be seen whether the Malaysian LLP would be a competitive tool in the global arena. PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 13

14 To further promote the use of the LLP structure in Malaysia, we can learn from the experiences of countries which have adopted and implemented the LLP structure ahead of Malaysia. More work will need to be done by the Malaysian Government to create a level playing field for LLPs. For instance, it could consider extending incentives currently granted to companies to include LLPs engaged in certain promoted industries (e.g. business outsourcing services, small and medium manufacturing industry, etc.). The Malaysian Government should also work towards gaining the recognition of its tax treaty partners so that Malaysian LLPs have certainty of access to tax treaty benefits. The ambiguities discussed in the earlier section (tax neutrality, expense deductibility etc.) should also be ironed out quickly so as not to hamper interest among the business community in adopting an LLP structure. It is hoped that with the implementation of these measures (amongst others), there will be greater impetus for both local and foreign investors to adopt LLPs for investments into Malaysia. This will contribute towards the Malaysian Government s vision and agenda of being viewed as a progressive and business-friendly nation, on the road to achieving high-income nation status by Limited Liability Partnerships - A new business vehicle in town PwC PwC Alert Alert Issue Issue 110, 110, November October 2013

15 Let s talk Frances Po Senior Executive Director PwC Taxation Services Sdn Bhd Tel: frances.po@my.pwc.com Pauline Lum Executive Director PwC Taxation Services Sdn Bhd Tel: pauline.ml.lum@my.pwc.com PwC Alert Issue 110, 106, November August Limited Liability Partnerships The new - A new FSA: business What it means vehicle for in town you? 15

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