PARTNERSHIPS

A. DEFINITION
By the contract of partnership, two or more persons bind themselves to contribute money, property or industry to a
common fund, with the intention of dividing the profits among themselves (Art. 1767, R.A. No. 386, as
amended, otherwise known as the Civil Code of the Philippines).
For purposes of taxation, partnerships actually fall under the term corporation as defined under the National Internal Revenue Code
(NIRC) of 1997. Section 22(B) of the NIRC provides the following definition, to wit:

SEC. 22. Definitions - When used in this Title:

xxx.
(B) The term corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), association, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government. General professional partnerships are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
The phrase no matter how created or organized indicates that a joint venture need not be undertaken in any of the standard
forms or in conformity with the usual requirements of the law on partnerships in order that one could be deemed so constituted for
purposes of the tax on corporations (Evangelista, et al. vs. Collector of Internal Revenue, 102 Phil. 140). Based on the foregoing
definition, Partnerships may therefore be classified into two (2), namely: taxable partnership and exempt partnership.

B. TAXES IMPOSED ON DIFFERENT KINDS OF PARTNERSHIPS

1. General Professional Partnerships as a partnership formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived from engaging in any trade or business.
(Section 22 (B) of the National Internal Revenue Code (NIRC) of 1997)

Taxes Implications of the

Income of GPP

A GPP is not considered a

taxable entity for INCOME
TAX PURPOSES. The
partners themselves, not
the partnership (although
it is still required to file an
income tax return), are
For purposes of computing the
liable for the payment of
distributive share of the
income tax in their
partners, the net income of
individual capacity
the partnership shall be
computed on their
computed in the same manner
respective distributive
as a corporation. Each partner
shares.
shall report as gross income
his distributive share, actually
or constructively received, in
the net income of the
partnership.

Partnerships
acts as the
withholding
agent.

Note: If GPP derives income from

considered a corporation, thus
If net income, it
shall form part of the
gross income of each
partner based on the
agreed ration subject
to:
10% or 15%
creditable
withholding tax

Net income
shall be
computed in
the same
manner as a
corporation
and the
return is
filed on or
before April
15
of each
Liability
year.

Creditable withholding tax on

GPPs and partners Since a GPP is not subject to
income tax, it is exempt from
withholding tax prescribed in
Revenue Regulations No. 2-98
on income payments it receives
in consideration for its
professional services

of a Partner
in GPP

other sources, it is
liable to pay corporate income tax.

If net loss, it may be

taken by the
individual partner in
his return of income.

Payments made to a
partner for services
rendered shall be
considered:
ORDINARY
BUSINESS INCOME

Illustrative problem:
A GENERAL PARTNERSHIP WHICH IS NOT A GENERAL PROFESSIONAL PARTNERSHIP A CONTRACT
WHERE THE PARTNERS AGREE TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY WITH THE
INTENTION OF DIVIDING THE PROFITS AMONG THEMSELVES This business arrangement is common among
lawyers, accountants, architects and engineers. Their standard investment is their talent or skills, and they are
generally paid based on the amount of time they spend in attending to their clients needs and the end result of
their work. Payments made by clients to GPPs for their professional services are likewise not subject to these
taxes GPPs, unlike corporations, are not separate taxable entities. GPPs are pass-through entities, thats why its
the partners that shoulder the income taxes. The BIR recognizes that GPPs are primarily formed because of the
need to pool resources. Accordingly, general professional partnerships are exempt from the withholding tax per
Revenue Regulations No. 2-98. It is therefore the individual partners who shall be subject to income tax and
consequently, to the withholding tax, in their separate and individual capacities.
In TAN, vs. DEL ROSARIO, The Court, first of all, should like to correct the apparent misconception that general
professional partnerships are subject to the payment of income tax or that there is a difference in the tax treatment
between individuals engaged in business or in the practice of their respective professions and partners in general
professional partnerships. The fact of the matter is that a general professional partnership, unlike an ordinary business
partnership (which is treated as a corporation for income tax purposes and so subject to the corporate income tax), is not
itself an income taxpayer. The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive shares of partnership profits. Section 23 of
the Tax Code, which has not been amended at all by Republic Act 7496, is explicit:

Sec. 23. Tax liability of members of general professional partnerships.

(a) Persons exercising a common profession in general partnership shall be liable for income tax only
in their individual capacity, and the share in the net profits of the general professional partnership to which
any taxable partner would be entitled whether distributed or otherwise, shall be returned for taxation and
the tax paid in accordance with the provisions of this Title.
(b) In determining his distributive share in the net income of the partnership, each partner
(1) Shall take into account separately his distributive share of the partnership's income,
gain, loss, deduction, or credit to the extent provided by the pertinent provisions of this
Code, and
(2) Shall be deemed to have elected the itemized deductions, unless he declares his
distributive share of the gross income undiminished by his share of the deductions.
There is, then and now, no distinction in income tax liability between a person who practices his profession alone or
individually and one who does it through partnership (whether registered or not) with others in the exercise of a common
profession. Indeed, outside of the gross compensation income tax and the final tax on passive investment income, under
the present income tax system all individuals deriving income from any source whatsoever are treated in almost invariably
the same manner and under a common set of rules.
Architectural, accounting and law firms are the most commonforms of general professional partnerships in the Philippines.
A GPP is different from a corporation and
the
usualbusiness partnership basically because it is formed not for thepurpose of trade or business, but for the purpose of all
owingpersons to exercise a common profession.Although exemptedby the law from the payment of income tax, a GPP is
still obligatedto file an income tax return for administrative purposes.Hence, Section 26 of the Tax Code states that person
s engagingin business as partners in a general professional partnership
shall be liable for income tax only in their separate and individual
capacities. In fine, a GPP is not an income taxpayer asit is merely a mechanism or flow through entity used by the
individual partners for the generation of income.

2. Taxable or Business Partnership all other partnerships no matter how created or organized which include
unregistered joint ventures and business partnerships subject to the corporate income tax, except when:
a. Undertaking construction projects; or

b. Engaged in petroleum, coal, geothermal and other energy operations under a service contract with
the government.

Liability of Partnership

The net income of a business

partnership is subject to the
30% regular corporate
income tax and must be filed
quarterly and annually
pursuant to Sec. 75 and Sec.
76 of the NIRC.
Furthermore, the taxable
income declared by a
partnership for a taxable year
which is subject to tax under
Section 27(A) of the Tax Code,
after deducting the corporate
income tax imposed therein,
shall be deemed to have been
actually or constructively
received by the partners in
the same taxable year and
shall be taxed to them in their
individual capacity, whether
actually distributed or not
(Section 73(D), NIRC).

SHARE OF A PARTNER
IN TAXABLE OR
BUSINESS
PARTNERSHIP
If net income, it
shall be treated as
dividend and shall be
subject to a final tax
as follows:
1.
2.

If net loss, it may be

taken by the
individual partner in
his return of income.

COMPENSATION
INCOME

RC, NRC, RA
10%
NRA-ETB 20%

DEDUCTIONS FROM GROSS INCOME

OF PARTNERSHIP
ALLOWABLE DEDUCTIONS
FOR PARTNERSHIP

ITEMIZED
DEDUCTION

Exempt Partnership

Payments made to a
partner for services
rendered shall be
considered:

OPTIONAL
STANDARD
DEDUCTIONS

The following are the kinds of partnerships that are exempt from taxes as expressly provided under Section 22(B) of
the NIRC, to wit:
1. General Professional Partnership;
2. Joint Venture or Consortium formed for the purpose of undertaking construction projects, and
3. Joint Venture or Consortium engaging in petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium agreement under a service contract with the government.

A.

General Professional
Partnership

A general professional partnership is not

considered as a taxable entity for income
tax purposes. The partners themselves,
not the partnership (although it is still
obligated to file an income tax return), are
liable for the payment of income tax in
their individual capacity computed on
their respective distributive shares of the
partnership profit (Mamalateo, Philippine
Income Tax (2010), p. 36). Since a general
professional partnership is exempt from
income tax, the professional fees paid to
it are thus exempt from the expanded
withholding tax (Rev. Regs. No. 13-78, as
amended by Rev. Regs. No. 14-2002).
(see separate discussion on general
professional partnership for further
reference).

B.

Joint Venture and Consortium

The
following
factors
are
essential to constitute a joint venture:
(i) Each party to the venture
must make a contribution, not necessarily
of capital, but by way of services, skill,
knowledge, material or money;
(ii) Profits must be shared among
the parties;
(iii) There must be a joint
proprietary interest and right of mutual
control over the subject matter of the
enterprise, and
(iv) Usually, there is single
business transaction (BIR Ruling No. 317Illustrative
Case:
92).
The in
corporate
tax was
However,
order thatincome
a joint venture
or
imposed
upon
group oftoindividuals
consortium
asareferred
in Section when
22(B)
each
to put
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of theagreed
Tax Code
will up
not money
be considered
games
ticket
for
the
sole
purpose
of
a separate taxable entity, it must be an
dividing
equally the
prize,
whichbythey
unincorporated
entity
formed
twodid
or
in
fact persons
win, in the
amount of
P50,000.00.
more
(individuals,
partnerships
or
Having
organized
a
corporations)
for and
the constituted
purpose
of
partnership
a civil nature,project
the said
undertaking of construction
or
entity
is the
bound toand
payother
the income
engaging
inone
petroleum
energy
tax
which
the
defendant
collected
operations with operating contractunder
with
the
aforesaid section 10(a) of Act No.
the government.
2833, as amended by section 2 of Act No.
3761.
There
no merit as
in a plaintiff's
Since it
is notis considered
separate
contention
that the
beor
prorated
taxable entity,
thetax
netshould
income
loss of
among
paid individually,
the jointthem
ventureand
or consortium
is taken
resulting
their exemption
from the tax
up and in
reported
by the co-ventures
or
(Gatchalian,
al. vs. Collector
of Internal
consortium et
members
in accordance
with
Revenue,
67 Phil. 666,
in Vitug
&
their participation
in as
thecited
project
as set
Acosta,
Law
and Jurisprudence (2014,
forth in Tax
their
agreement.
p. 71).