General professional partnership

THE Bureau of Internal Revenue (BIR) recently issued Revenue Memorandum Circular No. 3-2012 (RMC) clarifying the tax implications of general professional partnership.

Under Section 26 of the Tax Code, as amended, a general professional partnership as such shall not be subject to income tax. However, persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.

Accordingly, general professional partnerships are exempt from the withholding tax per Revenue Regulations No. 2-98.

Under the Tax Code, “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.

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.

Furthermore, each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.

However, it is worth mentioning that income payments made periodically or at the end of the taxable year by a general professional partnership to the partners, such as drawings, sharings, allowances, stipends, and the like are subject to the 15 percent, if the payments to the partner for the current year exceeds P720,000; and 10 percent creditable withholding tax, pursuant to Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-03.

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