Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Tax (4th edition)
An Angola company can be organized as: a partnership (sociedade em nome colectivo); a limited partnership (sociedade em comandita); a limited partnership with share capital (sociedade em comandita por acções); a limited liability company (sociedade por quotas de responsabilidade limitada); or a public limited company (sociedade anónima). The most common legal forms used by investors are sociedades anónimas and sociedades por quotas de responsabilidade limitada.
There are no transparent entities for tax purposes.
Broadly speaking, the natural investment vehicle to carry out businesses in Brazil is a local subsidiary. For the incorporation of a subsidiary, the most common types of legal entities are: Limited Liability Company (“Ltda.”) and Corporation (“Sociedade Anônima – S.A.”).
The Ltda. is widely used by most of Brazilian entities, while S.A. is generally used by publicly traded companies and is a less flexible entity to manage in terms of corporate governance. From a tax perspective, both entities are subject to the same taxation regimes.
Brazilian companies are considered opaque and subject to taxation as a unified corporation. On the other hand, some atypical arrangements, as the consortium (which is not considered properly an entity) has a transparent nature for tax purposes.
Finally, the Brazilian legislation does not contemplate ‘trust’ structures.
The Income Tax Act recognizes three taxpayers: individuals, corporations and trusts. Technically, a partnership is not a taxpayer; income is computed at the partnership level but it is allocated to the partners who are liable to pay tax. Unlimited liability companies (ULC) are not considered transparent entities; but they are recognized as such in the United States.
Companies, either in the form of corporations or limited liability entities are subject to Income Tax. Trusts are transparent for tax purposes and thus, only its beneficiaries are subject to Income Tax (should a given trust not have beneficiaries, the trustor shall be subject to taxation).
While Cyprus recognizes a wide range of business structures, including all the above, only natural and legal persons (individuals, companies and their branches and permanent establishments, and foundations) are treated as taxable entities. Partnerships and trusts are treated as transparent for tax purposes and the income is assessed on the partners and the beneficiaries respectively.
a) Taxable entities
German tax law differs between tax transparent entities, such as partnerships, and non-transparent entities, such as corporations. For income tax purposes the taxable income of a partnership is generally allocated to its partners in proportion to their interests held and taxed at the level of the partners. German tax law provides for an exception from the tax transparency of partnerships if profits are not distributed to the partners upon application. Corporations are treated as separate and distinct from their shareholders, so that the taxable income is taxed at the level of the corporation itself.
As regards trade tax, partnerships and corporations are generally liable to trade tax.
b) Business reasons for the usage of tax transparent entities
Tax transparent entities are primarily favourable if the partner wants to use losses from the business carried out with the partnership to reduce his personal tax burden. A part of the trade tax can be credited against the income tax of the partner provided he is an individual.
Yes, companies and trusts that have assessable income in Gibraltar are subject to tax at a rate of 10%. Partnerships are tax transparent and taxed in the hands of the Partners.
Corporations and partnerships alike are taxed as separate legal entities. Trusts cannot be established under Greek law however for tax purposes foreign trusts are considered as taxable entities.
In general, business entities are not transparent. Exceptions to this, such as Greek Venture Capital Mutual Funds (ΑΚΕΣ), are few in number.
Yes, companies and partnership firms carrying on business are recognized as taxable entities. However, in case of trusts such as set up as Alternative Investment Fund for pooling of investments, income other than business income is taxed on pass through basis in the hands of the Investors and not the trust.
Businesses are typically carried on through a limited liability company (which is a taxable entity) or by individuals (who are taxable in their own name). Business may also be carried on through partnerships (of companies or individuals or a combination) but partnerships are transparent for tax purposes and each partner is deemed to conduct its own several trade.
Trusts can attract income tax, capital gains tax or inheritance tax. The tax payable and the person responsible for ensuring the tax is paid largely depends upon the type of trust.
Yes. While the main form of conducting business is a limited company, there are several other entities that may be utilised, including partnerships and other forms of transparent entities such as family companies, trusts, and house companies (special companies suitable for investments in real estate).
By using an entity that is transparent for tax purposes, taxpayers can generally benefit from one level of taxation (that is, avoid the entity-level tax, which is applicable when utilising a limited company). Partnerships, for example, are a common form of incorporation in Israel utilised by investment funds, including venture capital and hedge funds. Trusts are used by high-net-worth families to effectively manage their wealth and its tax-efficient allocation among its members.
Companies can be incorporated in the form of società per azioni, società in accomandita per azioni, società a responsabilità limitata are considered taxable entities and subject to corporate income tax. The incorporation as società per azioni is required in order to carry out certain business activities (such as banking) while società a responsabilità limitata are usually used to carry out small-medium businesses.
Partnerships can be set up in the form of società in nome collettivo, società in accomandita semplice or società semplice and they are all transparent for income tax purposes, so that partners are taxed on their share of the partnership’s proﬁts regardless of whether the partners are resident or non-resident of Italy. Societa’ in nome collettivo and societa’ in accomandita semplice are generally used to run small and medium size businesses; income accrued with these partnership and imputed to the partners is always classiﬁed as business income. Societa’ semplici are generally used for succession planning purposes and as holding companies of certain particular assets given the ﬂexibility as to the rules applicable to their government and the fact that the income imputed to the partners does not lose its original qualiﬁcation.
Trusts can be qualiﬁed as (i) taxable entities (ii) transparent entities: when their beneﬁciaries are clearly identiﬁed and have a right to the income of the trust (such as a right to claim the distribution of an income); in such a case a trust is considered transparent and the income is imputed to the beneﬁciaries to the extent of their respective rights to the said trust income; (iii) disregarded entities: this is typically the case when the settlor or beneﬁciaries have, de facto, signiﬁcant powers in relation to the management of the trust assets. The income and gains of a disregarded trust are imputed to the settlor or beneﬁciaries, depending on the circumstances, and taxed in their hands as if they received them directly.
For Austrian tax purposes it has to be distinguished between opaque and transparent entities.
Stock companies (Aktiengesellschaft, abbreviated as "AG"), limited liability companies (Gesellschaft mit beschränkter Haftung, abbreviated as "GmbH") and private foundations (Privatstiftung) are opaque for Austrian (corporate) income tax purposes. Income realised by such entities is subject to Austrian corporate income tax at the level of such entities. These entities are also subject to VAT but private foundations may not run an active business, therefore, they hardly qualify as taxable person (entrepreneur) for VAT purposes.
Partnerships – most importantly the general partnership (Offene Gesellschaft, abbreviated as "OG") and the limited partnership (Kommanditgesellschaft, abbreviated as "KG") – are legal entities, but transparent for (corporate) income tax purposes. Income is taxed pro rata at the level of the partners. Partnerships can however be subject to VAT.
Under the Corporation Tax Act, corporations are recognized as taxable entities while partnerships are as transparent for tax purposes, and trusts are also transparent for tax purposes in general.
(i) Under the Companies Act, there are several types of corporation, such as stock corporations (kabushiki kaisha) and limited liability companies (godo kaisha). All types of corporations are recognized as taxable entities under the Japanese Corporation Tax Act. Among such types of corporations, the stock corporation (kabushiki kaisha) is the most popular, while limited liability companies are often chosen when a foreign corporation establishes a subsidiary in Japan, due to its flexibility in the corporate governance system and tax treatment under foreign tax law.
(ii) There are several types of partnerships under Japanese law, such as civil law partnerships (kumiai) or limited liability partnerships for investment business (toshijigyo yugensekinin kumiai). All types of partnerships formed under Japanese law are treated as transparent under Japanese tax law in general. Foreign partnerships are not always transparent under Japanese tax law. There is a Supreme Court case where a Delaware LPS was not considered transparent under Japanese tax law.
(iii) Trusts are transparent under Japanese tax law in general. However, collective investment trusts are not transparent, and the profits of such trusts are not subject to taxation until such profits are distributed to beneficiaries. In addition, the corporation-type trust is treated as a corporation for corporate tax law purposes and thus is not transparent.
The qualification of Luxembourg companies for Luxembourg CIT follows a list/ catalogue approach. The LITL provides provisions defining all legal and corporate entities existing under Luxembourg laws as either tax opaque (Article 159 LITL) or tax transparent (Article 175 LITL).
The Luxembourg SA (Société Anonyme) and the Luxembourg S.à r.l (Société à responsabilité limitée) are the most commonly used company forms in Luxembourg. These company forms are opaque and fully taxable business entities.
With respect to partnerships, the Luxembourg limited partnership (société en commandite simple (“SCS”)) as well as the Luxembourg limited partnership without legal personality (société en commandite spéciale (“SCSp”)) which was introduced into Luxembourg law in 2013, are frequently used. The partnerships as mentioned before are tax transparent not being subject to corporate tax in Luxembourg. Taxation occurs at the level of the partners.
The SCSp is mainly used for the structuring of funds and real estate transactions, providing more flexible solutions compared to other corporate forms.
Luxembourg provides a wide range of investment vehicles. Luxembourg investment funds such as the Specialised Investment Fund (“SIF”), the Reserved Alternative Investment Fund (“RAIF”) or the investment company into risk capital (“SICAR”) have favorable tax regimes.
From a Luxembourg point of view, a SIF is a taxpayer but not subject to tax as its income is fully exempt from Luxembourg CIT.
Depending on their performed activity, RAIFs are subject to either the same income tax exemption regime as SIFs or the same tax regime as SICARs.
The SIF as well the RAIF are unrestricted with respect to eligible assets and can be used for all investment purposes.
The tax regime of SICARs depends on the chosen legal form. SICARs established in form of a SCS or SCSp are tax transparent and thus not subject to tax.
SICARs established in the form of an SA or an S.à r.l are fully taxable entities being subject to CIT. However, income resulting from securities that represent the risk capital held as well as income resulting from the transfer, contribution or liquidation of these assets does not constitute taxable income and is thus fully tax exempt.
SICARs are designed for investments in private equity and venture capital.
In principle, SICARs established under the corporate form benefit from the Luxembourg double tax treaty network. However, UCITS, SIFs and RAIF may or may not benefit from the provisions of a double tax treaty. Such benefit is to be checked on a case-by-case basis.
Under the ITA, income tax is charged upon the income of any person accruing in or derived from Malaysia or received in Malaysia from outside Malaysia.
“Person” is defined under the ITA to include a company, a body of persons, a limited liability partnership and a corporation sole. It is noted that although partnerships, trusts and foundations are not expressed as “person” under the ITA, the definition is not exhaustive.
In respect of trusts, the ITA provides that any source forming part of the property of the trust, any source of a trustee of the trust, being a source of his or hers by virtue of specific provisions of the ITA and any income from any such source, save that gains arising from the realisation of investments from unit trusts, are all treated as income of the trust body of the trust. The income of the trust body of a trust is assessed and taxed separately from the income of a beneficiary from any source. Hence, income tax can only be charged once, either in the hands of the trustee or the beneficiary when it is paid out to the latter.
The ITA also accords deductions at specific rates for gifts of money made to an organisation or institution approved by the relevant authorities. The Act ITA further accords tax exemption to approved institutions, organisations or funds or religious institutions, organisations or funds that are not operated or conducted primarily for profit and that are established in Malaysia exclusively for the purposes of religious worship or the advancement of religion.
For partnerships, its partners, not the partnership itself, are liable to pay personal income tax for profits earned under the partnership. Conversely, the establishment of a limited liability partnership (“LLP”) is governed by the Limited Liability Partnerships Act 2012. An LLP is treated as a separate taxable person for the purposes of the ITA.
Pursuant article 7 of the Income Tax Law, the concept of legal entity comprises, amongst other, business corporations or companies, decentralised agencies whenever they primarily carry out business activities, financial institutions, partnerships and joint ventures.
Nevertheless, different tax treatments could be applicable depending on the nature of the relevant legal entity. Although tax transparency is not recognised per se with respect to Mexican entities or vehicles, certain types of trusts could be subject to a pass-through treatment as if they were fiscally transparent. That is, tax consequences arising from income derived by such trusts would be triggered at the level of its beneficiaries. Said vehicles are commonly used due to the versatility they offer. For instance, they are incorporated by means of an agreement or contract and can adopt a wide range of corporate purposes. Furthermore, they tend to be considered as attractive vehicles to channel foreign investment in the country since they allow for tax consequences to be triggered at the level of the beneficiaries (for instance, treaty benefits could be claimed by the beneficiary participating in the vehicle).
Notwithstanding the foregoing, it should be noted that in certain cases Mexican tax laws do recognise the tax transparency of foreign entities or vehicles.
There are many different legal forms through which businesses can be carried on.
- Dutch private limited companies (BV)
- Taxable entity (by legal fiction).
- Most common vehicle used for carrying on a business (excluding sole proprietorship).
- Capital divided into shares, legal personality, shareholders only liable for the nominal amount in shares issued.
- Dutch public limited companies (NV)
- Taxable entity (by legal fiction).
- Used for listed companies.
- Capital divided into shares, legal personality, shareholders only liable for the nominal amount in shares issued.
- Higher capital requirement than a BV.
- Limited partnerships (CV)
- Taxable if open limited partnership, otherwise transparent.
- Cooperatives (coöperatie)
- Taxable entity (by legal fiction).
- Non-holding cooperatives are not subject to Dutch dividend withholding tax.
- Must be incorporated by at least two members.
- Mutual insurance association (onderlinge waarborgmaatschappij)
- Taxable entity (by legal fiction).
- Associations (vereniging)
- Taxable entity insofar it conducts a material business enterprise.
- Foundations (stichting)
- Taxable entity insofar it conducts a material business enterprise.
- General Partnership (vennootschap onder firma)
- Tax transparent.
- Professional Partnership (maatschap)
- Tax transparent.
Any type of vehicle available in our corporate laws may be used for carrying on business and are, generally, recognized as legal entities by our law. By way of exception, our law does not recognize the condition of legal entity to participation accounts (asociaciones en participación), though they are not regarded to be pass-through vehicles, and grants the treatment of pass-through vehicles to the following structures: (i) consortia and joint ventures whose effective term is less than 3 years, (ii) local trusts (fideicomisos), and (iii) local investment funds. Local mutual funds are subject to a special tax regime whereby income is deferred until the certificates issued by such vehicle are redeemed or cancelled. There are no rules on foreign partnership and trusts and generally their tax treatment will depend upon (i) their being legal entities as per the law of their incorporation and (ii) the fact of being discretionary or not in the case of trusts.
Yes, corporations, partnerships and trusts are recognized as taxable entities. The exception is general professional partnerships, which are not subject to income tax. Individuals carrying on business in a general professional partnership are taxable on their distributive shares of the income of the partnership, whether distributed or not.
Polish law foresees different vehicles for carrying on business, being limited liability companies (spółka z ograniczoną odpowiedzialnością – “sp. z o.o.”) the most commonly used. Other types of entity operating in Poland include the following:
a. joint stock company (spółka akcyjna –“ s.a.”),
b. joint stock partnership (spółka komandytowo-akcyjna – “s.k.a”),
c. registered partnership (spółka jawna – “sp. j.”),
d. limited partnership (spółka komandytowa – “sp.k.”),
e. professional partnership (spółka partnerska – “sp. p.”),
f. branch of foreign corporation.
An individual may also conduct business as a sole proprietor.
So far, trusts and private foundations are unknown to the Polish legal system, and therefore they are not widely exercised in Poland. However, it is increasingly being argued that it is necessary to introduce the institution of the family foundation into the Polish legal system.
Partnerships (excluding limited joint-stock partnerships) are not subject to CIT. Income earned by partnerships is allocated to the partners and subject to CIT / PIT at their level, together with other earnings.
Corporations – i.e. limited liability companies, joint-stock companies and joint-stock partnerships are treated as separate and distinct from their shareholders, so that the taxable income is taxed at the level of the corporation itself.
A limited partnership (“LP”) is a very popular form of conducting business as it enables the partners’ liability to be limited and is not subject to CIT.
It should be clarified that LPs are entities without a legal personality and they are created by two types of partner: a partner whose liability for the company’s obligations is unlimited and who conducts the company’s affairs and represents it in all issues before third parties; and a partner with limited liability who is obliged to a fixed amount, which does not need to reflect the partner’s contribution to the LP.
To connect benefits from limited liability (not only for tax arrears purposes) with the tax advantages resulting from the tax transparency of partnership, many decides to establish a hybrid company – such as “limited liability company limited partnership” (spółka z ograniczoną odpowiedzialnością spółka komandytowa)
The general partner in this entity is a limited liability company that conducts the company’s affairs and represents it, and, therefore, its liability is unlimited (in practice, it will be limited exclusively to the company’s assets because of its legal nature). A limited partner is a natural person who can also be a shareholder of a general partner.
Tax burden optimisation for income tax is carried out through an appropriate profit distribution between general and limited partners. To achieve a measurable benefit in the tax law area, profit distribution should be done in a way that the profit of the general partner is considerably lower than the profit of the limited liability partner (e.g., unlimited liability partner: 1 per cent; and limited liability partner: 99 per cent).
This interesting hybrid is a type of partnership that is neither a taxpayer of CIT nor personal income tax. This means the partners in a limited partnership (natural persons) should pay personal income tax. The taxpayer’s income from participating in a partnership is determined proportionally to the right to a share in the partnership’s profit. This income is cumulated with general income subject to the progressive tax rate. The taxable person may tax its income from non-agricultural activity according to the linear rate of personal income tax at 19 per cent.
As for a limited liability company, it is a capital company and, therefore, it is double taxed, which means that taxes are paid both by the company (19 per cent on income earned) and the shareholders (19 per cent from dividends). This the reason why a general partner’s profit should be reduced to the minimum.
There are different vehicles through which it is possible to develop a business activity in Portugal. There are companies (including transparent companies) and other structures (such as foundations, associations and cooperatives) recognized as taxable entities, similar to what happens in most states.
By means of the Decree-Law 352-A/88, the Portuguese Government authorized the establishment of trusts exclusively devised to off-shore activities within the institutional framework of the Madeira International Business Centre (IBC).
As Portugal is a non-Common Law jurisdiction it does not possess internal legislation to regulate Trusts which are limited - to the Madeira IBC. In accordance with the applicable Decree-Law, the Settlor shall expressly designate the law that will regulate the Trust.
The trust is fully exempt from taxation on dividends received from shares, royalties or interest received on the deposits. All (non-financial) income distributed from the trustee to the trust’s beneficiaries is fully exempt of taxation provided these beneficiaries are corporate entities licensed to operate within the Madeira IBC or non-Portuguese resident entities/individuals.
Transparent entities in the Portuguese tax system are: civil-law companies not incorporated under a commercial form, incorporated firms of professionals and holding companies the equity capital of which is controlled, directly or indirectly, during more than 183 days by a family group or a limited number of members, under certain conditions.
For CIT purposes, the tax transparency regime also applies to ACE’s Complementary Business Groupings (ACE’s) constituted and operating in accordance with the applicable law and to European Economic Interest Groupings (AEIE’s), treated as resident.
The transparency regime is essentially characterized by attributing to the shareholders or members of the transparent entity its taxable amount (or, in case of ACE or AEIE, respective profits or losses), even in case of undistributed profits. Thus, the transparent entity is not liable to IRC, and the amounts attributed to the taxable income of its shareholders or members being therefore embodied for CIT or PIT purposes, depending on the specific case.
Where the shareholders or members of companies covered by the tax transparency regime are non-resident, there shall be considered derived income attributed to them through a permanent establishment situated within the Portuguese territory.
For income tax purposes, companies are recognised as taxable entities and are the primary taxable entity for carrying on large business in South Africa.
Partnerships are a common law vehicle and are fiscally transparent. Partnerships, specifically en commandite partnerships, are widely used for private equity funds. Partnerships offer greater flexibility and generally have less compliance requirements than companies.
Trusts, which were historically convenient from an estate-planning perspective, are similarly to partnerships largely unregulated in South Africa. A trust is regarded as a separate "person" for income tax purposes and, consequently, must be registered for income tax purposes. The use (and abuse) of trusts for perceived tax-saving purposes has been curtailed by SARS.
Business can be developed by way of corporate entities, most commonly, in the form of joint stock companies (“Sociedad Anónima” or “S.A.”) requiring a minimum share-capital of €60,000, or limited liability companies (“Sociedad Limitada” or “S.L.”) requiring a minimum share-capital of €3,000. The responsibility of the shareholders is limited in both cases.
From the tax viewpoint, corporations -generally speaking- , including not only S.A. and S.L, but also other type of commercial companies, are subject to Corporate Income Tax (hereinafter, CIT) regulations, which are levied on all legal entities resident in Spain.
Certain entities, mainly public entities and certain income of non-profit organizations can be exempt from CIT.
There are non-corporate entities that could operate in businesses, such as the civil partnership or the private equity funds.
CIT rules are also applicable to non-corporations, such as partnerships or lying heritages, provided they have a business purpose. Otherwise, in case they have not a business purpose, their income will be allocated (transparent) to their partners or co-proprietors. This is also the case regarding economic interest groupings, where profits or losses are taxed at the level of their co-proprietors.
Even more, individuals carrying out business activities -although taxed under Personal Income Tax (hereinafter, PIT)-, will apply, under certain cases, CIT rules when determining their business taxable income.
Only companies (the most common type being the company limited by shares) are treated as taxable entities separate from their shareholders.
Partnerships are treated as transparent for tax purposes. Profits and capital of Swiss partnerships are directly attributed to the partners, who are subject to income and wealth tax on said profits and capital.
It is not possible to establish a trust under Swiss law. Consequently, Swiss tax law recognises trusts as independent entities only in limited circumstances. As a general rule, if a trust is settled by a Swiss resident, the assets (and income derived from those assets) are attributed to said Swiss resident for Swiss tax purposes.
Yes. Under US tax law, certain entities are eligible to elect their classification for US tax purposes. Foreign as well as domestic entities may make the election.
Whether an entity is eligible to elect its classification for US tax purposes depends largely on whether the entity is treated as a “per se corporation” for US tax purposes (in which case it will be taxed as a separate taxable entity) and the number of its beneficial owners.
An entity with only one beneficial owner may elect to be treated as an entity that is disregarded from its owner for US tax purposes or as a separate taxable entity. An entity with more than one beneficial owner may elect to be treated as a partnership for US tax purposes or as a separate taxable entity.
For US tax purposes, certain legal entities, such as limited partnerships, LLCs, and small business corporation, are generally taxed as “pass-through” entities. A “pass-through” entity is not itself subject to US tax. Rather, income flows through, and is directly taxed, to the entity’s owners. Such entities may be used to mitigate the effects of double taxation of income.
Yes. Companies limited by shares and Partnerships are the most common vehicles for business simply because their structures are well understood and their regulatory environment well established.
In the UK there may be a difference between the recognition of an entity for tax purposes and the incidence of tax liability. A company is a legal entity and pays tax at the corporate level. A general partnership is not a legal entity distinct from its partners (except in Scotland) but profits are computed at partnership level and consequent tax is levied at partner level on the individual partner’s share of the profit. A limited liability partnership is a legal entity for company law purposes but, provided it is trading, is treated like a general partnership for tax purposes, ie as transparent.
Trusts can attract income tax, capital gains tax or inheritance tax. The tax payable and the person responsible for ensuring the tax is paid largely depend upon the type of trust.
A company is recognized as an entity subject to Belgian corporate income tax if it constitutes a separate legal entity that carries out a profit-making entity and is deemed to be a Belgian resident.
Under Belgian law, the concept of legal personality generally serves as the main determinating nexus to classify an entity as a taxable entity. Entities without legal personality are therefore in principle treated as transparent for income tax purposes. Belgian tax law also provides for a limited list of entities with legal personality that are deemed not to have legal personality for tax purposes, such as the economic interest groupings and the European economic interest groupings.
Vehicles for performing operations in Panama are the corporation, Limited Liability Company, limited liability partnership, general partnership, joint venture and branch of a foreign corporation.
Tax treatment for all the vehicles listed above is the same under Panama Tax Regulations. Nonetheless corporations are the most commonly used vehicle do to the fact that shareholders maintain as private information.
Depending on the jurisdiction where the holding is located, it might be possible that the Panamanian company incorporated is a limited liability company as is the transparent type of vehicle which shows the owners or shareholder information.