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 (2nd Edition)
In Spain we have non-legal entities existing exclusively for tax effects, such as temporary unions of companies, groupings of economic interest, consolidated groups. These have a special taxation treatment that eases to group in one entity the results obtained by all the others forming the group and serving the same end.
Likewise, we have the listed corporations of investment in the real estate market (SOCIMI), which are Real Estate Investment Trust (REIT), these shall tribute at a rate of 0%. Nevertheless, if some circumstances concur, the entity shall be bound by a special encumbrance on dividends distributed to shareholders with a share equal or higher than 5%. These dividends, at partners’ residence place, are either exempt or subject to a tax rate inferior to 10%.
On the other hand, we also have the holding entities of foreign securities (Entidades de Tenencia de Valores Extranjeros ETVE, in Spanish) also known as Spanish holdings. These are the corporations benefiting from a special taxation regime which consists of the non-taxation of the dividends or gains they obtain for holding shares in foreign companies. Therefore, they are companies with a big number of foreign investors who, by investing their funds by means of a Spanish holding, manage to develop international investments without paying taxes for the income derived from them.
Individuals and incorporated businesses are recognized as taxpayers and have to pay taxes in Romania. Unincorporated structures as joint-ventures, partnerships or other similar structures are transparent for tax purposes with partners / participants being subject to business tax or individual income tax, as the case may be.
As set out at Question 7, companies, partnerships and trusts are all recognised as entities for income tax purposes. Partnerships are generally treated as fully tax transparent (i.e. a partnership’s net income and losses flow through to the partners) and trusts are generally treated as largely tax transparent (i.e. a trust’s net income can flow through to its beneficiaries, but its losses cannot), but there are exceptions. Partnerships and trusts which are (respectively) characterised as corporate limited partnerships and as public trading trusts or corporate unit trusts are broadly taxed like companies.
Taxation is one of many commercial and legal factors which can influence, or are relevant to, the choice of vehicle for carrying on a business. For example, when deciding upon the appropriate investment vehicle for a business expected to initially generate tax losses and involve capital assets such as land, from an income tax perspective, consideration may be given to the fact that:
- Tax losses are trapped within companies and trusts, but can flow through to, and be used by, the partners of a partnership to offset other income; and
- Companies are unable to access the 50% capital gains tax discount, whereas the beneficiary of a trust or a partner in a partnership may be entitled to the benefit of the discount.
All entities carrying on a profit-making activity are taxable entities. Hence, partnerships are taxable entities, but income tax is paid by partners.
As a general rule, France tax law does not acknowledge transparent entities.
The French 'société civile immobilière' (SCI) is the most common vehicle used for French real estate investments: flexible, quick & cheap, allows a tax consolidation of the profits and losses derived from the different stakes without any tax consolidation formalism, but with unlimited liability of the partners.
The French 'société en nom collectif' (SNC) is a commercial vehicle which can be found in real estate mixed with services such as hotels, care homes, student houses etc…with similar characteristics as the SCI.
Corporations and trusts are treated as separate taxable entities under Canadian income tax law. However, a trust is treated as a flow-through entity and not subject to income tax if distributes all of its income and gains for the year to its beneficiaries. Partnerships are not treated as taxable entities.
Limited partnerships are transparent for tax purposes and are primarily used as private collective investment vehicles. Limited partnerships can also be used to carry on an active business; however this is less common.
Mutual fund trusts are not transparent for tax purposes; however, they are typically taxed as a flow-through vehicle. They are typically used for public collective investment vehicles and REITs. They are not appropriate for carrying on an active business in Canada.
Canadian unlimited liability companies (ULCs) are not transparent for Canadian tax purposes. However, they are transparent for United States tax purposes. As a result, they are often used in structuring investments into Canada by US entities in order to achieve US tax benefits.
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.
Businesses in Bulgaria generally adopt a corporate form. There are five different types of corporate structures in accordance with the Commercial Act:
- Unlimited Partnership;
- Limited Partnership;
- Limited Liability Company;
- Joint Stock Company; and
- Limited Partnership with Shares.
The key differences relate to the number of members and the kind of liability of the members. For instance, Unlimited Partnerships require the personal participation of their members. Limited Partnerships require the personal participation only of their unlimitedly liable members. The members of Limited Liability Companies and Joint Stock Companies participate and are liable only to the extent of their capital participation. All entities listed above are taxed as separate legal entities.
Bulgarian law does not envisage the existence of transparent entities, ie, where the income is considered to be the income of its members. One specific entity is the consortium, because of the contribution of its members and the distribution of the profit, which is mostly used for public procurements, but it is not a classic transparent entity.
Yes. Corporations, partnerships, estates and certain trusts generally are treated as separate entities for U.S. federal income tax purposes. Partnerships and certain trusts are not subject to tax at the entity level.
Certain entities (generally limited liability companies (LLCs)) may “check the box” to elect their classification for U.S. federal income tax purposes. Except for entities that are per se corporations (such as U.S. state law corporations or similar foreign entities), an entity with at least two members can choose to be taxable as a corporation or a partnership, and a business entity with a single member can choose to be taxable as a corporation or disregarded as an entity separate from its owner. As disregarded entities are not recognized for U.S. federal income tax purposes, they are used in tax structures for a variety of reasons to allow a group of entities to report as one company for U.S. federal income tax purposes, but for other state or foreign law purposes to be recognized as a separate legal entities; for example, to hold assets or businesses separate from other related entities, to facilitate a parent company’s need to register an entity in a foreign jurisdiction in order to own assets or carry on its business and comply with local payroll and social insurance requirements.
In Ukraine only limited liability companies, joint-stock companies, individual entrepreneurs, etc., are recognized as taxable entities. Therewith, partnerships, trusts are not recognized as taxable entities in Ukraine and there are no companies which are transparent for tax purposes.
While Cyprus recognises 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.
Any vehicle for carrying business in Ecuador is an entity for tax purposes subject to income tax as a corporation would be. These vehicles include de facto entities and independent estates with or without legal personality.
The only transparent entity recognized in the Ecuadorian tax legislation is the “fideicomiso mercantil” if it is not engaged in a trade or business.
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 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 utilized, 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 utilizing a limited company). Partnerships, for example, are a common form of incorporation in Israel utilized 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.
Only corporations (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 of the partnership and taxed at their level.
It is not possible to establish a trust under Swiss law. As a consequence, Swiss tax law recognises trusts as independent entities in limited circumstances only. As a general rule, assets (and income derived from those assets) contributed to a trust by a Swiss resident are still be attributed to said Swiss resident for Swiss tax purposes.
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 are generally qualified as taxable entities unless 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.
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.
The Income Tax Act recognises companies, branches of foreign companies and trusts as taxable entities. Based on current law, all forms of partnerships (limited liability partnerships and general partnerships) are transparent for tax purposes and their income is taxed at the hands of the partners.
From the perspective of income taxation, Polish law recognizes differences in entity structures, such as companies and partnerships; however, it does not explicitly regulate the tax status of trusts. Corporations and partnerships limited by shares are treated as taxpayers of Corporate Income Tax separate from the partners. Partnerships are transparent from an income tax perspective which means that revenues and costs are allocated for tax purposes to the partners. These tax transparent vehicles are often used by individuals due to the fact that in these cases the tax is paid only once, whereas in the case of companies, the tax is paid twice (on the income of the company and on the dividend paid to the shareholder). Limited partnerships are sometimes also used by companies which enable splitting various investments into separate operating entities and at the same time grouping the tax results of all of the entities at the shareholder company.
From the VAT perspective, companies and partnerships are treated as taxable entities.
Yes. Japanese corporate law makes available several options of corporate forms; among these, the most commonly used one is a kabushiki kaisha (stock corporation; commonly referred to as a “KK”). A godo kaisha, which is modeled after a U.S. limited liability company (LLC), is also common for small businesses or as subsidiaries of foreign companies (commonly referred to as a “GK”). As Japanese corporations, a KK or a GK is taxed as a corporation, and cannot be taxed as a transparent or passthrough entity.
Only non-corporate business forms are eligible for transparent or passthrough taxation for Japanese tax purposes. These business forms take the form of a partnership (kumiai), which is an aggregate of partners based upon a contractual relationship, but not being an entity separate and distinct from the partners. A partnership (kumiai) is taxed as transparent or passthrough; that is, they will not be treated as an independent taxpayer, but rather their partners are taxed as taxpayers with respect to the income derived from the business of the partnership. In general, the profits and losses derived from the business of the partnership are allocated to each of the partners based upon the percentage agreed upon in the relevant partnership agreement (most commonly, the ratio of capital contributions). There are rules for limitation of allocation of losses to certain passive partners (e.g., limited partners) to prevent tax avoidance using these partnership structures.
Trusts are also recognized. Generally, plain-vanilla common-law type of trusts are disregarded and treated as a conduit, i.e., it is treated for tax purposes as if the beneficiary of the trust owned the entrusted assets directly and derived the income and gains from the entrusted property directly. However, some special types of trusts are treated as a corporation by itself (i.e., as a standalone taxpayer apart from beneficiaries), and some investment trusts used as a collective investment vehicle are treated as somewhat an opaque entity, i.e., the trust itself is not a taxable entity and the beneficiaries or the investors are taxed only when they received actual distributions.
The Dutch corporate income tax act prescribes which entities are taxable entities. These are i.a. limited liability companies (i.e. NV or BV), other entities with a capital divided into shares, cooperative associations (i.e. Coop), associations and foundations to the extent they conduct an enterprise and "open" limited partnerships (i.e. CV).
A limited partnership is considered "open" and thereby becomes a taxable entity if the limited partners can transfer their partnership's interest without the unanimous consent of all other partners. A limited partnership is not a taxable entity if it is considered "closed", which means that for the transfer of a partnership interest the unanimous consent of all partners is required.
Dutch law does not include the trust. Trusts are generally considered to be transparent for tax purposes.
Pursuant to 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.
The most common company types in Norway are General Partnership (ANS), Limited Partnership (KS/IS) and Limited Liability Company (AS). Partnerships and Limited Partnerships are separate legal entities, but are considered transparent for tax purposes. Profits and losses generated by a partnership are calculated at the partnership level and the result is allocated to the partners and taxed at their hands. Limited Liability Companies qualify as taxpayers separate from the shareholders.
Trusts may not be formed under Norwegian law. Generally, trusts formed under the law of another jurisdiction would be recognised for tax purposes and would be regarded as being a separate taxable entity.
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.
For Austrian tax purposes it has to be distinguished between intransparent and transparent entities.
Stock companies (Aktiengesellschaft (AG)), limited liability companies (Gesellschaft mit beschränkter Haftung (GmbH)) and private foundations (Privatstiftung) are intransparent and subject to Austrian corporate tax law. Private foundations may not run an active business.
Partnerships - most importantly the general partnership (Offene Gesellschaft (OG)) and the limited partnership (Kommanditgesellschaft (KG)) are legal entities, but treated transparent for tax purposes; income is taxed proportionally in the hands of the partners.