Introduction:
Limited Liability Partnership is a hybrid form of business consisting of the elements of both a general partnership and a company. The main advantage is the limited liability of the partners and firm having a separate legal entity along with the benefits of having flexible operations in accordance with the agreement between the partners. Limited liability partnership got legal consent in India with the coming of Limited Liability Partnership Act, 2008 [“LLP Act”], and subsequent Limited Liability Rules, 2009. Being a budding field, there exist a number of lacuna and loopholes in the existing tax regime and the impact of conversion to an LLP in India. The jurisprudence in their regard is still emerging at a constant pace. There also exists a need to delve into the aspect of foreign LPPs which are even though small in number are increasing rapidly and cannot be neglected. Special emphasis needs to be given to the aspect of double taxation of such firms.
However, LLP as a form of business organization is increasingly becoming international in character. Several LLPs in India and globally have cross-border operations or foreign investments. While such international dimensions are proving to be great in terms of business, they pose several problems when it comes to the issue of taxation. This is primarily because of the difference in the way states treat partnerships: in some countries, they are tax opaque, in others tax transparent which often leads to the Double taxation or non- taxation complication. While there exist Double- Tax Avoidance Agreements (DTAAs) between states the research undertaken in this project highlight the fact that how these treaties are formulated is inadequate to address the issue of double taxation of LLPs.
Conversion to and fro from LLP
The Company Act, 2013 has made the regulation of companies stringent and complicated. In such a scenario several business organizations are contemplating the possibility of converting to an LLP given its inherent advantages. However, conversion from a private/public unlisted company to an LLP is not without its hassles. While the LLP Act explicitly provides for conversion to an LLP but the possibility of converting back does not exist. The tax implications of conversion pose another set of limitations. Condition precedents such as subsistence of no security interest make the process of conversion practically difficult for companies. Further, while there exist explicit statutory provisions allowing a company to carry forward losses and requiring them not to pay capital gains tax there exist no equivalents to this for ordinary partnerships choosing to convert to an LLP.
Scanty of Legislation and Obscurity in existing Framework Related to taxation of LLPs
The Limited Liability Partnership Act of 2008 avoided addressing one of the issues with respect to the provisions for taxation of LLPs. The determination as to whether LLP would be taxed like a company or a partnership firm was left for the Ministry of Finance to decide separately.
The framework was ultimately laid down by Finance Act, 2009, and 2010 which brought about the necessary amendments in the Income Tax Act, 1961 [“IT Act”]. It cleared the confusion by providing taxation of LLP on the same lines as that of a firm by substituted the definition of the firm, partner, and partnership given under Section 2(23) of the IT Act. [1] By these amendments, it was clarified that LLP shall be taxed at par with general partnership i.e. taxation in the hands of the entity and exemption from tax in the hands of its partners. Thus, now all the provisions of the IT Act will be applicable to the LLPs in the same manner as that of on a firm or partner or partnership in totality. In India, the applicable tax rate of a registered LLP is 30% of the total income, and an additional 12% surcharge might be applicable when the total income exceeds the threshold of one crore rupees. Furthermore, a 4% Health and Educational surcharge is also imposed. However since a foreign LLP is not an LLP as per the LLP Act[2] hence it is not treated as a firm within the meaning of Section 2(23), IT Act. It may be treated as a Company under Section 2(17)(ii)[3] as a foreign body corporate. Further, under Section 10(2A) the profits accrued of an LLP which is credited to a partner shall be exempted to tax. This will prevent double taxation.
The Problem of Double Taxation
Foreign LLPs are a growing arena in the Indian context. It is still growing however the law contains the possibility of such partnerships to operate in India.[4] In cases of cross-border operations such as those in foreign firms with Indian presence, several complex international law issues emerge in ascertaining the tax liability of a foreign partnership.
The common understanding is that the problem of double taxation can be addressed by the operation of double-tax avoidance agreements/ treaties [“DTAA”]. However, several problems arise in this regard too. A determination needs to be made of the circumstances in which the partnership can be allowed, or denied the benefit of such DTAA while being taxed in Source State.
The single most comprehensive international instrument dealing with the issue of double taxation is the OECD Model Tax Convention, 1963. But India is not a party to the OECD and further, it has expressly stated it that does not agree with the interpretation of Art.1 of the OECD Convention regarding that fact if a partnership is denied benefits under a tax convention because the State of Residence treats the partnership as a fiscally transparent entity then the members are entitled to the benefits of such a convention its members are entitled to the benefits of the convention. India advocates the position that this result is only possible when a provision to that effect is present in the convention entered into with State where the partnership is situated.[5] Accordingly, India has concluded certain DTAAs some, where partnerships have been specifically included (India- US Treaty; India- Canada DTAA) and some, where they are excluded (India-UK Treaty).
Apart from fulfilling the general rationale material requirements, an important criterion that must be fulfilled in order to claim the benefits of the DTAA is the criteria of it being ‘liable to tax’. This means that either by domicile or by residence or place of management or by any other mode the firm must be liable to pay. If no such case arises then the firm is not even liable to pay any tax. If it is liable then the tax treatment of foreign partnership under the laws of the country in which it is organized would determine whether the partnership would be granted the DTAA benefits or not.[6]
References:
[1] Sec 2(23) IT Act, 1961 reads as
firm shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);
(ii) “partner” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include,—
(a) any person who, being a minor, has been admitted to the benefits of partnership; and
(b) a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009);
(iii) “partnership” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009).
[2] Sec 2(n) LLP Act, 2008 reads as
“Limited liability partnership means a partnership formed and registered under this Act”.
[3] Sec 2(17) IT Act, 1961 reads as
“A company is (ii) any body corporate incorporated by or under the laws of a country outside India”.
[4] Sec. 59, Chapter XI, LLP Act, 2008.
[5] Updates to OECD Model Convention, 2008, http://www.oecd.org/ctp/treaties/model-tax-convention-on-income-and-on-capital-2015-full-version-9789264239081-en.htm
[6] Vivaik Sharma & Abhay Sharma , ‘Cross Border Taxation of Partnerships’ in International Taxation: A Compendium, pg. 484.
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