Partners

Partnerships

A partnership exists when business is carried on by two or more persons in common. A partnership is not a separate legal entity and is not taxed as such. Legally, a partnership comprises the individual partners.

There is a great deal of flexibility in relation to the way partnerships may be constituted. Partnerships may range between relationships of equals, to relationships of individuals with significantly different roles and rewards from the partnership. See our guides in relation to partnership law

Taxation of Partners

Each partner is taxed individually, in much the same manner as a sole trader. There are special rules in relation to the apportionment of partnership profits, losses and capital allowances. Each partner makes his own tax return , as if his share of the partnership profits was a separate business.

In addition, one partner, called the  precedent partner  must make an additional partnership return. This is not in respect of further liability but is a co-ordinating requirement.

The precedent partner may be designated by the partners. In the absence of agreement, the precedent partner is the one named first in the partnership deed or agreement.  The precedent partner must be resident in the State. That precedent partners is responsible for return the firm’s filing, which is required in addition to the  individual partner’s return.

Commencement & Cessation

See our chapter in relation to commencement and cessation of a sole trade, and how it affects taxation in the first and last three years of business. The special tax rules in relation to the commencement and cessation of trade apply in the context of each partner’s deemed separate trade. When a partner joins and leaves the partnership, there is a commencement and cessation of trade for that partner.

Cessation rules also apply when the partnership ends as well as when individuals join and leave the partnership. The partnership “relevant period” lasts for as long as at least one partner who was partner at the commencement remains as such or until trade is discontinued or the last partner becomes a sole trader.  For so long as the relevant period lasts, the partnership continues for the purpose of tax law.

For the most part the individual partner is treated as a sole trader in relation to his share of the profits. The same rules apply in relation to commencement, cessation and change of accounting date.

There may be a commencement when an individual joins the partnership. That partner is subject to the commencement rules. The other partners continue under the normal basis.

Equally when an individual leaves the partnership, such as by retirement or resignation, the individual cessation rules apply.

Shares

Each partner is taxed on his share of the profits of the partnership. The profit-sharing ratio is decided by the partnership agreement. Partnership legislation provides that in default of agreement otherwise, profits are presumed to be shared equally. The profits or losses of the partnership business are calculated in the same way as for a sole trade.

If the profit-sharing ratio changes mid-year, profits are apportioned on a time basis before and after the change. Capital allowances and charges of the partnership business are apportioned in the same ratios. Losses are apportioned in the same manner.

Calculating Income

The accounts are adjusted in the same way as for a sole trader. Appropriation of profits to individual partners whether described as salaries, interest on capital or otherwise are added back. They are then allocated to the partners before the residue is applied in the agreed profit-sharing ratio.

After income is allocated to the partners, they are assessed on their share of the profits of the trade. The losses and capital allowances at allocated. Each Partner may use his losses in the same way as a sole trader. He may elect to set the loss against future income of the same trade or business or offset it against all  of his or her income in the relevant year

Partners may receive interest on capital, drawings or salaries. Each of these are appropriation of profits and are not deductible expenses of the trade. They are therefore added back to the accounts as an adjustment in calculating taxable profits. Where profits are not distributed for any reason, each partner is assessed at his or her marginal rate.

Even though a person may be held out as a partner for example a salaried partner, he or she may be in fact, an employee. In this event they are taxable as such.

Charges Capital Allowances & Losses

Individual partners are deemed to have paid their proportion of the charges applicable to the partnership.  Capital allowances are apportioned in the profit-sharing ratios.  If there is a change in the composition of the partnership during the relevant period, profits are apportioned on a time basis relative to the member partners.

Capital allowances may increase a loss. They may not be the carried forward by a partner and revert to partnership for use in later years.

Capital allowances are split in the partners’ profit sharing ratios in the tax year concerned. Where there is a loss, the loss cannot be apportioned to give one partner a profit. Different partners may use their share of the losses differently.  One may claim against total income,  while another may bring the loss forward.

The amount of loss claimed by the partners must not exceed the loss to the partnership.  Where the partnership makes a profit, no partner is entitled to claim relief for a loss. Subject to this,  partners may use their partnership losses in different ways, in accordance with the general terms  applicable to the use of losses.

Where common issues relating to joint allowances and joint charges are involved, Revenue may deal with the precedent partner.  Where the Revenue’s determination is final or conclusive (by reason of no appeal or as a result of appeal) the partner may not appeal against these issues in relation to their impact on his own  tax computation.

Partnership charges are apportioned by reference to the profit sharing ratio for the year of assessment in which they are paid, rather than accrued.

Precedent Partner

The precedent partner is obliged to make aa return of all income of the partnership. He has certain other administrative obligations, including furnishing information as to the distribution and apportionment of profits, losses and allowances.

If for any reason,  a partner’s profit-share has not yet been allocated it is assessed under Case IV Schedule D on the precedent partner.  The precedent partner may withhold tax on subsequent distributions and the person receiving the same obtains a credit.  This treatment  changed as on from 2007.  All undistributed profits are assessed on the partners in their several shares.

A non-active partners may offset losses and allowances, up to a limit of €31,750 for allowances against other income. Non-active partners who incur expenditure on construction of hotels in Border and Midland counties are exempt from the restriction.

Limited Partners

Limited partnerships facilitate passive investment in trading partnerships.  The taxation legislation on limited partnership extends wider than the limited partnership legislation.

Formerly, limited partnerships were used as devices for tax avoidance.  The structure created a risk free trading loss for the limited partner. Anti-avoidance legislation has greatly reduced this possibility. Where a person is a limited partner, he may receive relief for losses only to the extent of his actual contribution to the partnership. This includes profits to which he is entitled, but which have not yet been distributed. There are restrictions on limited  partners and inactive partners in using losses and capital  allowances.

A person who carries on a trade as a partner either in Ireland or in a partnership registered outside Ireland, other than as an active partner is a limited partner for tax purposes. The partner is not active, in this context,  unless he works for the greater part of his time in the conduct or the day-to-day management of the trade.

A limited partner for the purpose of the legislation is

• a limited partner registered as such;
• a person carrying on a trade as a general partner who is not entitled to take part in the management but is not responsible for the partnership debts and liabilities, beyond a certain limit, or is indemnified by another;
• a person who carries on trade as a general partner other than as an active partner in the sense of working a greater part of his time in the conduct or management of the business;
• a person who carries on a trade in a partnership outside the State other than as an active partner; or
• a person who carries on a trade with others under an agreement or arrangement governed by foreign law, other than one who works for the greater part of his time in the conduct or management of the trade.

Limited Partner Restrictions

Losses  arising from a partnership to a limited partner are available  against income from the partnership. A person may not set off loss in a trade as a limited partner, beyond his total contributions to the partnership and his undistributed income from the partnership. He may not claim a deduction of interest on borrowings for an interest in the partnership to the same extent as ordinary partners.

There is a restriction on the deductibility of interest on borrowings to acquire an interest in a trading partnership.  Limited partners may only claim interest, capital allowance and trade losses against partnership profits.

The above limitations do not apply in certain hotel partnerships, where in  certain cases, allowances to a maximum of €31,750 per annum are available.  There are also certain situations in the context of renewable energy, fishing and certain historical partnerships where the wider deductions are allowed.