Public Ruling No. 5/2015 Taxation Of Limited Liability Partnership

Formation of an LLP

An LLP has hybrid features of a company and a partnership that provides limited liability to its partners.

An LLP or a foreign LLP that is registered under the LLPA should end with the abbreviation ‘PLT’ after the partnership’s name.

An LLP is governed by a different set of laws and is a separate legal entity capable of –
(i) suing or being sued;
(ii) acquiring, owning, holding and developing or disposing of properties; and
(iii) doing and responsible for such other acts as a body corporate may lawfully do.

LLP Agreement

The mutual rights and duties of the LLP and its partners are governed by the LLP agreement.

An LLP agreement shall consist of the following particulars –
(i) the name of the LLP;
(ii) the nature of business of the LLP;
(iii) the partners of the conventional partnership have agreed to become partners of the LLP;
(iv) the amount of capital contribution by each partner; and
(v) remuneration or similar payment to each partner.

Number of Partners

An LLP has a minimum of two partners and may have unlimited number of partners within any period of time. An LLP may carry on business with fewer than two partners for a period not exceeding six months or a longer period as may be determined by the Registrar.

Preparation of Financial Statement

An LLP is not required to prepare audited financial statement by an auditor but needs to keep proper and sufficient accounting and other records to indicate the true financial position.

For income tax purposes, an LLP is required to prepare complete accounting records containing the profit and loss account, balance sheet and explanatory notes to the accounts. However, if the accounting records are not prepared according to normal accounting format, the LLP shall keep the following records –
(i) information on income;
(ii) information on expenditure;
(iii) list of debtors and creditors/ liabilities;
(iv) list of all assets (current and fixed);
(v) percentage of capital contribution by each partner;
(vi) explanatory notes to items (i) to (v); and
(vii) other supporting documents to prove the business transactions.

Determining the Residence Status of an LLP

An LLP that carries on a business is resident in Malaysia for the basis year for a year of assessment (YA) if at any time during that basis year the management and control of its business are exercised in Malaysia.

Management and Control

Management and control are the key factors used to determine the residence status of an LLP in Malaysia. Management and control are considered exercised in the place where the partners met to discuss management of the business or affair of the LLP.

If at any time in the basis year for a year of assessment, at least one partners’ meeting is held in Malaysia in relation to the management and control of the LLP, the LLP is deemed resident in Malaysia for the basis year (even though all the other meetings are held outside Malaysia).

The location of trading activity or physical operations is not necessary the place of management and control. An LLP that carries on trading activity in Malaysia is not resident in Malaysia if it is found that –

commercial activities such as manufacturing or production and sales are controlled from overseas; and
partners’ meetings, during which all important business decisions are made, are also held overseas.

Distinction Between a Limited Liability Partnership, a Partnership and a Company

In general, the differences between a LLP, a partnership and a company are as follows:

Compliance Officer of a Limited Liability Partnership

The responsibility to carry out all actions and things that should be done by or on behalf of LLP for income tax purposes shall lie jointly or severally on:

(a) The compliance officer appointed from amongst the partners of the LLP; or

(b) If no compliance officer is appointed, then any one or all of the partners.

Responsibilities of the compliance officer or partner for income tax purposes amongst others are that he is required to:

(a) Keep complete accounting records of the business of the LLP. For a partnership or company that has converted to an LLP, accounts or documents of the partnership or company are still required to be kept by the LLP for a period of seven (7) years, even though the entity has been dissolved after the conversion.

(b) Complete and submit the income tax return form (ITRF) within the prescribed period.

(d) Inform the Director General of Inland Revenue (DGIR) on the changes of accounting period by submitting Form CP204B within the prescribed period.

(e) Ensure payment of tax by the LLP.

Example 1

Encik Ali bin Ahmad is the compliance officer who is also a partner of Damai Jaya PLT. Final notice under section 78 of the ITA for the year assessment 2013 was issued to him due to Damai Jaya PLT’s failure to submit ITRF.

If Encik Ali bin Ahmad failed to comply with the final notice, he would be prosecuted and if convicted in court, he could be fined or imprisoned.

Conversion of a Conventional Partnership or a Company to a Limited Liability Partnership

Conversion from a conventional partnership or a company to LLP must comply with the following conditions:

(a) From a conventional partnership to LLP –

(i) The LLP partners comprise of all the partners of the conventional partnership only.

(b) From a company to an LLP –

(i) the LLP partners comprise of all the shareholders of the company; and

(ii) there is no security interest in its asset subsisting or in force at the time of application.

A company may not be allowed to convert to an LLP if it still has outstanding taxes or debt due to the Government. Thus the company is advised to get a tax clearance letter from the DGIR to be submitted to the CCM for registration purposes.

For income tax purposes the business of an LLP is regarded as a continuous business. Therefore the value of each item in the balance sheet, such as trading stocks, debtors and creditors at the date of conversion shall continue to be used in the LLP.

Change of Partners in a Limited Liability Partnership

If there is a change of partners in an LLP where existing partners cease from the LLP due to retirement, death or other reasons or new partners participate in the LLP, the change has no impact on the business of the LLP and it is still regarded as an on-going business.

Tax Treatment of a Limited Liability Partnership

1. Imposition of Tax

Definition of 'person' includes the PLT. Therefore, any provisions of the ITA, exemption orders and income tax rules applicable to 'person' shall apply to the LLP. Specific incentives provided to a company do not apply to an LLP.

2. Tax Rate

Income tax shall be imposed on the chargeable income of an LLP for a year of assessment at the rate provided in Part 1 Schedule 1 of the ITA. However, the taxation of an LLP resident in Malaysia with a total capital contribution (whether in cash or in kind) of RM2.5 million and less at the beginning of the basis period for a year of assessment shall be at the rate as provided in paragraph 2D, Part 1 Schedule 1 of the ITA.

The above rate does not apply to an LLP if more than –

(i) fifty percent of the capital contribution (whether in cash or in kind) of the LLP is directly or indirectly contributed by a company;

(ii) fifty percent of the paid-up capital in respect of ordinary shares of the company is directly or indirectly owned by the LLP; or

(iii) fifty percent of the capital contribution (whether in cash or in kind) of the LLP and fifty percent of the paid-up capital in respect of ordinary shares of the company is directly or indirectly owned by another company.

The above-mentioned company shall have a paid-up capital in respect of ordinary shares of more than RM2.5 million at the beginning of the basis period for a year of assessment.

Restrictions on Partner’s Salary Deduction

Remuneration refers to basic salary and fixed allowances but does not include employer’s contributions to the Employees Provident Fund (EPF), Social Security Organisation (SOCSO) or insurance. In general, under subsection 33(1) of the ITA, the remuneration is an expense which is wholly and exclusively incurred in the production of income. However, the expenditure allowable under subsection 33(1) is subject to the prohibitions under subsection 39(1) of the ITA.

Remunerations or similar payments to partners of an LLP are not allowable for deduction if not specified or provided for in the LLP agreement.

Remunerations to be paid to the partners should be documented in the LLP agreement. Thus, if there is a change of partners in the LLP, where new partners will be paid remuneration, the LLP must prepare a supplementary agreement or any document to record the change.

Incorporation Expenses

An LLP which has capital contribution not exceeding RM2.5 million shall be allowed a deduction in respect of incorporation expenses for the basis period for a year of assessment.

Losses and Capital Allowances

If a conventional partnership or a company converts to an LLP, the LLP is considered carrying on a continuous business. The tax treatment in respect of losses and capital allowances are as follows:

1. Adjusted Loss

If a partnership or a company is converted to an LLP, the amount ascertained for any relevant year in respect of that partnership or company shall be allowed for the purpose of ascertaining the aggregate income of that LLP for a year of assessment following the relevant year of assessment.

Therefore the amount of current year losses that may not be fully absorbed as a deduction from the aggregate income of the partnership or company due to nil aggregate income or the loss exceeds the aggregate income, shall be allowed for ascertaining the aggregate income of the LLP for a year of assessment following the relevant year of assessment.

2. Capital Allowances

Allowances may not be fully absorbed in the absence of adjusted income or the adjusted income is not sufficient to absorb the allowances. Any unabsorbed allowances for a year of assessment shall be carried forward to subsequent year of assessment.

An LLP is not entitled to claim capital allowances on assets that have been transferred during the conversion of partnership or company to the LLP if the capital allowances have been claimed by a partner or a company in the same year of assessment where changes to the entity occurs. The PLT is entitled to claim capital allowances on assets transferred in the following years of assessment.

Qualifying Expenditure on Assets Acquired by an LLP

When a partnership or company is converted to an LLP, the transfer of assets to the LLP is deemed a control transfer. The amount of residual expenditure of the assets will be taken as the qualifying capital expenditure for the purpose of claiming capital allowances by the LLP.

Example 2

Teguh Jaya Sdn Bhd (accounts ending on 31 December) was converted to Teguh Jaya PLT in accordance with section 30 of the LLPA on 1.1.2013 and the closing date of accounts remained at 31 December.

Information on income of Teguh Jaya Sdn Bhd for the year of assessment 2012 is as follows:

Total income of Teguh Jaya Sdn Bhd for the year of assessment 2012 is as follows:

Teguh Jaya PLT is deemed carrying on a continuous business of Teguh Jaya Sdn Bhd. The unabsorbed loss of RM 83,000, unabsorbed capital allowances of RM 20,000 from Business 1 and RM 23,000 from Business 2 by Teguh Jaya Sdn Bhd for the year of assessment 2012 can be carried forward to the year of assessment 2013 and subsequent years and shall be allowed as a deduction from the income of Teguh Jaya PLT.

The last Form C to be submitted by Teguh Jaya Sdn Bhd is for the year of assessment 2012 (basis period from 1.1.2012 to 31.12.2012).

Teguh Jaya PLT must submit Form PT from the year of assessment 2013 (basis period from 1.1.2013 to 31.12.2013).

Example 3

Jati Diri Sdn Bhd (account ending on 31 December) was converted to Jati Diri PLT in accordance with section 30 of the LLPA on 1.7.2013 and changed the accounting period to end on 30 June.

The last Form C to be submitted by Jati Diri Sdn Bhd is for the year of assessment 2013 (basis period from 1.1.2013 to 30.6.2013). Form C for the year assessment 2013 must be submitted within seven (7) months from the date following the close of the accounting period which constitutes the basis period for a year of assessment, that is before or on 31.1.2014

Jati Diri PLT must submit Form PT from the year of assessment 2014 (basis period from 1.7.2013 to 30.6.2014). Form PT for the year of assessment 2014 must be submitted before or on 31.1.2015.

Example 4

Seri Cahaya Sdn Bhd (accounts ending on 31 December) was converted to Seri Cahaya PLT on 1.7.2014 and the first set of accounts of Seri Cahaya PLT is closed on 30 June 2015 (12 months). Seri Cahaya Sdn Bhd claimed capital allowances for the year of assessment 2014 (1.1.2014 to 30. 6.2014) and there are unabsorbed capital allowances.

Example 5

Che Rose Partnership (accounts ending on 31 December) was converted to Che Rose PLT in accordance with section 29 of the LLPA on 1.1.2013 and maintained the closing date of accounts at 31 December. Chee, Sani and Rosnah are partners of Che Rose Partnership.

Information regarding Che Rose Partnership for the period 1.1.2012 to 31.12.2012 is as follows:

(i) Profit sharing ratio for Chee, Sani and Rosnah are 1/4, 1/4 and 2/4 respectively.

(ii) Salaries to partners: Chee received RM 40,000 and Sani RM 20,000

(iii) Interest income shared equally among the partners.

Distribution of divisible income and computation of statutory income for each partner for the year of assessment 2012 are as follows:

(i) The last Form P of Che Rose Partnership is for the year of assessment 2012 (basis period from 1.1.2012 to 31.12.2012).

(ii) Che Rose PLT must submit Form PT from the year of assessment 2013 (basis period from 1.1.2013 to 31.12.2013).

(iii) After distribution of loss and capital allowances to each partner, the partners may then decide whether part or all of the amount of loss and capital allowances to be carried forward to Che Rose PLT for the year of assessment 2013. Losses and capital allowances that may be carried forward to the year of assessment 2013 are as follows:

The partners must keep records to prove the amount of loss and capital allowances carried forward to the business of Che Rose PLT. The person who prepares the tax computations for Che Rose PLT is required to keep the documents/records on losses and capital allowances carried forward by each partner for verification by audit officers of the Inland Revenue Board of Malaysia.

Example 6

Senang Hati Partnership (accounts ending on 31 December) was converted to Senang Hati PLT on 1.7.2014 and the first set of accounts of Senang Hati PLT is closed on 31 December 2014 (6 months). Partners claimed capital allowances for the year of assessment 2014 (1.1.2014 to 30.6.2014) and there is unabsorbed capital allowances.

Special Allowances for Small Value Assets

An LLP is entitled to claim the special rate of allowance for small value assets instead of the normal capital allowance rates. The special allowances for small value assets are equivalent to the amount of qualifying plant expenditure incurred on small value assets.

Distribution of Profits to Partners

An LLP can distribute profits to its partners. Profits paid, credited or distributed to partners in the LLP are exempt from tax. There is no withholding tax on profits paid, credited or distributed to the partners.

Submission of Estimate of Tax Payable

An LLP is required to provide estimate of tax payable and payment by instalments.

An LLP is entitled to the preferential tax rate for every first RM500,000 of its chargeable income.

Assessments Related to Years of Assessment of a Partnership Or Company Before Conversion to an LLP

Every partner of a partnership shall continue to be personally assessable and chargeable to tax for any years of assessment prior to conversion into an LLP. For a company that has converted to an LLP, the LLP shall be assessable and chargeable to tax for any years of assessment prior to the conversion.

Any assessment associated with income of a partnership or company before conversion to an LLP is made as follows –

Example 7

Juicy Fruity Partnership (accounts ending on 31 December) has converted to Juicy Fruity PLT on 1.1.2014. The closing date of accounts remains as at 31 December.

The partners consisting of Airin, Aishah and Adrina still remain the partners of the LLP after the conversion. A desk audit was conducted on the partnership on 30.4.2015 and it was discovered that there was income under declared by the partnership for the year of assessment of 2013. Tax computation of the partnership and divisible income of each partner were revised accordingly.

The amended assessment for the year of assessment 2013 is made on each partner.

Example 8

Dobi Sunshine Sdn Bhd (accounts ending on 31 December) has converted to Dobi Sunshine PLT on 1.7.2014. Based on audit carried out by officers of the Inland Revenue Board of Malaysia on Dobi Sunshine Sdn Bhd on 1.3.2015, it was discovered that the tax computation for the year of assessment 2013 has to be amended.

Amended assessment for the year of assessment 2013 is made on Dobi Sunshine PLT.

Tax Treatment of Partners of a Limited Liability Partnership

Partners are not liable to tax on their share of income from LLP (whether distributed or not). They will be taxed on remunerations, perquisites and benefits-in-kind received from the LLP.

Bilateral Credit and Unilateral Credit

Bilateral credit can be claimed by an LLP resident in Malaysia when the same income is taxed twice for the same year of assessment, i.e. that income is taxed in the country in which the source arises and once again in the country the LLP is resident, and Malaysia has entered into double taxation agreement with that country.

Unilateral credit can be claimed by an LLP resident in Malaysia when the same income is taxed twice for the same year of assessment, that is that income is taxed in the country in which the source arises and again in the country in which the LLP received the income, and Malaysia has no double taxation agreement with that country.

Income of an LLP for the basis year for a year of assessment derived from sources outside Malaysia and received in Malaysia are exempt from tax unless the LLP:

(a) is carrying on the business of banking, insurance and sea or air transport; and

(b) whose foreign income, although considered as derived from Malaysia, has suffered foreign tax.

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Edited by: 浪子

Source: http://lampiran1.hasil.gov.my/pdf/pdfam/PR_5_2015.pdf