Budget 2013 proposes amendments to income tax law to treat tax status of a limited liability partnership (LLP) similar to that of a company under Companies Act, 1965. LLP is referred to a partnership set up under Limited Liability Partnerships Act, 2012.
Tax status of a LLP:
1. LLP is subject to income tax rate of 25%. It enjoys a SME tax rate of 20% for first chargeable income up to RM500,000, if the capital at the beginning of the year of assessment is not more than RM2.5 million. Chargeable income in excess of RM500,000 is subject to tax rate of 25%. This is similar to SME tax rates applicable to a SME company.
2. Profit paid or credited to its partners are tax exempted. This is similar to the single tier dividend paid by a company to its shareholders where such single tier dividend received by its shareholders is exempted from tax.
3. Remuneration payments to a partner of a LLP that is not specified in the partnership agreement is not tax deductible.
4. It has 7 months from its year end to submit tax return to IRB. A timeframe similar to that of a company.
LLP will be becoming more common in Malaysia for professional firms like accounting or legal firms. A clear tax status of a LLP under the tax laws provides clarity to those firms in their consideration to convert into LLP.
It could potentially provides tax planning opportunities and may give some tax savings for partners under the LLP. Remuneration received by a partner will be taxed as salary based on the individual scale rates from 0% to a maximum of 26% for chargeable income more than RM100,000.
Instead of paying the partner in the form of remuneration, the LLP could pays the partner in the form of profit distribution. The profit is taxed at 25% at the LLP level and will be tax exempted in the hand of a partner. In this way, the partner could enjoy a tax saving of differential of 1% between 25% and 26%.
Let’s see from another perspective. Currently, EPF contribution by a normal partnership is not deductible for tax but can be claimed as tax relief by a partner subject to a maximum of RM6,000.
Under the LLP (if treated the same way similar to a company), EPF contribution by the LLP (say employer portion) will now be tax deductible at LLP level and will not form part of a partner’s taxable income when calculating the partner’s individual tax.
Also, to avoid losing any tax deductibility of any remuneration paid, the LLP partnership agreement would have to be well drafted and specifies remuneration payments in that agreement.
Tax administrative and compliance of a LLP will inevitably be increased. For example, like a company, LLP is also required to submit tax estimate for its upcoming year of assessment. Significant estimate shortfall will subject the LLP to tax penalty.