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HMRC internal manual

Partnership Manual

Tax status of overseas partnerships

As per the guidance at PM136000, partnerships established or incorporated under the laws of the UK are transparent for UK tax purposes. You should be aware that partnerships established under the laws of another country, however, may not be transparent for UK tax. Although the entity may be described as a partnership in the other country, its characteristics may be dissimilar to those of UK partnerships and, as such, different tax treatment may apply.

There is detailed guidance at INTM180000 to help you consider the classification of a foreign entity, i.e. whether it is either opaque or transparent, for UK tax purposes. A list of foreign entities for which HMRC has expressed a general view on the question of transparency/opacity is set out in INTM180030. Please be aware that the list does come with some caveats. In some instances, the view was given many years ago and there may have been subsequent changes to the foreign law affecting the classification. The entity’s internal constitution, i.e. agreements, articles of association or other documents governing its creation, continued existence and management, can also affect the classification.

The general approach taken in the UK’s double taxation agreements with regards to partnership income is given at INTM153340.

An entity will not be treated as a partnership for UK tax purposes just because it is not itself taxed on its profits (“fiscally transparent”). The proper analysis of partnership principles is still necessary before a firm is treated as a partnership for UK tax purposes.

The question of whether a non-UK firm is treated as a partnership for UK tax purposes is important when considering many issues, including (but not limited to):

  •  What business is carried on by the firm, by whom (as partner or otherwise) and where,
  •  What profits of the firm are chargeable to tax in the UK?
  • How income from the firm should be reported and whose obligation this is,
  •  What expenses are allowable as deductions?
  •  The availability of loss relief for any losses sustained by the firm, what income those losses can be used against and whether any relevant restriction applies,
  • The treatment of the firm under any provision in the Taxes Acts which specifically applies to partnerships.

If a firm is not treated as a partnership under the approach set out in this guidance, then it will depend on the specific facts of the case what the treatment for UK tax purposes should otherwise be. This guidance does not consider any alternative UK tax treatment.

Many countries around the world have legislation governing bodies called a “partnership” or a variant such as “limited liability partnership” or even “limited liability limited partnership”.

Other countries also have bodies that look like UK partnerships but are called by different names.

In deciding whether the firm is treated as a partnership for UK tax purposes, what structure a firm claims to be does not matter, what matters is what business the firm carries on and how it operates.

For UK Income and Corporation Tax, the term “partnership” includes firms formed outside the UK that meet the UK definition of a partnership, which is:

“Partnership is the relation which subsists between persons carrying on a business in common with a view of profit.”

In short a group of persons have come together to run a business enterprise together in order to make a profit that they then divide between them.