Tax Rules for General Professional Partnerships

Section 26 of the NIRC of 1997, as amended provides that a general professional partnership as such shall not be subject to the income tax imposed under this Chapter.
Section 26 further provides that persons engaging in business as partners in a general professional partnership are liable for income tax only in their separate and individual capacities.
Under Section 26, the net income of the partnership is computed in the same manner as a corporation for purposes of determining partners’ distributive shares.
Under Section 26, each partner must report as gross income the partner’s distributive share, whether actually or constructively received, in the partnership’s net income.

Section 22(B) of the NIRC of 1997, as amended defines general professional partnerships as partnerships formed by persons for the sole purpose of exercising their common profession.
Section 22(B) provides that a general professional partnership’s income must not be derived from engaging in any trade or business.
Section 22(A) states that “corporation” includes partnerships but expressly does not include general professional partnerships.

Income payments made to a General Professional Partnership in consideration for its professional services are not subject to income tax.
Because such income payments are not subject to income tax, withholding tax prescribed in Revenue Regulations No. 2-98, as amended does not apply to these professional-service payments.
Revenue Regulations No. 2-98, as amended, Section 2.57.5 provides an exemption from withholding for certain income payments, including payments to persons enjoying exemption from income taxes under any law.
Revenue Regulations No. 2-98, as amended, Section 2.57.5 recognizes General Professional Partnerships among the income payees enjoying such exemption for withholding purposes.

Section 26 requires that partners are taxed only in their separate and individual capacities.
Section 26 requires each partner to report as gross income the partner’s distributive share in the partnership’s net income, whether actually or constructively received.
Section 26 provides that distributive share computation uses partnership net income computed in the same manner as a corporation.

A general professional partnership may make income payments to partners periodically or at the end of the taxable year, including drawings, advances, sharings, allowances, stipends and the like.
Such periodically made or year-end payments are subject to 15% creditable withholding tax when the payments to the partner for the current year exceed PHP 720,000.00.
Such payments are also subject to 10% creditable withholding tax when otherwise imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 30-03, in Section 2.57.2(H).
The circular enjoins correct application of these withholding rates depending on the circumstances of the partner payments.

All concerned persons and entities must follow the income tax and withholding consequences established by Section 26 of the NIRC of 1997, as amended, and by Revenue Regulations No. 2-98, as amended (including the withholding rules and exemptions under Section 2.57.5).
All concerned must apply the withholding treatment for partner payments (15% thresholded by PHP 720,000.00, or 10% under the applicable rule in Section 2.57.2(H) as amended).
All concerned are enjoined to give the circular wide publicity to ensure uniform compliance.