In this blogpost, Mudrika Mathur, Student, University of Rajasthan and the Diploma in Entrepreneurship Administration and Business Laws by NUJS, writes about, what is limited liability partnership, Director Identification Number Or Designated Partner Identification Number, Taxability of partners of LLP under IT Act vis-à-vis Double Tax Avoidance Agreement and remuneration to the partners.
A Limited Liability Partnership is a hybrid structure between a company and a partnership which delivers the benefits of limited liability and allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement.
Partners are persons (whether natural or artificial) who have subscribed their name to the Incorporation document and further any new partner can be admitted to LLP as per provisions of LLP agreement. The LLP Act 2008 defines the term partner under Sec.2 (q) as ‘Partner’ in relation to an LLP, as any person who becomes a partner in LLP in accordance with the LLP agreement. The LLP Act, 2008 empowers Individuals, Foreign Nationals, Indian Companies, Foreign Companies, Foreign LLP and Foreign LLC to be partners in an LLP. (However, the Foreign LLP would have to comply with FEMA rules).A minimum requirement while incorporating an LLP is two partners(individuals or body corporate )and two designated partners and out of which at least one of them should be an Indian Resident.[1]
Director Identification Number Or Designated Partner Identification Number
All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN).” The partners need to file E-Form DIN-1 in order to obtain DIN or DPIN. In case, the partners already possess DIN (Director Identification Number), the same can be used as a DPIN. DIN / DPIN is a unique Identification Number allotted to an individual who is an existing director of a company or intends to be appointed as a director of a company pursuant to section 266A & 266B of the Companies Act, 1956 (as amended vide Act No 23 of 2006) / or a Designated Partner of a LLP under section 7 of the Limited Liability Partnership Act, 2008. Income-tax Permanent Account Name (Income-tax PAN) is mandatory as identity proof in case of Indian nationals and such case applicant details should be as per Income-tax PAN. In the case of foreign nationals, Passport number is required. In the case of Foreign Partner, the Passport copy is a mandatory requirement as a proof of identity. The address proof should not be older than 1 year from the date of filing of the E-Form. The Passport copy and address proof should be notarized by the Consulate of the Indian Embassy, Foreign public notary or Company Secretary in full-time employment / CEO / Managing director of the Indian company in which the partner proposed to be a director.[2]
Taxability of partners of LLP under IT Act vis-à-vis Double Tax Avoidance Agreement
Under the ambit of section 2(23) of the IT Act, a partner of an LLP is included in the definition of the term “Partner” under the Indian Partnership Act, 1932. It means that, for tax purposes, partners (including foreign partners) of LLPs are co-terminus with partners of a partnership. An LLP is chargeable to tax in India under section 167 A of the IT Act at 30%, consequently, under section 10(2A) of the IT Act, a partner’s share of income from a firm is exempt from tax in the hands of the partner. In the Indian context, a partner in an LLP would principally earn these sets of income:
- Share of profits in the LLP
- Interest on capital contributed by partner; and
- Remuneration in share of profits in the LLP, including a foreign partner’s share, in the profits of an LLP, is exempt in their hands under section 10(2A) of the Act as an LLP is a taxable entity under the Act and pays tax on profits earned by it.
Remuneration to partner
Remuneration paid by an LLP to a working partner is taxable as business income under section 28(v) of the IT Act. It means, for Indian income tax purposes all the sets of income derived by a partner including a foreign partner from an LLP is taxable (except for the share of profit) as business income of the partners.
Remuneration to foreign partner
The moot point is whether the payment by LLP to foreign partner should be characterized as “Independent Personal Services” (Article 14) /”Dependent Personal Services”/ “Business Income”. Under the India – UK treaty income derived by an individual as a member of a partnership for professional services is specifically characterized as “Independent Personal Services”. However, there are treaties which only include professional services by an individual in their independent capacity as “Independent Professional Services”. Taxability of such income in India is based on either number of days the individual is present in India or availability of fixed base in India to such individual for performance of his services. For remuneration to be regarded as “Dependent Personnel Services”, the existence of an employer or employee relationship between the payer and payee is a must. However, in the case of the partners of an LLP, they are considered as owners of the LLP and consequently the payment may not be characterized as income from “Dependent Personal Services”. If the rationale followed under the IT Act is applied to the tax treaty and remuneration paid to a foreign partner is regarded as “business income” of this foreign back to top partner, the same may still not be taxed in India under article 7 of business profits read with article 5 of the various tax treaties, unless the foreign partner has a permanent establishment in India. The rate of withholding tax on payments to the foreign partner would depend on the characterization of income. For the taxability of such payments, the provisions of the IT Act or the treaty, whichever are more beneficial to the foreign partner, should be applied.
[1] Rule 10(2) of LLP Rules,2009 (as amended by Rule 2 of the Limited Liability (Amendment)Rule,2010.
[2] Faq’s on Revised DIN Process (w.e.f,27 March’11),available at http://www.mca.gov.in/MCA21/dca/din/DIN1-4_faq1.html,last seen on 30/01/2016.
