Partnership is the relationship which subsists between persons carrying on a business in common with a view to profit provided that such relationship did not culminate as a registered company under Companies and Allied matters Act or by any other law. Section 1 Partnership law of Lagos State 2009 as Amended.

Under the companies and Allied matters Act 2020, Limited Partnership and Limited liability partnership were recognized. This similar position with the provisions of Partnership Laws of Lagos State.

Whether limited liability or limited liability partnership, the purpose of such partnership formation is to carry on a business in such scope and manner as may be mutually agreed and within the purview of the partnership agreement executed.

What is the tax implication of a business carried out under partnership scheme? Who is taxable, the partnership or partners?

In general terms, Partners and not partnership, are taxed in Nigeria under personal income tax; thereby taxing partners as individuals with chargeable incomes derived from partnership, according to partners respective profit shares from partnership income.

Under the Partnership Law of Lagos State 2009 income of partners of a limited liability partnership is liable to tax under personal income tax act.Section 70 Partnership Law of Lagos State 2009 as Amended.

A partner is liable to pay tax in the State the partner was resident during the assessment year. Partners are taxed on a preceding year basis; a partner is to file tax returns within 90 days of the end of the fiscal year, that is, by 31 March.

Under the Partnership Law of Lagos State, partnership is viewed as a combination of two or more sole traders, and partnership income to be distributed between the partners is determined using principles applicable to sole traders. The Partners are assessed in their individual names, based on the share of partnership profits allocated to them. A partner’s income from the partnership is calculated as the sum of any remuneration; interest on capital; cost of leave or recreation passages to or from Nigeria charged to the Partnership account in respect of that partner.

Under the Companies and Allied Matters Act 2020, determination and taxation of Partnership is left on the blue moon and undetermined. The act only draws a bulwark as the nature of Limited Partnership and Limited Liability partnership. The acted classified Limited Liability Partnership as a body corporate, can sue and be sued; and possess all juristic personal by reason of incorporation. Section 746(1) and Section 756 Companies and allied matters Act 2020.

In line with section 746 and 756 of CAMA, it is difficult to read section 70 of Partnership Law of Lagos State supra, in blood and fresh to mean that Limited Liability Partnership is taxed under its partner’s income. The position of CAMA 2020 is crystal and equivocal, Limited Liability Partnership is a corporate sole and should be taxed under Companies Income Tax Act.

DETERMINATION OF PARTNER’S TAXABLE INCOME

In a nutshell, the income of a partner derived from the partnership is calculated by summing up;

Salary or commission paid to the partner;
Interest on capital invested in the partnership by the partner;
Leave or recreational passages enjoyed by the partner and charged to the partnership account; and
Share of profit or losses of the partner.
In determining the share profits accrued to a partner, the net profit or loss of the partnership must be adjusted. An Adjustment is made by adding back to the net profit or loss all disallowable expenses and unreported taxable income under PITA while deducting from the net profit or loss all reported non-taxable incomes and allowable expenses under PITA. The adjusted profit or loss of the partnership is then split between the partners according to the agreed ratio. Expenses such as domestic or private expenses; capital withdrawn; loss recoverable under insurance; rent or cost of repair of premises not used in producing income; taxes on income or profits levied in Nigeria or elsewhere within Dobletaxation jurisdiction; payment to pension, provident, savings, widows, or orphan’s fund not approved by the Joint Tax Board (JTB); depreciation; sum reserved out of profits, etc; are allowable expenses deductible while computing Partner’s tax liability.

Partner’s profit on disposal of a fixed asset, disposal of an investment; and income received to cover a disallowed expense are Non-taxable income. Capital allowance where available is distributed in same manner of profit ratio and relieve against each partners income.

Where the partnership or any of the partners records a loss, such loss will be carried forward and relieved from the partner’s total partnership income next year. Where a partnership records profit while a partner records a loss, such loss cannot be carried forward and relieved from such partner’s total partnership income next year.

PARTNER’SPERSONAL INCOME TAX COMPUTATION.

While computing Partner’s PIT for the year of assessment, the following steps should be followed;

Identify net profit or loss of partnership;
Add all non-allowable expenses and unreported taxable income;
Deduct non-taxable income and allowable expenses not deducted;
Step 1-3 would give the adjusted profit or loss;
Deduct all private expenses and money given to each partner from the partnership profit and distribute to each partners account as income received from partnership;
Share the remaining adjusted profit between the partners in the profit and loss sharing formula.
Deduct loss carried over by each partner from the result of steps e and f;
Deduct each partner’s share of the capital allowance for the partnership;
Result of steps e to h is the earned income from partnership;
Add income from other sources received by each partner;
Deduct consolidated relief allowance and other allowable deductions for individuals;
The result is the chargeable income per partner;
Apply the tax rate to this income.

CONCLUSION

Partnership just like any other modes of business formation, its income are taxed under the hand of each partner’s income. Hence, tax liability in partnership business is bore by the partners and paid as personal income tax under personal income tax act.

The Partnership Laws of Lagos State supra gives a conclusive position on the taxation of partnership income, as it expressly state that income of partners of a limited liability partnership is liable to tax under personal income tax act. It is now difficult to read the provisions of section 746 and 756 CAMA to incorporate Limited Liability Partnership as nothing but a corporate sole in which case should be exonerate from Companies Income Tax under CITA. We suggest that a distinction be drawn while interpreting section70 Partnership Laws of Lagos State, and section 746 and 756 of CAMA 2020.

More so, recourse should be made reflecting the fact that CAMA is a federal law taking precedents over state laws while Partnership Law of Lagos State is a state law.

We submit that Limited Partnership should be taxed per partners Income under personal income tax, while Limited Liability partnership should be taxed under Companies Income Tax Act.