The income taxation of partnerships and their partner is based on, but not
identical to, United States federal taxation rules of partnerships. Thus,
partnerships are flow-thru vehicles that are not subject to income instead the
partners are responsible for the income taxes on their distributable share of
the Partnership’ items of income, even though the income is not distributed. A
partner must compute the taxable income including his/her distributable share of
partnership’s tax items for the year of the partnership ending within or with
taxable year of the partner.
A partnership is syndicate, group, pool, joint venture, or other unincorporated
organization, through or by means of which any business, financial operation, or
venture is carried on, and which is not a trust or estate or a corporation. In
general partnerships include civil, commercial, industrial and professional
partnerships as well as two or more persons are engaged in a joint venture for
profit. Limited liability companies [link a resumen LLC] may elect to be
classified as partnerships while under certain circumstances LLCs are mandated
to taxes as partnerships.
A Partnership computes its gross income and deductions, to arrive at taxable
income, in the same manner an individual would, with certain exceptions. One
exception is that partnerships are not allowed a deduction for carryover net
operating losses. Generally elections affecting the partnerships net income must
be made by the partnership.
The use of the of a Partnership’s losses is limited by the partner’s basis in
the partnership equity interest and can only be used against the distributable
share of other partnerships’ income or the prorate share of Corporations of
Partners must determine their tax liabilities taking into account separately
certain items, among them:
- Short and long term capital gains and losses
- Charitable deductions
- Dividends subject to the 10% withholding tax
- Income covered by industrial/development tax grants or tourism concessions
- Net income or loss of the partnership
If the partnership is engaged in a PR trade or business the partners will be
deemed engaged in such trade or business with respect to their distributable
share of tax items. Accordingly, non-resident partners will be deemed in a trade
or business in Puerto Rico in regards to such distributable share of income and
will have to file Puerto Rico income tax returns. Furthermore, foreign corporate
partners may be subject to the branch profit tax.
The distributable share in the partnerships income, gains, losses and other tax
items shall be determined by the partnership agreement unless otherwise provided
in the Puerto Rico Internal Revenue Code of 2011. Such distributable share shall
be determined according to the partners’ interest in the partnership if the
agreement does not provide for distributable shares or if the allocation does
not have a substantial economic effect. The character of the income, losses and
other tax items included in the partner’s distributable share shall be
determined as if such items were realized directly from the source realized by
the partnerships (example: sourcing of income).
The managing partner must withhold at the source 33% of the distributable share
in the net income of the partnership, if the partner is an individual, and 30%
in the case of a corporation, less the 7% withholding tax on payment for
services rendered in Puerto Rico and the 7% withholding tax for payments made
under judicial or extra-judicial claims.
The partners and the partnership do not recognize gain or loss upon the
contribution of money or property to the partnership, except in the case of:
- Flexibly depreciated property if an election to recognize gain or losses is
- Property subject to obligations or liens that are assumed by the partnership to
the extent that such assumed obligations or liens exceed the partner’s basis in
the contributed property; and
- The gain realized on the transfer of property to partnership that would be
treated as an investment company.
Partners do not recognize gain on distributions made by the partnerships to the
extent that the cash distributed does not exceed his/her basis in the
partnership interest (outside basis) before the distribution. However, special
gains recognition rules apply in the case of property previously contributed by
a partner and distributed within 7 years if certain condition are met.
No loss is recognized by partners except in liquidating distributions provided
that the amount of the cash distributed and the basis in unrealized receivables
and inventory distributed exceed the adjusted basis of the partner in his/her
partnership interest (outside basis).
Note that gains and losses recognized in distributions have capital assets
2013 Modifications to Income and Sales Taxes Regimes