When two or more independent taxable units (tax entities) carry on income-generating activity and/or jointly own assets, the form of liability externally will normally be decisive as regards whether or not assessment as a partnership will be applied. This also applies if, for example, several private limited companies jointly carry on an income-generating activity.
If the joint activity or ownership is not organised as a company which constitutes a separate tax entity, the assets and income of the partners will be taxed. The business must then be assessed as a partnership in accordance with the net method. This applies even if the partnership is not registered as a company in the Register of Business Enterprises. If no commercial activity is carried out, the joint activity or ownership will be considered to be joint ownership.
The business will generally not be considered a separate tax entity if it fulfils one or more of the following criteria:
- at least one of the partners has personal and unlimited responsibility for the business’s collective obligations externally
- two or more of the partners have personal and unlimited responsibility for parts which collectively form the business’s collective obligations
The business’s assets and income are taxed amongst the partners (assessment as a partnership).
Assessment as a partnership according to the net method means that the business’s net assets and general income will be assessed for the company as if it was a taxpayer. The net result will then be allocated between the partners and taxed on them. If distribution (transfer free of charge) to a personal partner in a business assessed as a partnership is carried out, a supplement to the partner’s general income must also be calculated. In the case of distribution to a tax entity that is covered by the exemption method, 3% of the distributed amount will be taxed. For more information on this, see “The exemption method”.
Jointly owned entities which do not carry on commercial activity must always be assessed as a partnership according to the gross method; see the topic “Joint ownership - tax assessment according to the gross method”.
Housing companies where the income is assessed according to Section 7-3 of the Tax Act will also be assessed as a partnership even if all the partners have limited liability; see the topic “Housing – housing companies, etc. and the shareholders”.