Income Tax for Partners of Partnership Enterprises

On December 23, 2008, the State Administration of Taxation issued  the Notice Concerning Income Tax for Partners of Partnership Enterprises (the "Notice"), effective retroactively on January 1, 2008. The Notice clarifies that partners should pay income tax on their partnership distributions. An individual partner is subject to a progressive sole proprietorship income tax rate, ranging from 5% to 35%.  For an entity, partnership distributions will be aggregated with its other revenue, the taxable income of which is subject to a 25% enterprise income tax.  The Notice also states that the taxable income for each partner should be determined according to certain allocation principles, such as agreement in partnership, negotiation between partners and proportion of contribution. It provides that the partnership should not allocate all of its profits to part of the partners, which may cause tax avoidance. However, since the allocation proportion of a partnership's profits can be agreed on by partnership agreement, it is not clear whether an extremely small proportion will also be deemed as allocating all of the partnership's profits to part of its partners.

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