Limits to Tax Planning

S. 93 1. Introduction

Partnerships can be used as an instrument in cross-border investment or business. Traditionally partnerships have been used by small and family-run enterprises, but their use has increased tremendously within multinational enterprises due to their flexibility as business forms and the less formal requirements in comparison to corporate structures.

The use of partnerships can create many challenges – and also opportunities – from a tax perspective. From an international tax point of view the tax treatment and the nature of partnerships amongst the different legal forms is perhaps the least harmonized, thus creating challenges in a cross-border situation.

Partnerships are mainly treated in two different ways in taxation in different jurisdictions: they are either treated as transparent entities, in which case the income of the partnership is taxed at the level of its partners, or, they are separate taxable entities (like corporations) in which case the partnership is taxed on its income and is liable to the tax itself.

The main issues arising in a cross-border situation with partnerships are as follows:

• is the partnership considered a person from a tax treaty point of vie...