Query in LLP Taxation

[S SHANMUGASUNDARAM]

Query in LLP Taxation

Facts

1. A profitable Private Ltd Company with only 2 shareholders and 2 Directors
2. Its Reserves is Rs.300 Lakhs
3. It is owning a Immovable property more than 3 years old
4. Book Value of said immovable property is Rs.20Lakhs and Market Value is Rs.100 Lakhs
5. Its annual Turn over is 200 lakhs and profit after tax is Rs.35Lakhs
6. It wants to convert into LLP under the provisions of LLP Act.
7. No secured Loan

QUERY

1. Tax liability for Private Ltd for the conversion
2. Tax liability for Individual shareholders for the conversion
3. tax Liability when the above said Rs.300 lakhs reserves credited to Partners a/c upon conversion
4. tax Liability when the above said Rs.300 lakhs reserves drawn by Partners any time  after  conversion
5. Tax on the PAT of Rs.35Lakhs credited to partners a/c every year after conversion

[Amruta Powar]

1. Tax liability for Private Ltd for the conversion

There is no capital gains tax for Pvt. Ltd. Company on account of conversion, if conditions stipulated u/s 47(xiiib) of IT Act are complied with which are as follows:

1. All the assets and liabilities of the Company immediately before the conversion shall become the assets and liabilities of the limited liability partnership;
2. All the shareholders of the Company immediately before the conversion shall become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in LLP should remain in the same proportion as their shareholding in the company on the date of conversion;
3. The shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;
4. The aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than fifty per cent at any time during the period of five years from the date of conversion;
5. The total sales, turnover or gross receipts in business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees; and
6. No amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

However in case of non compliance of any of the conditions provided as aforesad, the amount of profits or gains arising from the transfer of such capital asset or intangible asset not charged under section 45 by virtue of conditions laid down in the said proviso shall be deemed to be the profits and gains chargeable to tax of the successor limited liability partnership for the previous year in which the requirements of the said proviso are not complied with.”.

AI Summary

LLP conversion tax neutrality under section 47(xiiib) hinges on strict asset, shareholder and distribution continuity conditions. Conversion of a private company into an LLP will not attract capital gains if conditions of section 47(xiiib) are met: all assets and liabilities transfer to the LLP; all shareholders become partners with equivalent capital and profit shares; shareholders receive no consideration except partnership interest and profit share; the aggregate profit share of those shareholders remains at least fifty percent for the prescribed period; the company's prior turnover is within the statutory threshold; and no distribution is made out of accumulated profits to partners during the restraint period. Breach results in taxability of the successor LLP for the sheltered gains.