So, you and your friend have decided to partner and start a business, if the business is registered then it will be registered as a partnership.

Investopedia defines a partnership as a ‘formal arrangement by two or more parties to manage and operate a business and share its profits.’ However, husband and wife cannot register a partnership. In a partnership, each partner contributes to all aspects of the business. Profits and losses are shared among the partners according to the formula agreed by both parties in the partnership deed.

PIN Registration for Partnerships

The partnership is required to apply for a PIN on iTax. The documents required for registration are; copy of the Acknowledgement receipt, PIN Certificate for one of the partners (needs to be on iTax), deed of partnership (optional) and Tax Compliance certificate of the partners (optional).

Income Tax Partnership Return (IT2P)

Partnerships declare their profit through the Income Tax Partnership Return (IT2P).  When filing a partnership return, one is required to capture the PIN of each partner and indicate the profit sharing ratio. Any profits or losses are then transferred to each partner’s PIN to be used when filing their annual return.

The return should be filed anytime between 1st January to 30th June of the following year. There is no requirement for accounts to be audited as each partner is required to prepare his own accounts.

Do Partnerships pay corporation tax?

Unlike corporate entities, Partnerships do not pay corporation tax. All partners must individually account for their taxes. Their profit is distributed to the individual partners in the ratio of their ownership. The profit then forms part of each individual's income, from where it is taxed as business income at a graduated scale of 10%- 25%. The partners are required to file their Individual Income Tax Returns for a particular year of income, between 1st January to 30th June of the following year.

Other tax laws relevant to Partnerships

Partnerships with employees are required to apply for PAYE and deduct tax according to the prevailing tax rates from their employees' salaries or wages.  The tax should be remitted to KRA on or before the 9th of the following month.

Partnerships can voluntarily register for VAT if they deal with the supply of taxable goods or services. However, they must register if their annual turnover exceeds Kshs. 5,000, 000. 

Generating a Tax Compliance Certificate

Before issuance of a Tax Compliance Certificate for the partnership, the partner’s individual PINs are also checked.

All partners are therefore required to be tax compliant by ensuring that they file their individual returns and declare their income made from the partnership.