Japanese Tax Blog in English

日本の税務情報を英語で書くブログ by みなと国際会計事務所

Partnership is regarded as a pass-through entity for individual income tax (LLPの法人性)

time 2018/09/23

Basic rules

A partnership (Civil Code Article #667) is not usually regarded as an independent corporate entity, therefore it is taxable on each individual partners. Its tax implication is similar to those of co-owning. You claim income and expenses on a prorated basis. The rate can be whatever you agree with other partners (#674). Unless the partnership has its own fiscal year, revenue and expenses have to be recognized on a calendar year.

NTA website

A member that acts only passively who doesn’t participate in its decision for important purchases, disposition or material loans, and only receives a distribution from the partnership is regarded as “Passive Partner” or 特定組合員 (Tokutei Kumiai-in). A Passive Partner can not offset his losses from the partnership against his other income (Special Taxation Measures Law #41-4-2).

Whether an individual is a Passive Partner or not is determined by each partnership.

Is LLP or LLC in US a pass through entity?

There were contradicting rulings by the lower courts in the past. That is why it was confusing.

Court Osaka Tokyo Nagoya
Regional Court corporate
not corporate
not corporate
High Court corporate
not corporate

Recently, the Supreme Court gave the ruling on the case of a Limited Liability Partnership under Delaware Law.

The case was about the LLP established in Delaware to purchase properties. The properties were put in a trust to be managed by a trust bank.

The plaintiffs claimed the loss from the LLP as though it was a pass-through entity and offset against incomes in their tax returns.

The tax authority rejected the offsetting, reasoning that the LLP was an independent legal entity almost as a legal corporate.

Ruling by Supreme Court on July 17, 2015

There were two considerations in the ruling and they are taken to be standard criteria for future judgment.

1) Is it a legal entity?

2) Can it own and exercise legal rights and bear liabilities?
The ruling says that the most fundamental element of a corporation is that it can be the one to own legal rights and liabilities. A Delaware LLP can.

From Deloitte website


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