Register to receive Taxand’s latest opinion on topical tax news
News › Weekly Alert Article
Limited partnership act and the taxation of carried interest
The limited partnership act has recently been enacted in Mauritius. Taxand Mauritius takes a look at this development and its implications.
A limited partnership is a partnership which has 1 or more general partners (GPs) and limited partners (LPs), as opposed to the traditional partnership which has GPs only. The main advantage of Limited partnerships is that they provide limit tax liability for the Limited partners. Moreover the limited partner's participation in the business shields Limited partners from paying taxes on profits, especially early on when debts and other expenses is greater than the business' income. The limited partnership also passes on its losses to the partners individually allowing them to offset their personal income from other sources.
If a shareholder invests in a company the profits of the company are taxed in Mauritius. However the shareholders may also be taxed on their dividend income in their country of residence. A limited partnership structure is used to avoid the double taxation. The Limited Partners can be treated as a transparent entity for tax purposes irrespective of whether it and is not taxed in Mauritius. The profits of the limited partnership are taxed only when received and reported by the partners individually in their country of residence.
General partners are like entrepreneurs who have ideas but do not have enough capital to start their business. Instead of creating a company/sole trader they sometimes use a limited partnership for its flexible ownership structure. Most limited partnership agreements include a clause that allows the general partner(s) to buy out the limited partner(s) after a certain amount of time has passed or certain financial milestones have been reached. This arrangement benefits general partners who need to raise money for a business or investment but who do not want to share permanent ownership of the asset with their investors. Limited partners can also leave and be replaced without dissolving the partnership.
Also published in Thomson Reuters' Taxnet Pro, 28 May 2014
The Limited Partnership act can be used as a tax neutral vehicle specifically for private equity investment. The Limited Partnership will be treated as a transparent entity for income tax purposes irrespective of whether it is treated as a separate legal entity for legal purposes. Moreover a Limited Partnership can be similar to a Limited Liability Partnership if the general partner is a company with limited liability.