How GPP Partners Report and Pay Income Tax on Their Distributive Share

A General Professional Partnership (GPP) — such as a law firm or accounting firm organized as a partnership — pays no income tax itself, but each individual partner is fully taxed on their distributive share of the GPP’s net income. This pass-through treatment comes from Section 26 of the National Internal Revenue Code (NIRC), and it comes with specific rules on deductions and withholding that partners often get wrong.

Why doesn’t the GPP itself pay income tax? #

The GPP exemption exists because a professional partnership is treated as a conduit for its partners’ individual professional practice, not as a separate business earning its own profit — the tax liability is meant to fall on the individuals actually practicing the profession, not on the firm as an entity.

Section 26 of the NIRC provides:

“A general professional partnership as such shall not be subject to the income tax… Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.”

In practice, the GPP still files an annual return — commonly BIR Form 1702-EX — as an information return showing how net income was computed and allocated, even though the GPP pays no tax on that income itself.

Can a partner choose OSD separately from what the GPP claimed? #

No — the deduction election is made once, at the GPP level, and it binds every partner; a partner cannot mix and match deductions independently of what the partnership itself claimed when computing net income.

Revenue Regulations No. 2-2010 clarified this interaction directly: if the GPP elects the Optional Standard Deduction (OSD) when computing its net income, the partners are deemed to have also availed of OSD and cannot separately claim itemized deductions against their distributive share. Conversely, if the GPP claims itemized deductions, a partner cannot instead claim OSD on their own distributive share — because the itemized deductions were already applied at the entity level before the share was ever computed. A partner’s own individual expenses unrelated to the GPP’s practice (for example, expenses from a separate sole proprietorship the partner runs) are unaffected and follow that separate business’s own deduction rules.

Does the GPP still withhold tax on what it pays its partners? #

Yes. Even though the GPP itself is exempt, drawings, advances, or profit distributions the GPP pays to its partners are subject to creditable withholding tax, and the GPP issues BIR Form 2307 to each partner as proof of tax withheld — the same certificate a client would issue the GPP for its professional fees, just one level down.

• 10% creditable withholding tax applies if a partner’s cumulative gross income payments from the GPP for the year do not exceed ₱720,000
• 15% creditable withholding tax applies once a partner’s cumulative payments for the year exceed ₱720,000
• Partners then use the BIR Form 2307 certificates received from the GPP to credit the tax already withheld against their own income tax due, computed and reported on BIR Form 1701Q quarterly and finalized on BIR Form 1701

Summary #

A GPP itself is exempt from income tax under Section 26, but its partners are not — each reports their distributive share as personal gross income, is bound by whatever deduction method the GPP elected, and still receives BIR Form 2307 certificates from the GPP on profit distributions to credit against their own return. For the client-side question of whether a GPP’s professional fees are subject to withholding in the first place, see Withholding Tax on GPP Professional Fees: Is a Law Firm Partnership Subject to BIR Form 2307?, and for how partners file their own quarterly return, see How to File BIR Form 1701Q: Quarterly Income Tax Return for Self-Employed Individuals.