Legality of partnerships
Partnerships are a form of joint-venture between private individuals and legal entities which is obliged to know, execute and act in compliance with the requirements of the Law “On VAT”, the Law “On income tax”, the Law “On collection of social and health insurance contributions”, and the Law “On local tax system” in order to be able to exercise a temporary joint activity for profit purposes.
Legal requirements for partnerships function in the same way as for all other taxpayers subject to the above-mentioned laws and they are not exempted unless such exemption for partnerships is the result of an inter-governmental agreement, ratified by their respective parliaments.
Partnerships of investors and owners in construction
Investors or owners of a construction project often have difficulty to finance their project due to the lack of sufficient capital, human resources or technical equipment to implement it. By establishing a joint-venture as a union of private individuals and legal entities to exercise a temporary, joint and for-profit activity, construction project investors and owners often manage to overcome difficulties and accomplish their goals. Although not separate legal entities, such joint-ventures have their advantages and disadvantages. However, they are necessary for construction investors and their quality development.
Partnerships of construction contractors
Construction projects may be implemented by joint ventures of contractors, which are considered partnerships from the perspective the Law “On income tax”. Usually partnerships are created for a specific purpose (project, contract, work) and a limited period of time. Partnerships created for implementing similar construction projects are registered and subject to the same laws that apply to partnerships of investors and owners.
In cooperation with interest groups and other public administration institutions, at the end of each year the Ministry of Finances presents instructions and rules relative to changes in taxes administered by tax authorities.
In order to gain juridical capacity, a partnership between two or more private individuals or legal entities, which can register with the tax administration without a decision from the NRC, will simply complete the required steps described in the Law “On tax procedures”.
Partnerships have the obligation to prepare financial balance sheets presenting financial indicators of their activity. Although they may not be registered as entities with special juridical capacity, according to fiscal legislation, they are obliged to declare closure of their activity and complete relevant closure procedures with the Tax Office, and simultaneously with the NRC, which has issued the certificate for exercising their activity.
Auditing Investors’ partnerships
During audits of partnerships created for financing construction projects, it is important to take into consideration issues relative to creation, activity and liquidation of partnerships. Each partner brings individual resources in a partnership and can be compensated in different ways. Auditors should get acquainted with plenty of specific information, especially information made known to the partners by the Administrative Council. Such information specifically relates to:
– Fairness of information provided to partners;
– Management report;
– Contracted construction project;
– Respect of equality between partners based on their contribution;
– Movement of partnership members;
– Modification of partnership accounting presentation and assessment;
– Irregularities, errors and violations identified;
Review of fairness of information provided to partners is made:
– On one hand, by reviewing the Administrative Council management report and annexes, whether they are mandatory or not, and;
– On the other hand, by checking all documents on partnership’s financial situation and accounting that are addressed to partners.
Audit of a partnership’s balance sheet is conducted in the same way as described above.
Auditing contractor partnerships
Tax auditors auditing partnerships created for implementing construction projects should be aware of the specific issues relative to their creation, activity and liquidation. Each partner brings individual resources into the partnership and can be compensated in different ways. Parties should be considered independently.
Such perspective often leads to potential questions and problems, such as:
– What resources (fixed assets, capital, services, etc.) has each party contributed into the partnership?
– What is the value and basis of property each of them has contributed?
– Which of the partnership members has more active contributions?
– Which are the partnership profit, loss and distribution rates?
– Have there been changes in the property structure inside the partnership?
– Has the partnership distributed liquidities?
– What type of property has been distributed and who are the beneficiaries?
– How is the construction company compensated for its work (in Lek, capital growth, etc.)?
– How does the construction company allocate direct costs in the partnership project?
– What impact does project implementation have on the contract between parties?
Audit of a partnership’s balance sheet and its activity declarations is similar to audits of other juridical forms exercising similar activity, despite their form of organization.
Requests for information from partnerships
According to these construction industrial notes, the history of partnership incomes is very important in calculating their tax obligations and conducting transparent tax audits and assessments, in compliance with the specific legislation for this sector. Incomes indicate the tendency of transactions.
– Costs incurred (deductible or non-deductible) are another important factor for crosschecking the situation of economic activity. Such costs have already been explained in details in the fiscal legislation.
– It is important to have an understanding of labor force in terms of its distribution by types of activity, its share in production and evasion, in terms of zones and employment rates, etc.
– Actives of an economic activity are another significant criterion for the activity of a partnership.
– Loans and obligations of a particular economic activity observed at the moment of tax audits represent a substantial indicator in terms of the assessment of their activity progress and potential abuses with obligations. A breakdown of this group (partners’ accounts, 1-year loans, etc) reveals analytic indicators and shows the importance of the above criterion.
All the above would be insufficient to complete the framework of information on partnerships. In any case, the situation should be carefully studied in advance and this can help to frame the questions to be answered.