Fiscally Transparent Entity

Term of the Day - 23 February 2024

Today’s Term is “Fiscally Transparent Entity”.

A fiscally transparent entity, often referred to as a pass-through entity, is a legal structure in which income generated by the entity is not subject to entity-level taxation but is instead passed through to the individual owners or investors for taxation at their individual tax rates. In such entities, the income is not taxed at the entity level; instead, it flows through to the owners' personal tax returns.

Globally, and dependent on country-specific laws, common examples of fiscally transparent entities include partnerships and S-corporations (for example, in the USA). These entities are treated as conduits for tax purposes, allowing profits, losses, and other tax attributes to pass through to the owners without being subject to entity-level taxes. The owners are then responsible for reporting and paying taxes on their share of the entity's income.

In the case of Ghana, Partnerships do not bear income tax at the entity-level, except for Final Withholding Payments. All profits, losses, and tax credits are passed through to the individual partners based on the Partnership Profit or Loss Sharing Ratio set out in the Partnership Deed and taxed at the individual partner level.

Globally, the fiscally transparent structure is often chosen for its tax efficiency and simplicity, as it avoids the double taxation that occurs when both the entity and its owners are taxed on the same income. However, the tax treatment may vary by jurisdiction, and individuals should consider the specific tax laws applicable to their situation when choosing a business structure.