Is a limited liability partnership (LLP) taxed as a company or as an AOP?

A limited liability partnership is taxed as an association of persons (AOP), not as a company. The Finance Act, 2026 wrote the words “limited liability partnership” into the definition of AOP in section 80(2)(a) of the Income Tax Ordinance, 2001, and that definition expressly excludes companies. The change applies from 1 July 2026.

What does the law say?

Section 80(2)(a). An association of persons “includes a firm, a Hindu undivided family, any artificial juridical person, limited liability partnership and anybody of persons formed under a foreign law, but does not include a company”. The footnote to the consolidated text records that the words “limited liability partnership” were inserted by the Finance Act, 2026. Section 5 of that Act makes the insertion.

Section 92(1). An AOP is liable to tax separately from its members. Where the AOP has paid tax, the amount a member receives as member out of the AOP’s income is exempt. Section 2(32) says “member” includes a partner in a firm. An LLP, as an AOP, sits inside this rule.

Section 92(4A). The same Finance Act inserted a new sub-section: where the income of a limited liability partnership is exempt from tax, any amount a member receives as a share of the LLP’s profits “shall be included in the income of that member”.

The omitted explanation. The Finance Act, 2026 also omitted an explanation to section 92(1). It had said that where an AOP’s income was exempt and no tax was payable, the member’s share remained exempt. That explanation is no longer in the text.

How does it work in practice?

An LLP is treated like any other AOP for tax year 2027 onwards:

• The LLP computes its own taxable income and pays tax at the rates for associations of persons in Division I of Part I of the First Schedule.
• Where the LLP has paid tax, a partner’s share is exempt in the partner’s hands under section 92(1).
• If a corporate partner is involved, the first proviso to section 92(1) excludes its share from the LLP’s income and taxes it at company rates.
• If the LLP’s turnover reaches Rs. 300 million in the tax year or any earlier tax year, the second proviso to section 92(1) applies. The partners’ shares lose the exemption unless accounts audited by a Chartered Accountants or Cost and Management Accountants firm are filed with the LLP’s return.
• If the LLP’s income is exempt, section 92(4A) moves the charge to the partners: each partner’s share is included in that partner’s income.

Worked example (illustrative figures)

Two LLPs in Karachi, each with two partners sharing 50:50, for tax year 2027:

LLP A: taxable income. Profit of Rs. 8,000,000, on which the LLP pays tax as an AOP. Each partner’s share is Rs. 8,000,000 × 50% = Rs. 4,000,000. Because the LLP has paid tax, section 92(1) exempts each Rs. 4,000,000 in the partners’ hands (assuming turnover has never reached Rs. 300 million).

LLP B: exempt income. Suppose all of LLP B’s income of Rs. 8,000,000 is exempt under some provision of the Ordinance. The LLP pays no tax on it. Under section 92(4A), each partner’s share of Rs. 4,000,000 is included in that partner’s income. Across both partners, Rs. 4,000,000 + Rs. 4,000,000 = Rs. 8,000,000 comes into charge, the same total as the LLP’s exempt income.

The difference is the point of section 92(4A): exempt income no longer passes to the partners tax free.

What if …?

What if the LLP has some taxable and some exempt income? Section 92(4A) speaks of the case where “the income of a limited liability partnership is exempt”. It does not say how a share is split where only part of the income is exempt. The text does not settle that.

What if the LLP was set up before 1 July 2026? The amendments are part of the Finance Act, 2026, which comes into force on 1 July 2026 unless otherwise provided. How an LLP was treated for tax year 2026 and earlier, before these words were inserted, is not addressed on this page.

What if the partner is a company? The first proviso to section 92(1) applies to any AOP with a company member, so it covers an LLP too.

Common mistakes

• Assuming “limited liability” means company tax. Section 80(2)(a) puts LLPs in the AOP definition, which excludes companies.
• Relying on the old explanation. The explanation keeping members’ shares exempt where the AOP’s income was exempt was omitted by the Finance Act, 2026.
• Forgetting the Rs. 300 million audit condition. It applies to LLPs as it does to any AOP.

What to check in the official text

Read section 80(2) and section 92 in the consolidated Ordinance amended to 30 June 2026, and the footnotes that record the Finance Act, 2026 changes. Section 5 of the Finance Act, 2026 has the amending words. Check the AOP rates in Division I of Part I of the First Schedule in the official PDF. The Limited Liability Partnership Act, 2017, which governs how LLPs are formed, is not part of this corpus, and nor are any SECP rules on LLPs.