By Daisy Gu

I.Civil Attributes of Executive Partners' Remuneration

1.Can Executive Partners Receive Remuneration from the Partnership?

Article 971 of the Civil Code stipulates that “partners may not request payment for performing partnership affairs unless otherwise agreed in the partnership agreement.” Article 67 of the Partnership Enterprise Law (concerning limited partnerships) clarifies that “executive partners in a limited partnership may request the determination of remuneration and payment methods for performing partnership affairs in the partnership agreement.” Therefore, in the case of an agreed arrangement, an executive partner in a limited partnership is entitled to receive remuneration from the partnership.

2.Civil Attribute of the Remuneration

a.Does an employment relationship exist between the executive partner and the partnership?

The current law does not provide a clear definition of whether an executive partner has an employment relationship with the partnership, and there is no uniform understanding in judicial practice. However, a case published by People's Court provided an interpretation of an employment relationship, defining it as a socio-economic relationship formed between an employer and an individual employee during the process of utilizing labor capacity and realizing labor value. This relationship is primarily characterized by two aspects: (1) During the labor process, the worker provides their labor as a form of contribution, which is subject to the employer's control and use. (2) A labor relationship has distinct subordination features, including personal, organizational, and economic subordination. Employees are required to accept the employer's management, comply with its rules and regulations, and receive corresponding remuneration based on the value of their labor. Of these two, subordination is regarded as the critical criterion for determining the existence of an employment relationship.

Although an executive partner may undertake additional labor, such labor is self-directed, aiming at serving own interests, and exhibiting a high degree of autonomy. Consequently, it lacks the core element of subordination required to establish an employment relationship. 

b.Remuneration as Part of a Distribution Agreement among Partners

The remuneration for an executive partner is essentially part of the distributive share arrangement agreed upon by the partners. According to Article 33 and 34 of the Partnership Enterprise Law, profits and losses are distributed according to the partnership agreement, which is negotiated and agreed upon by all partners.

Additionally, unlike employees who receive salary and are not exposed to the risks of the enterprise’s operations, executive partners bear the risk of profits and losses as they are involved in the management and operation of the partnership. Therefore, the remuneration for an executive partner should be seen as part of the overall distribution agreement among the partners, rather than as an employment contract between the partnership and the executive partner.

II.Tax Attributes of Executive Partners' Remuneration

1.Personal Income Tax Law and Remuneration Classification

Article 6, Paragraph 1, Subparagraph (1) of the Implementation Regulations of the Individual Income Tax Law stipulates that "wage and salary income refers to the income an individual receives as a result of their appointment or employment, including wages, salaries, bonuses, year-end raises, labor dividends, allowances, subsidies, and any other income related to their appointment or employment." Subparagraph (2) defines "income from services" as the income an individual earns from providing services, including income from activities such as design, decoration, installation, drafting, testing, medical services, legal services, accounting, consulting, lecturing, translation, editing, calligraphy, sculpture, film, audio and video recording, performance, advertising, exhibitions, technical services, intermediary services, agency services, and other similar services." Subparagraph (5) provides that "business income refers to: (1) the income earned by individual industrial and commercial households from production and business activities, as well as income earned by individual investors in sole proprietorships or individual partners in partnerships from the production and business activities of domestic sole proprietorships or partnerships."

Executive partners do not establish an employment relationship with the partnership, nor are their activities listed under the service income items. Therefore, their remuneration does not qualify as salary or income from labor services. Instead, it stems from the business income of the partnership.

2.Regulations on Taxation of Partnership Income

The Notice on the Individual Income Tax Collection of Investors in Sole Proprietorships and Partnerships (Finance and Tax [2000] No. 91) stipulates that the net income of a sole proprietorship or partnership (hereinafter referred to as "the enterprise") for each taxable year, after deducting costs, expenses, and losses, shall be treated as the investor's personal income derived from production and business operations. This income, which is subject to tax under the provisions related to "business income of individual industrial and commercial households" in the Individual Income Tax Law, will be taxed at a progressive rate ranging from 5% to 35%, according to a five-tiered system of excess progressive taxation. However, the remuneration for the investor shall not be deductible for tax purposes. Thus, the remuneration paid to executive partners is subject to individual income tax as business income, not as salary.

Conclusion

In summary, the remuneration for executive partners in a partnership enterprise should be understood as a form of remuneration for services rendered within the partnership framework, rather than as salary. It arises from the distribution arrangement among the partners and is subject to taxation as business income under the relevant tax regulations.