WHAT IS PASS-THROUGH STATUS?

A pass-through status is a business structure that takes away the obligation to pay corporation tax.

 

An entity usually pays tax twice — one for the income generated by the firm's shareholders and another at a corporate level, which is corporation tax.

 

Under the pass-through status, the income generated is taxed in the hands of the investor and that the fund itself does not have to pay tax on the same. Without this, an entity would be subject to double taxation — paying tax whenever income is generated at the fund level, and then again in the hands of the investor.

 

Examples of pass-through entities include sole proprietorships, S corporations, master limited partnerships, limited liability partnerships, and limited liability companies.

 

This special tax status usually affects most corporations and their shareholders since only the owners are taxed.

 

In 2014, the Union Budget gave a booster to real estate investment trusts (REITs), a pooled vehicle which can be used to invest in real estate, by allowing a pass-through status.

 

Without this, REITs were subject to double taxation — paying tax whenever income was generated at the fund level, and then again in the hands of the investor.