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دستورالعمل های 1120-F برای برنامه M-3

دستورالعمل های برنامه M-3 (شکل 1120-F)، درآمد خالص (Los) برای شرکت های خارجی با دارایی های قابل گزارش 10 میلیون دلار یا بیشتر

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  • فرم 1120-F برنامه M-3 - ادغام درآمد خالص (Los) برای شرکت های خارجی با دارایی های قابل گزارش 10 میلیون دلار یا بیشتر
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Department of the Treasury  
Internal Revenue Service  
2023  
Instructions for  
Schedule M-3  
(Form 1120-F)  
Net Income (Loss) Reconciliation for Foreign Corporations with Reportable Assets  
of $10 Million or More  
Section references are to the Internal Revenue  
Code unless otherwise noted.  
that are reported on Form 1120-F,  
Schedule L. Foreign banks are foreign  
corporations described in Regulations  
section 1.882-5(c)(4).  
Schedule M-3 (Form 1120-F) must  
either (i) complete Schedule M-3 (Form  
1120-F) in its entirety, or (ii) complete  
Schedule M-3 (Form 1120-F) through  
Part I and complete Schedule M-1  
instead of completing Parts II and III of  
Schedule M-3 (Form 1120-F). If the filer  
chooses to complete Schedule M-1  
instead of completing Parts II and III of  
Schedule M-3 (Form 1120-F), line 1 of  
Schedule M-1 must equal line 11 of Part  
I of Schedule M-3 (Form 1120-F).  
Filers must answer all questions on  
page 1 of the form. Furthermore, for any  
part of Schedule M-3 (Form 1120-F)  
that is completed, all columns must be  
completed, all numerical data requested  
must be provided, and any statement  
required to support a line item must be  
attached. All additional statements  
specifically referenced in these  
Future Developments  
For the latest information about  
developments related to Schedule M-3  
(Form 1120-F) and its instructions, such  
as legislation enacted after they were  
published, go to IRS.gov/Form1120F.  
Who Must File  
Any foreign corporation required to file  
Form 1120-F that reports on  
Schedule L, line 17, column (d), of Form  
1120-F total assets at the end of the  
corporation's tax year that equal or  
exceed $10 million, must complete and  
file Schedule M-3 in lieu of  
General Instructions  
Purpose of Schedule  
Schedule M-1, Reconciliation of Income  
(Loss) per Books With Income per  
Return.  
Schedule M-3, Part I, determines the  
adjusted financial net income (loss) of  
the non-consolidated (see  
Non-consolidated financial statement,  
later, for the definition) foreign  
A foreign corporation filing Form  
1120-F that is not required to file  
Schedule M-3 may voluntarily file  
Schedule M-3.  
corporation filing Form 1120-F, U.S.  
Income Tax Return of a Foreign  
Corporation. Schedule M-3, Parts II and  
III, reconcile this financial result with the  
corporation's taxable income before the  
NOL deduction and special deductions  
on Form 1120-F, Section II, line 29.  
instructions must be completed and  
attached to the Schedule M-3 when  
filed. If Part III is completed, please note  
that Part III requires that results from  
Schedule I (Form 1120-F), Interest  
Expense Allocation Under Regulations  
Section 1.882-5, and Schedule H (Form  
1120-F), Deductions Allocated To  
Effectively Connected Income Under  
Regulations Section 1.861-8, also be  
included. See instructions for Part III,  
lines 26b, 26c, and 31, later.  
Note. A foreign corporation that is  
required to complete (or voluntarily  
completes) Schedule M-3 is still  
required to complete Schedule M-2,  
Analysis of Unappropriated Retained  
Earnings per Books.  
For purposes of this reconciliation,  
Part I, line 1, provides rules for  
determining the financial statement(s)  
the taxpayer must use in reporting the  
net income (loss) to be reported on Part  
I, line 4. Part I, lines 5 through 10 then  
provide adjustments to include or  
exclude financial results to reconcile the  
financial statement results reportable on  
Part I, line 4, to the foreign corporation's  
adjusted financial net income (loss)  
reportable on Part I, line 11.  
When and Where To File  
Attach Schedule M-3 (Form 1120-F) to  
the foreign corporation's Form 1120-F  
income tax return. Be sure to check the  
box at the top of Form 1120-F, page 1,  
indicating that Schedule M-3 is  
attached.  
Other Form 1120-F  
Schedules Affected by  
Schedule M-3  
Completion of  
Schedule M-3  
Requirements  
For foreign corporations other than  
foreign banks (see definition in the  
instructions for Part I, line 1, later), Part I,  
line 11 includes the worldwide financial  
net income (loss) of the  
Form 1120-F filers that are required to  
file Schedule M-3 (Form 1120-F) and  
have at least $50 million total assets at  
the end of the tax year must complete  
Schedule M-3 (Form 1120-F) in its  
entirety.  
Schedule L  
Generally, the assets and liabilities  
required to be reported on Schedule L  
are the total assets and liabilities  
reflected on the set(s) of books of the  
foreign corporation that include assets  
that give rise to U.S. effectively  
non-consolidated foreign corporation,  
adjusted for the results of non-includible  
entities and includible disregarded  
entities (see definition later under Entity  
Considerations for Schedule M-3). For  
Form 1120-F filers that (a) are  
required to file Schedule M-3 (Form  
1120-F) and have less than $50 million  
connected income and U.S. booked  
liabilities (as defined in Regulations  
section 1.882-5(d)(2)). The total assets  
and liabilities include the interbranch  
assets and liabilities and the  
foreign banks, Part I, line 11, is generally total assets at the end of the tax year, or  
limited to the financial income (loss)  
derived from the same set(s) of books  
(b) are not required to file Schedule M-3  
(Form 1120-F) and voluntarily file  
Dec 12, 2023  
Cat. No. 50152J  
noneffectively connected assets  
reflected on such books. Such books  
will reflect the assets of the foreign  
corporation located in the United States  
and all other of its assets used in its  
trade or business within the United  
States (other than its assets giving rise  
to effectively connected income under  
sections 864(c)(6) or (7)). A foreign  
corporation may instead elect to report  
its worldwide assets and liabilities on  
Schedule L under Regulations section  
1.6012-2(g)(1)(iii). If a foreign  
that give rise to U.S. booked liabilities  
under Regulations section 1.882-5(d)  
(2). Under such circumstances, the set  
of books would remain reportable on  
Schedule L for Code-based reporting  
purposes, but for treaty-based reporting  
purposes, such transfer may effect  
attribution to another part of the  
1.882-5(d)(2)(ii). However, the  
Schedule M-3 reporting on Part I, line 11  
must always reflect the worldwide profits  
and losses of the foreign corporation  
filing the Form 1120-F even if the  
Schedule L books determined under  
Regulations section 1.882-5(d)(2)(ii)  
gives rise to less than worldwide  
reporting under the facts and  
corporate enterprise under a functional  
and factual analysis and no longer be  
reportable on Schedule L as part of the  
U.S. permanent establishment after the  
transfer. Additionally, a set of books  
having no effectively connected income  
or U.S. booked liabilities under  
circumstances.  
Entity Considerations for  
Schedule M-3  
For purposes of Schedule M-3,  
references to the classification of an  
entity (for example, as a corporation, a  
partnership, or a trust) are to the  
classification of the entity for U.S.  
federal income tax purposes.  
corporation (including a foreign bank)  
elects worldwide reporting on  
Schedule L, the same set(s) of books  
must be used to report the adjusted  
worldwide net income (loss) results in  
Part I, line 11.  
Regulations section 1.882-5(d)(2) might  
still constitute a set of books of the U.S.  
permanent establishment because the  
items recorded thereon are primarily  
attributable to the U.S. permanent  
establishment under the application by  
analogy of the OECD Transfer Pricing  
Guidelines as expressly authorized by  
or pursuant to a U.S. income tax treaty  
and accompanying documents.  
If the foreign corporation has more  
than one set of books and records  
relating to assets located in the United  
States or used in a trade or business  
conducted in the United States, it must  
report the combined amounts shown on  
all such books and records on  
For a foreign corporation other than a  
bank, the financial results of an entity  
that is disregarded as separate from the  
foreign corporation filing Form 1120-F  
for federal income tax purposes  
(“disregarded entity”) are reported on  
Schedule M-3, Part I, line 4, if the  
Schedule M-2  
Schedule L, as adjusted to eliminate  
transactions recorded between the  
reportable books. However, amounts  
recorded for transactions between the  
set(s) of books and other divisions of  
the foreign corporation or includible  
disregarded entities (see definition later  
under Entity Considerations for  
foreign corporation's applicable income  
statement includes the net income of  
such disregarded entity. Otherwise, the  
results of the disregarded entity are  
separately reported on Part I, line 5. On  
Parts II and III, any item of income, gain,  
loss, or deduction of a disregarded  
entity must be reported as an item of the  
foreign corporation, and is not reported  
on Part II, line 9, 10, or 11, as from a  
partnership or pass-through entity. The  
applicable financial statement may  
include a disregarded entity only if it is  
owned directly or indirectly by the  
foreign corporation. An applicable  
financial statement may not include a  
disregarded entity that is the direct or  
indirect owner of the foreign corporation  
filing Form 1120-F.  
If the foreign corporation is a bank (and  
checked the “Yes” box on Part I, line 1 of  
Schedule M-3), the amount shown on  
Schedule M-2, line 2 (Net income (loss)  
per books) must equal the amount  
shown on Schedule M-3, Part I, line 11.  
Both the foreign bank's Form 1120-F,  
Schedule L reporting and Schedule M-3  
(Form 1120-F) reporting are based on  
the same set(s) of Schedule L books  
which are generally determined on the  
basis of Regulations section 1.882-5(d)  
(2)(iii). If, however, the foreign bank  
elects to complete its Form 1120-F,  
Schedule L on the basis of its worldwide  
books, then the bank will be required to  
report its net income (loss) on  
Schedule M-3) reportable on  
Schedule M-3, Part I, line 5, are not  
eliminated for Schedule L purposes  
(except for certain transactions with  
disregarded entities that are also  
reportable on Schedule L), unless the  
taxpayer elects worldwide reporting  
under Regulations section 1.6012-2(g)  
(1)(iii).  
Schedule M-2 and Schedule M-3 from  
the same worldwide set(s) of books  
used for Form 1120-F, Schedule L  
purposes.  
Adaptation of Form 1120-F,  
Schedule L for treaty-based  
reporting. The set(s) of books that  
must be reported on Form 1120-F,  
Schedule L are those of the U.S.  
permanent establishment. These books  
will generally be the same set(s) of  
books reported on Schedule L, as  
described above. However, certain  
books that give rise to effectively  
connected income might not necessarily  
give rise to treaty-based reporting. For  
example, the assets on a set of books  
could still be attributed to a U.S. office  
for effectively connected income  
reporting purposes even when  
Foreign bank disregarded entity  
books—reporting for lines 4 and 5.  
For foreign banks, the net income (loss)  
of certain disregarded entities are not  
combined with other U.S.-based sets of  
books reported on line 4. The set(s) of  
books with respect to disregarded  
If the foreign corporation is not a  
bank (and therefore checked the “No”  
box on Part I, line 1), the amount shown  
on Schedule M-2, line 2 (Net income  
(loss) per books) should reflect the net  
income (loss) associated with the  
Schedule L books. This amount will  
equal the amount shown on  
entities are included on Part I, line 5, if  
the set(s) of books of such disregarded  
entities give rise to U.S. booked  
liabilities under Regulations section  
1.882-5(d)(2)(iii). Transactions between  
the set(s) of books reported on line 4  
and line 5 are eliminated on line 8.  
However, the net income (loss) of a U.S.  
LLC that is a disregarded entity whose  
set(s) of books do not give rise to U.S.  
booked liabilities of the foreign bank  
under Regulations section 1.882-5(d)(2)  
(iii) is not included on line 4 or line 5.  
Schedule M-3, Part I, line 11 only if the  
corporation voluntarily chooses to  
complete Form 1120-F, Schedule L on  
the basis of the corporation's worldwide  
set(s) of books under Regulations  
section 1.6012-2(g)(1)(iii), or, if the  
Schedule L books determined under the  
facts and circumstances constitute the  
same results as worldwide income  
reporting under Regulations section  
considered transferred from the U.S.  
permanent establishment for treaty  
reporting purposes (see, for example,  
Regulations section 1.864-4(c)(5)(iii)) if  
under the facts and circumstances, such  
assets also constitute a set of books  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
2
Transactions between such disregarded type, (5) the state or country in which it  
Question A. Treaty position taken on  
Form 1120-F, Section II, for taxable  
income. If a foreign corporation is a  
resident in a country having an income  
tax treaty with the United States, answer  
Yes” if the corporation reports income  
under the treaty method in lieu of the  
effectively connected income rules  
under sections 864(c) and 882. For  
reporting under this method in Parts II  
and III, see Treatment of Items Under an  
Eligible Treaty-Based Return Position to  
Attribute Business Profits to a U.S.  
Permanent Establishment, later.  
entities and set(s) of books reported on  
line 4 are not eliminated.  
is organized, (6) the date on which it first  
became a reportable entity partner, (7)  
the date with respect to which it is  
Related Filing  
reporting a change in its ownership  
interest in the partnership, if applicable,  
(8) the interest in the partnership it owns  
or is deemed to own in the partnership,  
directly or indirectly (as defined under  
these instructions), as of the date with  
respect to which it is reporting, and (9)  
any change in that interest as of the  
date with respect to which it is reporting.  
The reportable entity partner must  
retain a copy of each required report it  
makes to each partnership under these  
instructions. Each partnership must  
retain copies of the required reports it  
receives under these instructions from  
reportable entity partners.  
Example 1. A, an LLC filing a Form  
1065 for 2023, is owned 50% by Z, a  
foreign corporation engaged in a trade  
or business within the United States. A  
owns 50% of each of B, C, D, and E,  
each of which is also an LLC filing a  
Form 1065 for calendar year 2023. Z  
was first required to file Schedule M-3  
(Form 1120-F) for its corporate tax year  
ended December 31, 2022, and filed its  
Form 1120-F with Schedule M-3 for  
2022 on October 16, 2023. As of  
Requirements—Requirements  
of Reportable Entity Partners  
Reportable entity partner. For  
purposes of these instructions, a  
reportable entity partner with respect to  
a partnership filing Form 1065, U.S.  
Return of Partnership Income, is an  
entity that (1) owns or is deemed to  
own, directly or indirectly, under these  
instructions a 50% or greater interest in  
the income, loss, or capital of the  
partnership on any day of the tax year,  
and (2) was required to file  
Questions B through D. For  
Schedule M-3, Part I, questions B  
through D, use only the financial  
statements of the foreign corporation  
filing Form 1120-F. If the foreign  
corporation prepares its own financial  
statements but is controlled by another  
corporation (U.S. or foreign) that  
prepares financial statements that  
include the foreign corporation, the  
foreign corporation must use for its  
Schedule M-3, Part I, its own financial  
statements rather than the financial  
statements of the controlling  
Schedule M-3 on its most recently filed  
U.S. federal income tax return or return  
of income filed prior to that day.  
For purposes of these instructions,  
(1) the owner of a disregarded entity is  
deemed to own all corporate and  
partnership interests owned or deemed  
to be owned under these instructions by  
the disregarded entity; (2) the owner of  
50% or more of a corporation by vote on  
any day of the corporation's tax year is  
deemed to own all corporate and  
corporation. These financial statements  
are used for completing line 4.  
partnership interests owned or deemed  
to be owned under these instructions by  
the corporation during the corporation's  
tax year; (3) the owner of 50% or more  
of partnership income, loss, or capital  
on any day of the partnership tax year is  
deemed to own all corporate and  
Non-consolidated financial  
statement. A foreign corporation's  
“non-consolidated” financial statement  
may include a financial statement which  
reports a consolidation of entities or  
subsidiaries that the foreign corporation  
owns. In such a case, the net income or  
(loss) of such entities or subsidiaries  
would be included in the amount  
reported on line 4 and, except for  
disregarded entities, would be  
October 17, 2023, Z was a reportable  
entity partner with respect to A and,  
through A, with respect to B, C, D, and  
E. On November 6, 2023, Z reports to A,  
B, C, D, and E, as it is required to do  
within 30 days of October 17, that Z is a  
reportable entity partner directly owning  
(with respect to A) or deemed to own  
indirectly (with respect to B, C, D, and E)  
a 50% interest. Therefore, because Z  
was a reportable entity partner for 2023,  
each of A, B, C, D, and E is required to  
file Schedule M-3 (Form 1065) for 2023,  
regardless of whether they would  
partnership interests owned or deemed  
to be owned under these instructions by  
the partnership during the partnership  
tax year; and (4) the beneficial owner of  
50% or more of the beneficial interest of  
a trust or nominee arrangement on any  
day of the trust or nominee arrangement  
tax year is deemed to own all corporate  
and partnership interests owned or  
deemed to be owned under these  
instructions by the trust or nominee  
arrangement.  
eliminated by reporting these amounts  
on line 7 (see line 7, later). Any  
adjustments associated with removing  
such amounts would be reported on  
line 8.  
otherwise be required to file  
Schedule M-3 for that year. Z must  
retain a copy of each of the required  
reports it makes to A, B, C, D, and E  
under these instructions, including the  
reports it makes on November 6, 2023.  
Example 2. FC1 is a foreign  
corporation other than a bank, resident  
in Country X, and engaged in a trade or  
business in the United States. FC1 is  
required to file Form 1120-F. FC1  
reports on Schedule L more than $10  
million in assets and, therefore, is  
required to file Schedule M-3. FC1 is  
owned 100% by FC, its non-banking  
parent corporation also resident in  
Country X. FC1's net income (loss)  
results are included in a certified audited  
consolidated financial statement of FC.  
FC1 also has an unconsolidated  
Reporting requirements of  
reportable entity partner. A  
reportable entity partner with respect to  
a partnership (as defined above) must  
report the following to the partnership  
within 30 days of first becoming a  
reportable entity partner and, after first  
reporting to the partnership under these  
instructions, thereafter within 30 days of  
the date of any change in the interest it  
owns or is deemed to own, directly or  
indirectly, under these instructions, in  
the partnership: (1) its name, (2) its  
mailing address, (3) its taxpayer  
Specific Instructions for  
Part I—Financial  
Information and Net  
Income (Loss)  
Reconciliation  
When To Complete Part I  
Part I must be completed for any tax  
year for which the foreign corporation  
files Schedule M-3.  
financial statement that is not certified.  
In answering questions B through D,  
FC1 may not use FC's consolidated  
financial statement. FC1's  
identification number (TIN or EIN), if  
applicable, (4) its entity or organization  
“non-consolidated financial statement”  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
3
is its own unconsolidated, worldwide  
financial statement, which is a  
Part I, lines 2b and 2c, regarding  
reportable on Schedule L are excluded  
from line 4 unless they are included in  
the corporation's financial consolidation  
of its Schedule L books in accordance  
with the bank's ordinary and  
restatements of income statements,  
statement described in question C. If FC refer to the income statement issued by  
was also engaged in a trade or business the corporation filing the U.S. income  
within the United States with reportable  
assets over $10 million, then FC would  
be required to file its own Schedule M-3  
and would be required to use its  
tax return. Answer “Yes” on lines 2b  
and/or 2c if the corporation's annual  
income statement has been restated for  
any reason. Attach a statement  
consistently applied internal accounting  
practices. Disregarded entities  
includible in Schedule L that are not  
included in a non-tax financial  
certified audited financial statement  
described in question B. In such  
providing a short explanation of the  
reason for the restatement for each  
applicable period, including the original  
amount and restated amount of each  
annual statement period's net income.  
consolidation of the corporation's  
Schedule L books in accordance with  
the bank's ordinary and consistently  
applied internal accounting practices,  
are separately reported on Part I, line 5.  
circumstances, FC1 would continue to  
use its own non-consolidated statement  
described in question C.  
Example 3. Same facts as  
Line 3. Publicly Traded Stock  
Example 2, except FC1 is a disregarded  
entity. Under U.S. tax principles, FC is  
the taxpayer treated as directly engaged  
in trade or business within the United  
States and is required to file Form  
1120-F and Schedule M-3. FC's  
Ordinary and consistent internal  
accounting practices. If the foreign  
bank's ordinary and consistently applied  
accounting practices include the  
consolidation of more than one set of  
books that is reportable on Schedule L,  
as determined under Regulations  
section 1.882-5(d)(2)(iii), the foreign  
bank may use such consolidated books  
for completing Part I, line 4. If additional  
set(s) of books that constitute  
If the foreign corporation's stock is  
traded on any exchange, domestic or  
foreign, please report the name of the  
exchange(s) on the line provided. If  
additional room is needed, attach a  
statement.  
“non-consolidated” financial statement  
is its consolidated, certified audited  
financial statement, described in  
question B, because it is the financial  
statement of the company engaged in a  
trade or business within the United  
States that is required to file Form  
1120-F and Schedule M-3. FC's  
For purposes of line 3, if the foreign  
corporation's stock is not publicly traded  
(as defined above) and its voting stock  
is owned or controlled 50% or more by  
another foreign corporation whose stock  
is publicly traded (as defined above),  
check the “Yes” box and report the  
name of the exchange(s) on the line  
provided. The foreign corporation  
Schedule L books are not included in  
the consolidated books, then such other  
Schedule L books must also be  
consolidated entities (other than any  
disregarded entities) are eliminated as  
“non-includible” entities on Part I, line 7.  
reported on line 4, or if such other books  
are set(s) of books of includible  
disregarded entities, they must be  
reported on line 5. Interbranch  
whose stock is publicly traded does not  
need to file Schedule M-3 (Form  
transactions between the Schedule L  
books must be eliminated and reported,  
if necessary, on line 8.  
Line 1. Foreign Banks Described in  
Regulations Section 1.882-5(c)(4)  
1120-F) unless such corporation is also  
engaged in a trade or business within  
the United States and has reportable  
assets of $10 million or more.  
If the foreign bank does not have the  
certified audited financial statements  
described in question D, the bank  
If a foreign corporation is a foreign bank  
described in Regulations section  
1.882-5(c)(4), answer “Yes” to Part I,  
line 1. Special rules pertain to the  
corporation for Part I, lines 4 through 11.  
For Schedule M-3 purposes, a foreign  
bank is defined based on section 581  
principles with respect to its banking  
activities on a worldwide level, without  
regard to whether it conducts a banking  
trade or business within the United  
States. These requirements include  
having a substantial part of its  
should use any other financial statement  
from which the balance sheet reported  
on Form 1120-F, Schedule L, is derived.  
For this purpose, the term “any other  
financial statement” includes unaudited  
financial statements prepared by the  
corporation under the method of  
Line 4. Net Income (Loss) From the  
Income Statement Identified in  
Part I, Line 1  
Part I, line 4, reports the net income  
(loss) from the applicable income  
statement identified in Part I, line 1.  
accounting generally used by the  
corporation's U.S. operations. If no such  
statements are available, trial balances  
prepared from general ledgers or similar  
other records should be used.  
Foreign banks. If the foreign bank  
has the type of non-consolidated,  
worldwide business consist of receiving  
deposits and making loans and  
worldwide financial statement described  
in question B or C, the foreign bank  
should check the “Yes” box for the  
applicable question B or C. However, do  
not report these results on Part I, line 4,  
unless the foreign bank also chooses  
worldwide reporting of the set(s) of  
books on Form 1120-F, Schedule L,  
under Regulations section 1.6012-2(g)  
(1)(iii). If the foreign bank has certified  
audited financial statements from which  
the balance sheet reported on Form  
1120-F, Schedule L, is derived (as  
described in question D), the net  
discounts, or of exercising fiduciary  
powers similar to those permitted to  
national banks. In addition, the foreign  
corporation must be subject to bank  
regulatory supervision in its country of  
incorporation.  
Foreign corporations other than  
banks. If the foreign corporation is not  
a bank, Part I, questions B, C, and D,  
provide a hierarchy of applicable income  
statements for reporting on Part I, line 4.  
If the corporation has the  
non-consolidated, worldwide, certified  
audited financial statement described in  
question B, report the net income (loss)  
from such statements on line 4. If the  
corporation does not have a financial  
statement of that type but does have the  
non-consolidated, worldwide, unaudited  
financial statement described in  
Line 2. Questions Regarding  
Income Statement Period and  
Restatements  
Enter the beginning and ending dates  
on line 2a for the corporation's annual  
income statement period ending with or  
within the current tax year.  
income (loss) from such statements is  
used to complete line 4, except that any  
disregarded entities whose results are  
question C, report the net income (loss)  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
4
from such statements on line 4. These  
unaudited financial statements should  
first include those prepared by the  
corporation under the method of  
accounting generally used by the  
corporation. If no such unaudited  
statements are available, other financial  
statements may be used, including trial  
balances prepared from the  
includible disregarded entities reported  
on line 5.  
depending on the foreign corporation's  
accounting principles. However,  
inclusion of disregarded entities will be  
necessary on line 5 when a taxpayer  
has reported on Part I, line 4, amounts  
from financial statements described in  
question D or similar unaudited  
statements.  
Adjustments for intercompany  
transactions between the foreign  
corporation and includible disregarded  
entities may be required. See the  
instructions for Part I, line 8, later.  
Line 5. Net Income (Loss) From  
Includible Disregarded Entities  
(“Includible Entities”)  
Include the net income (loss) of any  
disregarded entity that is not included in  
the income reported on Part I, line 4, but  
should be included in Part I, line 11. The  
financial results of disregarded foreign  
entities are reported on lines 5a  
corporation's worldwide books and  
records that are based on the method of  
accounting generally used by the  
corporation.  
If the foreign corporation has none of  
these financial statements, then the net  
income (loss) derived from the set(s) of  
books described in question D is used  
to report net income (loss) on line 4,  
excluding disregarded entities. All  
disregarded entities are reported on  
Part I, line 5. For corporations other than  
banks, the set(s) of books described in  
question D are those that give rise to  
U.S. booked liabilities under  
(income) and 5b (loss), and the financial  
results of disregarded U.S. entities are  
reported on lines 5c (income) and 5d  
(loss). The applicable financial  
All foreign corporations. Attach a  
supporting statement that lists for each  
includible disregarded entity reported on  
lines 5a through 5d the name, EIN (if  
applicable), and net income (loss) per  
the financial statement of that includible  
disregarded entity.  
statement of the disregarded entity to be  
used is determined first under question  
B, if available, then under question C.  
However, a foreign bank should only use  
the set(s) of books from the disregarded  
entity that are reportable on Schedule L.  
Line 6. Net Income (Loss) Not  
Included on Lines 4 and 5 From  
Includible Foreign Locations  
Foreign banks. A foreign bank  
should include on line 5 each  
disregarded entity that meets the  
following two conditions.  
Regulations section 1.882-5(d)(2)(ii).  
All foreign corporations. The  
amount on line 4 must equal the  
financial statement net income (loss) for  
the income statement period ending  
with or within the tax year, as indicated  
on line 2a.  
If the income statement period differs  
from the corporation's tax year, the  
income statement period indicated on  
line 2a applies for purposes of Part I,  
lines 4 through 8.  
Line 6 applies only to foreign  
corporations other than banks whose  
books and records are not sufficient to  
report worldwide income on lines 4 and  
5. Line 6 reporting will be necessary  
1. The disregarded entity is either  
itself engaged in a trade or business  
within the United States and has  
generated income effectively connected only when the corporation does not  
with it, or it is not engaged itself in a  
trade or business within the United  
States but has income effectively  
connected with a trade or business  
within the United States of the foreign  
bank; and  
have a worldwide trial balance to report  
its worldwide income as satisfaction of  
the requirements of question C. In such  
circumstances, the corporation will have  
used Form 1120-F, Schedule L, books  
determined under Regulations section  
1.882-5(d)(2)(ii) on lines 4 and 5 and will  
need to report the net income (loss)  
from all non-Schedule L books on line 6.  
Line 6 reporting does not apply to  
corporations that are able to report  
worldwide net income (loss) on lines 4  
and 5 from financial statements  
Combined Reporting of  
Schedule L set(s) of books—  
2. The net income (loss) of the entity  
would be includible on Part I, line 4, if  
the assets and liabilities of such entity  
were held directly by the foreign bank  
rather than by the disregarded entity.  
Question D filers. All foreign banks  
(and any other foreign corporation that  
reports on Part I, line 4, the financial  
results from the set(s) of books used in  
preparing Form 1120-F, Schedule L,  
excluding disregarded entities) must  
attach a statement that identifies each  
book (for example, New York Branch,  
International Banking Facility, Cayman  
Branch) and its net income (loss) that is  
included on Part I, line 4. However, if a  
foreign bank in its ordinary business  
practice prepares a consolidation of one  
or more books required to be reported  
on Schedule L, such consolidated  
results may be reported on line 4 in lieu  
of reporting the separate results for  
each book in the consolidation. If a  
consolidation of reportable books does  
not exist, then transactions recorded  
between these books must be  
If the income of the includible  
disregarded entity is effectively  
described in questions B or C, or from  
worldwide trial balances.  
connected with a trade or business  
within the United States but would not  
have been includible on Part I, line 4, if  
the assets giving rise to such income  
were held directly by the foreign  
Attach a supporting statement that  
provides, by country, the name and net  
income (loss) per the financial  
corporation rather than by the includible  
entity, then any effectively connected  
income of the includible entity is  
statement on Part I, line 6, of all foreign  
locations. Foreign corporations other  
than banks that have effectively  
reported on Part II, line 23, columns (b)  
through (e), instead of Part I, line 5.  
connected income with respect to  
transactions entered into as a global  
dealer in securities must report  
Foreign corporations other than a  
bank. If the foreign corporation is not a  
bank, include on line 5 all disregarded  
entities not included on Part I, line 4.  
When a foreign corporation reports  
income (loss) from a financial statement  
identified in question B or C, net income  
(loss) of a disregarded entity may or  
may not be included on line 4,  
separately in this supporting statement  
the net income (loss) for each set(s) of  
books for which the effectively  
connected dealer income is recorded  
within each separate country. All foreign  
corporations must report their effectively  
connected global dealing income in Part  
II, line 16.  
separately eliminated and shown in the  
aggregate as a separate reconciling  
elimination line item on this schedule. In  
such a case, report on Part I, line 8, the  
eliminations for transactions between  
set(s) of books reported on line 4 and  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
5
Part I, line 5. For example, adjustments  
must be reported on line 8 to eliminate  
on Part I, line 8, must be made. The  
foreign corporation must restore on  
Line 7. Net Income (Loss) of  
Nonincludible Entities  
any intercompany dividends received by Schedule M-3, Part I, line 8, the equity  
the foreign corporation from any  
income inclusion from that entity. If the  
foreign corporation does not account for  
the entity on the equity method on its  
own general ledger, it will not have  
eliminated the equity income for  
non-consolidated, worldwide financial  
statement purposes, and therefore will  
have no elimination of equity income to  
reverse.  
This line will generally not apply to  
foreign banks (unless a nonincludible  
entity is consolidated in the Schedule L  
set(s) of books for line 4 purposes), nor  
does it apply to foreign corporations  
other than banks that report on Part I,  
lines 4 and 5, income (loss) from the  
financial statements described in  
question D. For other corporations,  
remove the net income (in line 7a) or  
loss (in line 7b) of any other entity  
whose income (loss) is reported on Part  
I, line 4, but should be excluded from  
Part I, line 11. Examples of such entities  
are the foreign corporation's  
disregarded entity whose results are  
included on Part I, line 5. However, if a  
disregarded entity is not reportable in  
Part I (for example, because it does not  
give rise to U.S. booked liabilities under  
Regulations section 1.882-5(d)(2)(iii)),  
the dividend received by the foreign  
bank is not eliminated on Part I, line 8.  
Instead, the dividend is eliminated as an  
interbranch transaction on Part II, line 3,  
column (c).  
The attached supporting statement  
for Part I, line 8, must identify the type  
(for example, minority interest,  
intercompany dividends, etc.) and  
amount of consolidation or elimination  
entries reported, as well as the names  
of the entities to which they pertain. It is  
not necessary to report intercompany  
eliminations that net to zero on Part I,  
line 8, such as intercompany interest  
income and expense. For instance, if  
the foreign corporation reports interest  
income on Part I, line 4, from  
Foreign corporations other than  
banks. For foreign corporations other  
than a bank, adjustments are necessary  
in order to ensure that the consolidation  
entries and intercompany elimination  
entries included in the amount reported  
on Part I, line 11, are only those  
subsidiaries (other than disregarded  
entities) and partnerships that were  
combined with the corporation in the  
type of consolidated financial statement  
described in questions B or C. Do not  
remove in Part I the financial statement  
net income (loss) of any nonincludible  
entity accounted for in the financial  
statements on the equity method.  
Adjustments are made for these entities  
on Part II, lines 8 through 11.  
applicable to worldwide income of the  
non-consolidated foreign corporation.  
Adjustments on line 8 may be with  
respect to transactions between the  
foreign corporation and either a  
transactions with a disregarded entity  
included on Part I, line 5, it is not  
necessary to report the offsetting gross  
interest income and gross interest  
expense on Part I, line 8.  
disregarded entity reported on Part I,  
line 5, or a nonincludible entity reported  
on Part I, line 7. Adjustments for  
In addition, on Part I, line 8,  
adjustments for intercompany  
transactions between the foreign  
corporation and nonincludible entities  
may be required. See instructions for  
line 8.  
transactions with nonincludible entities  
are required only when the foreign  
corporation reports worldwide income  
on Part I, line 4, from a financial  
Example 4. F is a foreign  
corporation other than a bank and has a  
fiscal financial and tax year end. F files  
Form 1120-F because it engaged in a  
trade or business within the United  
States and is required to file  
statement described in Part I, questions  
B or C. For example, adjustments must  
be reported on line 8 to remove minority  
interests and to reverse the elimination  
of intercompany dividends included on  
Part I, line 4, that relate to the net  
Schedule M-3. F owns two U.S.  
subsidiaries, S1 and S2, and has made  
a check the box election for S1 to be  
treated as a disregarded entity. Both S1  
and S2 have the same fiscal year end as  
F. In addition, F's home country  
Attach a supporting statement that  
provides the name, EIN (if applicable),  
and net income (loss) per the financial  
statement or books and records  
included on line 4 that is removed on  
this line 7 for each separate  
income of entities removed on Part I,  
line 7, because the income to which the  
consolidation or elimination entries  
relate has been removed. In addition,  
consolidation or elimination entries must  
be reported on line 8 to eliminate any  
intercompany dividends received by the  
foreign corporation from any  
accounting rules require the inclusion of  
S2's income and expenses in F's  
non-consolidated, worldwide, certified  
audited financial statements. However,  
S1's income and expenses are not  
included in F's non-consolidated,  
worldwide, certified audited financial  
statements.  
nonincludible entity.  
Line 8. Adjustments to  
Intercompany Transactions  
disregarded entity whose results are  
included on Part I, line 5.  
Include on Part I, line 8 (i) adjustments  
to consolidation entries and elimination  
entries that are contained in the amount  
reported on Part I, line 4 (see line 4  
instructions), required as a result of  
adding amounts on Part I, lines 5 and 6;  
and (ii) amounts of any additional  
On Schedule M-3, F must check  
Yes” to question B. F must report its net  
income (loss) from its non-consolidated,  
worldwide, certified audited financial  
statements on Part I, line 4. On Part I,  
line 5, F must include the net income  
(line 5c) or loss (line 5d) generated by  
S1, the disregarded U.S. entity.  
Special treatment of equity  
method inclusions for a foreign  
corporation other than a bank. If a  
foreign corporation other than a bank  
reports worldwide income on Part I,  
line 4, and is an owner of an interest in  
another entity that (1) is accounted for in  
the foreign corporation's separate  
general ledger on the equity method,  
and (2) is fully consolidated in the  
foreign corporation's worldwide financial  
statements (thus eliminating the equity  
inclusion) and, if that entity is also  
reported on Part I, line 7, as a  
consolidation entries and elimination  
entries that are required as a result of  
removing amounts on Part I, line 7.  
Because S2 is included in the  
Foreign banks. For foreign banks,  
adjustments are necessary to account  
for the elimination of certain  
non-consolidated, worldwide, certified  
audited financial statements, it is not  
reported on Part I, line 5, since it is  
already included on Part I, line 4.  
transactions between the Schedule L  
books reported on line 4 and for  
Any adjustments necessary to  
transactions between the foreign bank  
and each disregarded entity reported on  
nonincludible entity, then an adjustment  
remove intercompany transactions  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
6
between F and S1 must be reported on  
Part I, line 8.  
disregarded entity FDE2 with net loss of  
($5,000). FDE1 and FDE2 do not have  
any effectively connected income and  
do not have books that give rise to U.S.  
booked liabilities under Regulations  
section 1.882-5(d)(2)(ii). FC reports net  
income on these financial statements of  
$50,000. In addition, FC has foreign  
locations that are not included in such  
income statements. These locations do  
not have effectively connected income  
on set(s) of books that give rise to U.S.  
booked liabilities. The financial net  
income of such foreign locations is  
$25,000.  
FC must answer “No” to questions B  
through D in Part I. FC must report on  
Part I, line 4, $35,000 (total income  
reported of $50,000, excluding the  
results of FDE1 and FDE2). On Part I,  
line 5a, FC will include the $20,000 of  
net income of FDE1 and will include on  
Part I, line 5b, the ($5,000) net loss of  
FDE2. The net income of $25,000 from  
foreign locations must be included on  
Part I, line 6, such that $75,000 is the  
net income reportable on line 11.  
engaged in trade or business within the  
United States and required to file Form  
1120-F and Schedule M-3. FC has  
certified audited income statements that  
report its non-consolidated, worldwide  
net income and unaudited income  
statements for the set(s) of books it  
reports on Schedule L for its trade or  
business within the United States. FC  
reports net income on the set(s) of  
books of its trade or business within the  
United States of $50,000, which  
Line 9. Adjustments to Reconcile  
Income Statement Period to Tax  
Year  
Include on line 9 any adjustments  
necessary to reconcile differences  
between the income statement period  
reported on line 2a and the  
corporation's tax year. Attach a  
supporting statement identifying the  
type of transaction and amount of each  
adjustment.  
includes the results of U.S. disregarded  
entity USDE1 with net income of  
$15,000 and U.S. disregarded entity  
USDE2 with a net loss of ($5,000).  
Although FC must answer “Yes” to  
question B, FC must not report on Part I,  
line 4, the results of these  
Line 10. Other Adjustments to  
Reconcile to Amount on Line 11  
non-consolidated, worldwide, certified  
audited income statements. FC must  
also answer “No” to question D. FC must  
report on Part I, line 4, the amount from  
the unaudited income statements for the  
set(s) of books it reports on Schedule L  
of $40,000 (total income reported of  
$50,000, excluding the results of  
Include on line 10 any other  
adjustments, not reportable on lines 5  
through 9, to reconcile net income (loss)  
on Part I, line 4, with net income (loss)  
on Part I, line 11.  
For any adjustments reported on Part  
I, line 10, attach a supporting statement  
that provides, for each entity to which an  
adjustment relates, the name and EIN (if  
applicable) of the entity, the nature of  
the adjustment, the amount of net  
income (loss) included in Part I before  
any adjustments on line 10, and the  
amount of net income (loss) included on  
Part I, line 11.  
USDE1 and USDE2 which also give rise  
to effectively connected income and are  
set(s) of books included in Form 1120-F,  
Schedule L). On Part I, line 5c, FC will  
include the $15,000 of net income of  
USDE1 and will include on Part I,  
Example 6. Foreign corporations  
other than a bank. FC is a non-bank  
foreign corporation engaged in trade or  
business within the United States and is  
required to file Form 1120-F and  
Schedule M-3. FC owns NI, a C  
line 5d, the ($5,000) net loss of USDE2.  
Assuming no other adjustments are  
required on Part I, lines 8 through 10,  
the net income reported on Part I, line 4,  
is $40,000, and the net income reported  
on line 11 is $50,000.  
corporation for federal income tax  
purposes. FC has certified audited  
income statements that report its  
worldwide income and that of NI. FC  
reports net income on these statements  
of $120,000. Included in these results  
are foreign disregarded entity FDE1 with  
net income of $30,000, foreign  
Line 11. Adjusted Financial Net  
Income (Loss) of the  
Non-Consolidated Foreign  
Corporation  
Specific Instructions for Parts II  
and III  
General Reporting Information  
disregarded entity FDE2 with net loss of  
($5,000), and NI's net income of  
The sum of lines 4 through 10  
constitutes the adjusted financial net  
income (loss) of the non-consolidated  
foreign corporation that is to be  
reconciled in Parts II and III with the  
foreign corporation's taxable income  
reported on Form 1120-F, Section II,  
line 29.  
$40,000. FDE1 and FDE2 both have  
effectively connected income that gives  
rise to U.S. booked liabilities. Interest  
income of $5,000 received by FC from  
NI is eliminated in the preparation of  
these statements.  
A statement or explanation may be  
attached to any line item even if none is  
required. For each line item in Parts II  
and III, report in column (a) the amount  
of the item included in the net income  
(loss) reported on Part I, line 11. For  
each line item, report in column (e) the  
amount included in determining taxable  
income (loss) on Form 1120-F,  
FC must answer “Yes” to question B.  
FC must report on Part I, line 4,  
Example 5. Foreign corporations  
other than a bank. FC is a non-bank  
foreign corporation engaged in trade or  
business within the United States and  
required to file Form 1120-F and  
$120,000. The results of FDE1 and  
FDE2 are not reported on Part I, line 5,  
since their results are already included  
on Part I, line 4. NI's income of $40,000  
is reported on Part I, line 7, because NI  
is a nonincludible entity. The $5,000 of  
interest income is reported on Part I,  
line 8. Assuming no other adjustments  
are required on Part I, lines 9 and 10,  
the total income reported on Part I,  
line 11, is $85,000 ($120,000 – $40,000  
+ $5,000).  
Section II, line 29.  
Columns (b), (c), and (d)  
Schedule M-3. FC does not have  
income statements that report its  
The temporary and permanent  
non-consolidated, worldwide income,  
but FC does have unaudited income  
statements for the set(s) of books it  
reports on Schedule L with respect to its  
trade or business within the United  
States. Included in these results are  
foreign disregarded entity FDE1 with net  
income of $20,000 and foreign  
differences reportable in columns (b)  
and (c) are those book-to-tax  
differences determined through a  
comparison of the financial statement  
and tax amounts, under the Code or an  
applicable income tax treaty, for each of  
the line items included on Part I, line 11,  
and shown in Parts II and III.  
Example 7. Foreign bank. FC is a  
foreign corporation that is a bank  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
7
Column (b). Temporary  
under U.S. tax principles and also be  
apportioned to non-ECI under section  
864(c). In such cases, a permanent  
difference may not be double counted  
by including it a second time in column  
(d). In such circumstances, where an  
amount includible in column (a) is both a  
permanent difference and apportionable  
to non-ECI, the amount is reported in  
column (c) and not in column (d).  
Accordingly, non-ECI tax-exempt  
interest is reported in column (c) as a  
permanent difference under U.S. tax  
principles. No additional apportionment  
is necessary in column (d) for such  
amounts.  
expense in Part III, line 26. Expenses  
allocable from Schedule H, line 20, are  
reportable in Part III, line 31, in columns  
(d) and (e) as a positive number.  
book-to-tax differences. In column  
(b), report the book-to-tax difference for  
each item expected to reverse in a  
future year or which reverses a prior  
year difference (whether or not so  
reported on a prior year's  
Column (d). Foreign corporations  
other than banks. Foreign  
corporations other than banks use  
column (d) to report apportionments  
only to non-ECI. In Part II, column (d),  
report apportionments of income as a  
negative amount and report losses as a  
positive number. Combine columns (a),  
(b), (c), and (d) to reconcile the amount  
apportioned to ECI in column (e). For  
Part III, except for lines 26 and 31, report  
expenses that are apportioned to  
Schedule M-3). Temporary differences  
that increase the amount shown in  
column (a) are reported as a positive  
number.  
Column (c). Permanent  
book-to-tax differences. In column  
(c) report any book-to-tax difference not  
expected to reverse in a future year, and  
that also does not constitute a reversal  
of a prior year difference. The  
Special treatment may apply for  
column (c) reporting on Part III, lines  
26d (substitute interest payments), 26e  
(interest equivalents), and 27 (substitute  
dividend payments). See instructions for  
those lines below.  
non-ECI as a negative number in  
determination as to whether a difference  
is temporary or permanent should be  
based on the facts available at the time  
the foreign corporation files its U.S. tax  
return. If the foreign corporation is  
unable to determine whether a  
column (d). See special instructions for  
the reporting of interest expense on  
line 26. Corporations other than banks  
do not report the allocation of expenses  
under Regulations section 1.861-8 from  
Schedule H (Form 1120-F), line 20, on  
Schedule M-3, Part III, line 31.  
Apportionments between  
difference between column (a) and  
column (e) for an item will reverse in a  
future tax year or reverses a prior year  
book-to-tax difference, report the  
difference for that item in column (c).  
Amounts that are permanent  
differences that reduce the income or  
expense amount shown in column (a)  
are recorded as negative numbers. For  
example, interbranch income and  
expense amounts recorded on a foreign  
bank's books reportable on Schedule L  
(and therefore included in column (a))  
that are disregarded under U.S. tax  
principles are permanent differences  
reportable as negative amounts in  
column (c).  
effectively and non-effectively  
connected income (ECI and  
Part III, lines 26d, 26e, and 27. In  
Part III, line 26d (substitute interest  
payments), line 26e (interest  
non-ECI). The combination of columns  
(a), (b), and (c) results in the gross  
taxable income or deduction amount  
under U.S. tax principles for each line  
item in Parts II and III that is eligible for  
allocation and apportionment between  
ECI and non-ECI.  
equivalents), and line 27 (substitute  
dividend payments), amounts in these  
categories paid by the foreign  
corporation that are not included in  
column (a) are reported in column (c) as  
a positive number. Amounts described  
in lines 26d, 26e, and 27 are reported in  
column (c) whether or not any of the  
amount is apportionable in whole or in  
part to ECI in column (e). Column (d) is  
used for these line items only to  
Column (d). Foreign bank.  
Column (d) is used to report the portion  
of the combined amount of columns (a),  
(b), and (c) that is allocated and  
apportioned to non-ECI. If an amount  
apportioned to non-ECI is included in  
column (a), then report such amount as  
a negative number in column (d). If the  
apportioned amount included in column  
(a) is a loss, then include the  
apportion amounts to non-ECI.  
Example 9. FC is a foreign bank that  
is required to file Form 1120-F and  
Schedule M-3. FC included on Part I,  
line 11, $100 of interest income, of  
which $60 is effectively connected  
tax-exempt interest income and $40 is  
noneffectively connected tax-exempt  
interest income. In addition, FC included  
on Part I, line 11, $300 of fee and  
commission income that was  
If interbranch amounts recorded on  
Schedule L books are treated as  
third-party amounts under Proposed  
Regulations sections 1.863-3(h) and  
1.475(g)-2 of the global dealing rules, or  
recognition treatment is otherwise  
provided under an Advance Pricing  
Agreement or Mutual Agreement  
apportioned loss as a positive number in  
column (d). Certain income may be  
apportioned to ECI that is not reported  
on the Schedule L books and is not  
reportable in column (a). These  
amounts include allocable global  
Procedure, then such interbranch  
amounts are treated as amounts subject  
to apportionment between non-ECI and  
ECI in columns (d) and (e) and not as  
permanent differences in column (c).  
dealing income in Part II, line 16, and  
other income from non-Schedule L  
books reportable in Part II, line 23. Such  
income is apportioned to ECI and  
reported in column (d) as a positive  
number. For amounts reportable in Part  
II, if the apportioned amount is a loss,  
report such loss as a negative number  
in column (d). In column (e), combine  
the amounts in columns (a), (b), (c), and  
(d) to determine the amount of each line  
item apportioned to ECI. See special  
reporting instructions for reporting  
amounts in column (d) for substitute  
dividends and substitute interest income  
in Part II, lines 3c and 4b, and for the  
allocation and apportionment of interest  
recognized for U.S. tax purposes in a  
prior year.  
FC reports on Part II, line 4a, column  
(a), the $100 of tax-exempt interest  
income. FC reports ($100) of permanent  
book-to-tax difference on line 4a,  
Note. References in Proposed  
Regulations section 1.863-3(h) to  
Regulations section 1.482-8 should  
instead refer to Proposed Regulations  
section 1.482-8, which deals with  
allocating income earned in a global  
dealing operation.  
Amounts that are apportionable to  
non-ECI are generally reportable only in  
column (d). However, some amounts  
may be both permanent differences  
column (c), to eliminate the tax-exempt  
interest income. No amount is  
reportable on line 4a, column (d), since  
all of the income is a permanent  
difference under U.S. tax principles  
without regard to its allocation between  
effectively and noneffectively connected  
income. FC also includes on Part II,  
line 7, column (a), the $300 of fee and  
commission income. Since this amount  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
8
was already recognized in a prior year  
for U.S. tax purposes, FC reports on  
line 7, column (b), a temporary  
difference of ($300).  
otherwise reportable based on Code  
principles, either (1) attach a separate  
statement identifying each such line  
a U.S. permanent establishment under  
Article 7 (Business Profits) of an  
applicable income tax treaty, the  
item, or (2) on Part II or III, as applicable, amounts are also includible as a  
include footnotes or similar references  
for each such item to indicate that a  
treaty-based position was claimed for  
determining the amount reportable in  
column (e). If no amount is reportable in  
column (e), see Treaty-based reporting,  
later.  
book-to-tax difference if they are  
reported in business profits under an  
eligible treaty-based tax return position.  
Such amounts are reported as  
Example 10. The facts are the  
same as in Example 9, except the $100  
of tax-exempt interest is not included on  
Part I, line 11, and is therefore excluded  
from Part II, line 4, column (a). Because  
the $100 of tax-exempt interest income  
is allocable to both ECI and non-ECI, it  
has significance in determining the  
allocation of expenses under indirect  
methods under Regulations section  
1.861-8, and is therefore required to be  
reported on Part II, line 23, as income  
not included in the Schedule L books  
that is allocable and apportionable to  
ECI. Because no amount is includible in  
column (a), the full $100 of tax-exempt  
interest is reported in column (d) as a  
positive number and in column (c) as a  
negative number. As a result, there is no  
amount reportable in column (e).  
permanent differences in column (c)  
and included in column (e). Third-party  
amounts included in worldwide income  
that are not attributable to the U.S.  
permanent establishment should be  
reported in the following manner.  
Interbranch reporting. If the  
foreign corporation is a foreign bank  
electing to use an eligible treaty,  
interbranch income and expense and  
noneffectively connected income are  
not treated as permanent differences to  
the extent such items are attributable to  
the U.S. permanent establishment and  
are also included in the net income  
(loss) reported on Part I, line 11. For any  
item reported on Part I, line 11, that is  
attributable to the foreign corporation's  
U.S. permanent establishment, such  
amounts may have temporary  
Columns (b) and (c). Temporary  
and permanent differences are  
determined in accordance with the  
instructions for these columns, earlier,  
except that each line in column (e) is as  
determined below.  
Column (d). Differences for  
amounts not attributable to a U.S.  
permanent establishment are reported  
as a negative number in column (d).  
Differences for losses not attributable to  
a U.S. permanent establishment are  
reported as a positive number in Part II.  
Treatment of Items Under an  
Eligible Treaty-Based Return  
Position to Attribute Business  
Profits to a U.S. Permanent  
Establishment  
differences under U.S. tax principles (for  
example, depreciation deductions  
includible in column (a) may have  
temporary book-to-tax differences  
reportable in column (b)). For amounts  
reported in Part II, column (a), do not  
report as permanent differences  
Column (e). Combine columns (a),  
(b), (c), and (d) and report the income or  
deduction for each line item that is  
includible in business profits attributable  
to the U.S. permanent establishment in  
column (e).  
If a foreign corporation elects to use an  
eligible treaty that provides a  
interbranch interest or other interbranch  
income in column (c) or noneffectively  
connected income including foreign  
related party interest, dividends or  
royalties that are not effectively  
permissible method other than the rules  
of section 864(c) and 882 to determine  
its business profits attributable to a U.S.  
permanent establishment, the foreign  
corporation must report on Form 1120-F,  
Section II, its business profits  
Example 11. Treaty-based  
reporting of business profits of a  
foreign bank. FC is a foreign bank  
that has three sets of books that give  
rise to U.S. booked liabilities under  
Regulations section 1.882-5(d)(2)(iii)  
and that are reportable on Form 1120-F,  
Schedule L. Two of the books are  
maintained in the United States by its  
U.S. branch. The third book is a portfolio  
of effectively connected loans that are  
recorded, managed, and funded in FC's  
home office in Country X. The three  
books are consolidated for Form 1120-F,  
Schedule L, reporting purposes. FC files  
its Form 1120-F and Schedule M-3  
under an eligible treaty to report its  
business profits attributable to its U.S.  
permanent establishment in lieu of  
reporting its net effectively connected  
income under sections 864(c) and 882.  
The two books maintained in the United  
States are primarily attributable to FC's  
U.S. permanent establishment. The  
third set of books that constitutes a set  
of books for Regulations section  
connected income under section 864(c)  
(4)(D) in column (d) to the extent such  
amounts are attributable to the U.S.  
permanent establishment under the  
OECD Transfer Pricing Guidelines,  
applied by analogy. Report on any such  
applicable lines in Part II or III using  
either of the methods of identification  
specified under Foreign bank  
attributable to its U.S. permanent  
establishment under such income tax  
treaty that applies the OECD Transfer  
Pricing Guidelines in lieu of the  
effectively connected income rules of  
sections 864 and 882. In such a case,  
the treatment of items in columns (c)  
and (d) must be adapted to apply the  
concepts of the applicable treaty.  
treaty-based reporting above, indicating  
that the amount reported in column (e)  
reflects interbranch income or loss  
attributable to the U.S. permanent  
establishment.  
Treaty-based reporting for foreign  
corporations other than banks.  
Foreign bank treaty-based reporting.  
For foreign banks, if any amounts are  
not reported in Part II, column (a), as  
part of the set(s) of books that constitute  
the books of the U.S. permanent  
establishment, but are attributable to the  
U.S. permanent establishment under  
application of the OECD Transfer Pricing  
Guidelines, such amounts are included  
as permanent differences in columns (c)  
and (d). Report in column (e) all  
Foreign corporations other than banks  
must include interbranch income and  
expense as book-to-tax differences to  
the extent such items are not included in  
worldwide income reported on Part I,  
line 11, and such items are attributable  
to the U.S. permanent establishment.  
Interbranch income should have been  
eliminated in arriving at the adjusted  
non-consolidated income reportable on  
Part I, line 11. To the extent such  
amounts that are business profits  
attributable to the U.S. permanent  
establishment. When a treaty-based  
position modifies the amount(s)  
1.882-5(d)(2)(iii) purposes is not  
attributable to FC's permanent  
establishment in the year FC files its  
Form 1120-F under the treaty-based  
method.  
reportable for any of the line items  
shown in Parts II and/or III of  
interbranch amounts are attributable to  
Schedule M-3 from the amounts  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
9
On the two books that are attributable interest expense attributable to the  
corporation's investment in a  
to FC's U.S. permanent establishment,  
FC records net book income of $175.  
(FC has the following income: $500 of  
interbranch interest income, $200 of  
noneffectively connected interest  
income, and $1,200 of effectively  
connected income under Code-based  
principles. FC has $1,000 of third party  
interest expense and $400 of  
business profits of the U.S. permanent  
establishment. A footnote should be  
included indicating that interbranch  
income was included in the column (e)  
amount.  
partnership or other pass-through entity,  
and interest equivalents, all interest  
income included on Part I, line 11,  
whether from unconsolidated affiliated  
companies, third parties, banks, or other  
entities, whether from foreign or  
In Part III, the $325 of book expenses  
attributable to the U.S. permanent  
establishment are recorded in columns  
(a) and (e) in their respective categories.  
No adjustments are made in this  
example in column (b) for temporary  
differences or to business profits that  
are not attributable to the U.S.  
domestic sources, whether taxable or  
exempt from tax, and whether classified  
as some other type of income for U.S.  
income tax purposes (such as  
interbranch interest expense on the  
books of its U.S. permanent  
dividends), must be included on Part II,  
line 4a, column (a). For the exceptions,  
look for the specific line in Part II.  
establishment that is priced at arm's  
length with its home office. Each type of  
interest expense is also attributable to  
its U.S. permanent establishment. On  
the two sets of books maintained in the  
United States, FC has other third party  
expenses of $325 attributable to the  
permanent establishment.) FC also has  
$100 of income attributable to its U.S.  
permanent establishment that is  
permanent establishment in column (d).  
No additional expenses are attributable  
to the U.S. permanent establishment  
from the home office, which would have  
been reportable in column (d). A  
footnote should be referenced to this  
line indicating that a treaty-based  
position was used in determining the  
interest expense.  
Similarly, all fines and penalties  
included in Part I, line 11, paid to a  
government or other authority for the  
violation of any law for which fines or  
penalties are assessed, must be  
included on Part III, line 11, column (a),  
regardless of the authority that imposed  
the fines or penalties, regardless of  
whether the fines or penalties are civil or  
criminal, regardless of the classification,  
nomenclature, or terminology attached  
to the fines or penalties by the imposing  
authority in its actions or documents.  
recorded in its home office on set(s) of  
books that are predominantly not  
attributable to FC's U.S. permanent  
establishment. FC determines that $75  
of its book interest expense must be  
disallowed after equity capital is  
Schedule M-3 Reporting  
Requirements for Regulations  
Section 1.6011-4(b) Reportable  
Transactions  
If a foreign corporation would be  
required to report in column (a) of Parts  
II and III the amount of an item  
allocated to the U.S. permanent  
If an amount is attributable to a  
establishment under the OECD Transfer  
Pricing Guidelines applicable to Article 7  
(Business Profits) of the treaty.  
reportable transaction described in  
Regulations section 1.6011-4(b), the  
amount must be reported in columns  
(a), (b), (c), (d), and (e), as applicable,  
of Part II, line 12 (items relating to  
reportable transactions), regardless of  
whether the amount would otherwise be  
reported on another line in Part II or Part  
III of Schedule M-3. Thus, if a taxpayer  
files Form 8886, Reportable Transaction  
Disclosure Statement, the amounts  
attributable to that reportable  
specifically listed on Schedule M-3 in  
accordance with the preceding  
FC reports $350 of treaty-based  
profits attributable to its U.S. permanent  
establishment as follows.  
paragraphs, except for the fact that the  
corporation has capitalized the item of  
income or expense and reports the  
amount in its financial statement  
balance sheet or in asset and liability  
accounts maintained in the  
On Part II, line 4a, column (a), $1,900  
of interest income is reported for the  
total interest income of the set(s) of  
books attributable to the U.S. permanent  
establishment. In column (c), $100 is  
reported as a permanent difference for  
the income not included on the set(s) of  
books reported on Form 1120-F,  
Schedule L. In column (e), the total  
interest of $2,000 is reported as income  
attributable to the U.S. permanent  
establishment.  
corporation's books and records instead  
of in its income statement, the foreign  
corporation must report the proper tax  
treatment of the item in columns (b), (c),  
(d), and (e), as applicable.  
transaction must be reported on Part II,  
line 12.  
A corporation is required to report in  
column (a) of Parts II and III the amount  
of every item specifically listed on  
Schedule M-3 that is in any manner  
included in the foreign corporation's  
current year income statement net  
income (loss) or in an income or  
Furthermore, in applying the  
preceding paragraphs, a foreign  
corporation is required to report in  
column (a) of Parts II and III the amount  
of any item specifically listed on  
On Part III, line 26a, the U.S.  
permanent establishment's book  
Schedule M-3 that is included on Part I,  
line 11, regardless of the nomenclature  
associated with that item in the income  
statements or books and records.  
Accurate completion of Schedule M-3  
requires reporting amounts according to  
the substantive nature of the specific  
line items included in Schedule M-3 and  
consistent reporting of all transactions  
of like substantive nature that occurred  
during the tax year.  
interest expense of $1,400 is reported in  
column (a). The total book amount is  
reversed on line 26a in either column (b)  
or (c). The $1,400 from column (a) is  
reported in columns (b) and/or (c) as a  
negative number. This includes the $75  
portion of the $1,400 that constitutes  
equity capital allocated to the U.S.  
permanent establishment. On Part III,  
line 26b, column (d), the $1,325 tax  
amount of the interest expense (after  
the $75 allocation of equity capital is  
taken into account) is reported. This  
$1,325 amount reported in column (d) is  
carried to column (e) and constitutes the  
amount from line 26a that is treated as  
expense account maintained in the  
corporation's books and records, even if  
there is no difference between that  
amount and the amount included in  
taxable income. However, this reporting  
is not required in cases where (a) these  
instructions provide otherwise, or (b) the  
amount is attributable to a reportable  
transaction described in Regulations  
section 1.6011-4(b) and is therefore  
reported on Part II, line 12.  
For example, all expense amounts  
that are included in the income  
For example, with the exception of  
interest income reflected on a  
Schedule K-3 received by a foreign  
corporation as a result of the  
statements or exist in the books and  
records that represent some form of  
“Bad debt expense” must be reported  
on Part III, line 24, column (a),  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
10  
regardless of whether the amounts are  
recorded or stated under different  
nomenclature in the income statements  
or the books and records such as:  
“Provision for doubtful accounts,”  
“Allowance for uncollectible notes  
receivable,or “Impairment of trade  
accounts receivable.Likewise, as  
stated above, all fines and penalties  
must be included on Part III, line 11,  
column (a), regardless of the  
clearly identifies the item or transaction  
from which the difference arises. For  
further guidance about adequate  
disclosure, see Regulations section  
1.6662-4(f), Rev. Proc. 2004-45,  
2004-31 I.R.B. 140, and Rev. Proc.  
2005-75, 2005-50 I.R.B. 1137. If a  
specific item of income, gain, loss,  
expense, allocation, or deduction is  
described on Part II, lines 1 through 24,  
or Part III, lines 1 through 32, and the  
line does not indicate to “attach a  
statement,and the specific instructions  
for the line do not call for an attachment  
of a statement, then the item is  
Each description should adequately  
describe all five columns of Part II,  
line 24, or Part III, line 32. If additional  
information is required to provide an  
acceptable description, provide a  
supporting statement.  
Example 12. Temporary  
differences. Foreign corporation FC is  
a calendar year taxpayer that placed in  
service ten depreciable, fixed, U.S.  
assets in a previous tax year. FC is  
required to file Schedule M-3 for the  
current tax year. FC's total depreciation  
expense for its 2023 tax year for five of  
the assets is $50,000 for income  
terminology or nomenclature attached  
to them by the corporation in its books  
and records or income statements.  
Similarly, if the fine and penalty, for  
example, are ncluded in another item,  
the amount of the fine or penalty should  
be segregated and included on Part III,  
line 11.  
considered separately stated and  
adequately disclosed if the item is  
reported on the applicable line and the  
amount(s) of the item(s) are reported in  
the applicable columns of the applicable  
line.  
statement purposes and $70,000 for  
U.S. income tax purposes. FC's total  
annual depreciation expense for its  
2023 tax year for the other five assets is  
$40,000 for income statement purposes  
and $30,000 for U.S. income tax  
With limited exceptions, Part II  
includes lines for specific items of  
income, gain, or loss (“income items”). If  
an income item is described in Part II,  
lines 1 through 23, report the amount of  
the item on the applicable line,  
purposes. In its income statements, FC  
treats the differences between income  
statement and U.S. income tax  
Note. A statement or explanation may  
be attached to any line even if none is  
required.  
depreciation expense as giving rise to  
temporary differences that will reverse in  
future years. FC must combine all of its  
depreciation adjustments. Accordingly,  
for its 2023 tax year, FC must report on  
Part III, line 23, depreciation expense as  
shown on its income statement of  
$90,000 in column (a), a temporary  
difference of $10,000 in column (b), and  
U.S. income tax depreciation expense  
of $100,000 apportionable between  
non-ECI and ECI in column (d) and  
column (e).  
Except as otherwise provided,  
differences for the same item must be  
combined or netted together and  
reported as one amount on the  
applicable line of Schedule M-3.  
However, differences for separate items  
must not be combined or netted  
together. Each item (and corresponding  
amount attributable to that item) must  
be separately stated and adequately  
disclosed on the applicable line of  
Schedule M-3, or any statement  
required to be attached, even if the  
amounts are below a certain dollar  
amount.  
regardless of whether or not there is any  
difference for the item. If there is a  
difference for the income item, or only a  
portion of the income item has a  
difference and a portion of the item does  
not have a difference, and the item is not  
described in Part II, lines 1 through 23,  
report and describe the entire amount of  
the item on Part II, line 24.  
With limited exceptions, Part III  
includes lines for specific items of  
expense, allocation, or deduction  
(“expense items”). If an expense item is  
described on Part III, lines 1 through 31,  
report the amount of the item on the  
applicable line, regardless of whether or  
not there is a difference for the item. If  
there is a difference for the expense  
item, or only a portion of the expense  
item has a difference and a portion of  
the item does not have a difference and  
the item is not described in Part III, lines  
1 through 31, report and describe the  
entire amount of the item on Part III,  
line 32.  
Example 13. Bad debt and  
warranty reserves. Foreign  
Corporation D files and completes  
Schedule M-3 for its 2023 tax year. The  
income statement year is identical to the  
tax year. On the last day of its 2023 tax  
year, D establishes two reserve  
Required statements for Part II,  
line 24, and Part III, line 32. A  
separate statement must be attached to  
Schedule M-3 (Form 1120-F) that  
includes a detailed description of each  
item and adjustment entered on Part II,  
line 24, and Part III, line 32.  
The description for each amount  
entered in column (a) must be readily  
identifiable to the name of the account  
in the financial statements or books and  
records of the taxpayer, under which the  
amount in column (a) of the statement  
was recorded in the accounting records.  
Also, the description for each amount  
entered in column (a) must include  
detailed information supporting each  
adjustment reported in columns (b), (c),  
and (d), including how the adjustment is  
identified in the accounting records. The  
entire description is considered the tax  
description for the amount reported in  
column (e) for each item reported on  
Part II, line 24, or Part III, line 32.  
accounts in the amount of $100,000 for  
each account. One reserve account is  
an allowance for accounts receivable  
that are estimated to be uncollectible.  
The second reserve is an estimate of  
future warranty expenses. Both reserves  
are only for assets that give rise to  
effectively connected income. In its  
income statements, D treats the two  
reserve accounts as giving rise to  
temporary differences that will reverse in  
future years. The two reserves are  
expenses for D's 2023 income  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, loss, expense, or deduction  
and the item is not described or  
included in Part II, lines 1 through 24, or  
Part III, lines 1 through 32, report the  
entire amount of the item in columns (a)  
and (e) of Part II, line 27.  
statements but are not deductions for  
U.S. income tax purposes in 2023. D  
must not combine the Schedule M-3  
differences for the two reserve  
Separately stated and adequately  
disclosed. Each difference reported in  
Parts II and III must be separately stated  
and adequately disclosed. In general, a  
difference is adequately disclosed if the  
difference is labeled in a manner that  
accounts. D must report the amounts  
attributable to the allowance for  
uncollectible accounts receivable on  
Part III, line 24, Bad debt expense, and  
must separately state and adequately  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
11  
disclose the amounts attributable to the  
other reserve, for warranty costs, on a  
required attached statement that  
column (b) without regard to its  
are amounts attributable to inventory  
valuation, such as amounts attributable  
to cost-flow assumptions, additional  
costs required to be capitalized  
effectively or noneffectively connected  
character. The amounts allocable to  
supports the amounts on Part III, line 32. noneffectively connected income are  
then determined and reported in column (including depreciation) such as section  
D must also provide a description for  
(d). E must report the ($25,000)  
allocable to noneffectively connected  
income in column (d) and U.S. income  
tax bad debt expense of $50,000 in  
column (e).  
263A costs, inventory shrinkage  
accruals, inventory obsolescence  
reserves, and lower of cost or market  
(LCM) write-downs. Attach a statement  
separately stating each item included on  
this line and the amount for each  
column.  
each reserve that meets the  
requirements for Part III, line 32,  
discussed earlier under Required  
statements for Part II, line 24, and Part  
III, line 32. In this example, an  
acceptable description would be “Future  
Warranty Expense Reserve.”  
Specific Instructions for  
Part II. Reconciliation of  
Net Income (Loss) per  
Income Statement of  
Do not report the following on this  
line 2:  
Note. There is no need to add the title  
of the reserve account to the description  
if the account name for the amount in  
column (a) is already part of the  
adjustment description.  
Amounts reportable on Part II, line 12;  
Any gain or loss from inventory  
Non-Consolidated Foreign  
Corporations With Taxable  
hedging transactions reportable on Part  
II, line 13;  
Example 14. Non-ECI and ECI  
Mark-to-market income or (loss)  
Income per Return  
apportionment of temporary  
under section 475 reportable on Part II,  
line 14;  
Note. Foreign corporations report, on  
lines 1 through 17, 19 through 21a, 24,  
and 27 in column (a), the income (loss)  
items included in the financial net  
income (loss) reported on Part I, line 11.  
See the instructions for Part I, line 11, for  
reporting differences between foreign  
banks and foreign corporations other  
than a bank.  
differences. Corporation E files and  
completes Schedule M-3 for its 2023 tax  
year. The income statement year is  
identical to the tax year. At the  
Global dealing income reportable on  
Part II, line 16;  
Section 481(a) adjustments related to  
beginning of the tax year, E establishes  
an allowance for uncollectible accounts  
receivable (bad debt reserve) of  
cost of goods sold or inventory valuation  
reportable on Part II, line 18;  
Original issue discount, imputed  
$100,000, all of which is related to  
assets that give rise to effectively  
connected income. During 2023, E  
increased the reserve by $250,000 for  
additional accounts receivable that may  
become uncollectible, of which  
interest, and phantom income  
reportable on Part II, line 20;  
Tiebreaker rules. There are tiebreaker  
rules described in detail below under  
each applicable line instruction for Part  
II. For example, for foreign corporations  
that report income from their U.S. trade  
or business associated with global  
dealing activities in securities or  
Fines and penalties reportable on  
Part III, line 11;  
Judgments, damages, awards, and  
similar costs, reportable on Part III,  
line 12;  
$150,000 is related to assets that give  
rise to effectively connected income.  
Additionally, during 2023, E decreases  
the reserve by $75,000 for accounts  
receivable that were discharged in  
bankruptcy during 2023, of which  
$50,000 is related to assets that give  
rise to effectively connected income.  
The balance in the reserve account on  
the last day of the 2023 tax year is  
$275,000, of which $200,000 relates to  
assets that give rise to effectively  
connected income. The $100,000  
amount to establish the reserve account  
and the $250,000 to increase the  
reserve account are expenses on E's  
2023 income statements, but are not  
deductible for U.S. income tax purposes  
in 2023. However, of the $75,000  
decrease to the reserve, only $50,000,  
which is attributable to assets that give  
rise to effectively connected income, is  
deductible for U.S. income tax purposes  
in 2023.  
Amounts reported on Part II, line 17,  
Sales versus lease; and  
financial instruments, global dealing  
income is prioritized on line 16 even  
though some income or loss amounts in  
the global dealing book might otherwise  
appear to be reportable on another line  
(for example, dividends on line 3a or 3b,  
or hedges on line 13).  
Amounts reported on Part III, line 25,  
Purchase versus lease.  
Lines 3a and 3b. Dividends  
Report on lines 3a through 3b, column  
(a), the amount of dividends included on  
Part I, line 11, from foreign and U.S.  
entities. Report on lines 3a through 3b,  
column (e), the amount of any dividends  
included in taxable income on Form  
1120-F, Section II, line 4. Do not include  
on lines 3a through 3b dividends from  
global securities dealings which are  
reportable on Part II, line 16b, or  
Line 1. Gross Receipts or Sales  
Enter total gross receipts or sales net of  
returns and allowances. In column (e),  
enter the amount from Form 1120-F,  
Section II, line 1c. Do not report gross  
receipts resulting from reportable  
transactions (line 12), sale of securities  
that are marked to market (line 14),  
currency gains and losses from other  
section 988 transactions (line 15), or  
receipts or sales of securities from  
global securities dealings (line 16).  
dividends reported elsewhere (for  
example, substitute dividends  
reportable on line 3c and reportable  
transactions reportable on line 12). Any  
effectively connected dividends from  
corporations reported by the foreign  
corporation under the equity method are  
reported in columns (c) and (e) of this  
line, as described in the instructions for  
Part II, line 8.  
Line 2. Cost of Goods Sold  
In its income statements, E treats the  
Report on line 2 any amounts treated as  
part of cost of goods sold during the tax  
year, regardless of whether the amounts  
would otherwise be reported elsewhere  
in Part II or Part III. However, do not  
reserve account as giving rise to a  
temporary difference that will reverse in  
future tax years. For its 2023 tax year, E  
must report its income statement bad  
debt expense of $350,000 in Part III,  
line 24, column (a). The temporary  
difference of ($275,000) is determined  
under U.S. tax principles and reported in  
Line 3c. Substitute Dividend  
Payments Received  
report the items mentioned in the next  
paragraph on this line 2. Examples of  
amounts that must be included on line 2  
Report on line 3c, the gross substitute  
dividend payments received with  
respect to securities loans under section  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
12  
1058 or substantially similar  
are sourced and characterized as U.S.  
eliminate all $100 of the tax-exempt  
transactions, or from sale repurchase  
transactions, as described in  
source dividends. Under FC's treaty with interest income (including the  
the United States, the dividends are  
subject to a 15% gross basis tax.  
noneffectively connected portion) and  
all $600 of the interbranch interest  
income. FC must also report ($150) of  
noneffectively connected interest  
income from its “10% rule securities” in  
column (d) as a negative amount. FC  
combines columns (a), (b), (c), and (d)  
and reports $1,150 of effectively  
connected interest income in column  
(e).  
Regulations sections 1.861-3(a)(6),  
1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do  
not net substitute dividend payments  
received against any substitute dividend  
payments made by the foreign  
The substitute payments are not  
reportable on Part I, line 11, or Part II,  
line 3c, column (a). FC must report $200  
of dividends on line 3c, column (c), as a  
positive number. On line 3d, column (d),  
the $200 is reported as a negative  
number. FC enters zero in column (e).  
On Form 1120-F, Section I, FC must  
report the substitute dividends received  
that are not properly withheld upon and  
reported by the withholding agent on  
Form 1042-S.  
corporation to another securities lender.  
Foreign banks—worldwide report-  
ing. Foreign banks must also report in  
column (c) all U.S. source substitute  
dividend payments received as  
Line 4b. Substitute Interest  
Payments Received  
beneficial owner to the extent they are  
not already included on Part I, line 11,  
and without regard to whether such  
payments received are effectively  
connected income. For example,  
substitute dividends received by a  
foreign bank that are not reported on  
Form 1120-F, Schedule L, must be  
reported as U.S. source payments  
received in column (c) and reversed to  
the extent of the non-ECI portion of the  
payments in column (c) as a negative  
number in column (d). Reporting in  
columns (c) and (d) for substitute  
dividends is required even if no amount  
would be reported in columns (a) and  
(e). Any U.S. source substitute  
Report on line 4b the gross substitute  
interest payments received with respect  
to securities loans under section 1058,  
sale repurchase transactions, or similar  
transactions, as described in  
Line 4a. Interest Income  
Excluding Interest Equivalents  
Report on Part II, line 4a, column (a), the  
total amount of interest income included  
on Part I, line 11, and report on Part II,  
line 4a, column (e), the total amount of  
interest income included on Form  
1120-F, Section II, line 5, that is not  
required to be reported elsewhere in  
Part II. In column (b) or (c), as  
Regulations sections 1.861-2(a)(7),  
1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do  
not net substitute interest payments  
received against substitute interest  
payments made by the foreign  
corporation with respect to any section  
1058 sale repurchase transactions,  
including payments made with respect  
to “matched book” transactions, or any  
similar transaction.  
applicable, adjust for amounts treated  
for U.S. income tax purposes as interest  
income that are treated as some other  
character of income in the income  
statements, or vice versa. All  
dividends that are effectively connected  
with the foreign corporation’s trade or  
business within the United States are  
reportable in column (e). Do not report  
on any line substitute dividend  
Foreign banks—worldwide report-  
ing. Foreign banks must report all U.S.  
source substitute interest payments  
received as beneficial owner, whether or  
not such payments are included in Part  
I, line 11, and are effectively connected  
income. All U.S. sourced substitute  
interest received by a foreign bank that  
is not reported on Form 1120-F,  
interbranch interest income included on  
Part I, line 11, that is excluded from  
taxable income is reported as a  
permanent difference in column (c). For  
foreign corporations other than banks,  
see the instructions for Part I, line 8,  
regarding eliminations of interbranch  
transactions.  
payments received in custody for  
another owner of the substitute payment  
or such payments reportable on  
line 16b.  
Schedule L, is reportable in column (c)  
and the non-ECI portion is reversed as a  
negative amount in column (d). Both  
U.S. and foreign source substitute  
interest that is effectively connected with  
the foreign corporation's trade or  
Example 15. FC, a foreign bank  
resident in Country X, is engaged in a  
banking trade or business within the  
United States through a U.S. permanent  
establishment. FC has an income tax  
treaty with the United States that  
Do not report on this line 4a, in any  
column, amounts reported in  
accordance with instructions for Part II,  
lines 4b, 4c, 9 through 13, 16a, 20, and  
23.  
business within the United States is  
reportable in column (e).  
Do not report on line 4b substitute  
interest payments received in custody  
for another owner of the substitute  
payment or such payments reportable  
on line 16a.  
Report all substitute interest  
payments received on line 4b whether  
or not such amounts are characterized  
as interest or other income under the  
Code.  
imposes a 15% tax on gross portfolio  
dividends received by the corporation  
that are not attributable to a U.S.  
Example 16. FC is a foreign bank  
that is required to file Form 1120-F and  
Schedule M-3 for the current tax year.  
FC included on Part I, line 11, the  
following interest income items totaling  
$2,000: $600 of interbranch interest  
income; $100 of tax-exempt interest,  
$60 of which is effectively connected;  
$300 of interest income with respect to  
securities described in Regulations  
section 1.864-4(c)(5)(ii)(b)(3) (“10% rule  
securities”), $150 of which is allocable  
to noneffectively connected income  
under the rule of that paragraph; and  
$1,000 of other effectively connected  
interest income.  
permanent establishment. FC records  
securities lending transactions with  
respect to U.S. and foreign stocks on its  
home office set(s) of books. These  
set(s) of books do not give rise to U.S.  
booked liabilities under Regulations  
section 1.882-5(d)(2)(iii) and are not  
reportable on Form 1120-F, Schedule L.  
FC receives $200 of substitute  
dividends from transactions described  
in section 1058, all of which are not  
effectively connected with FC's trade or  
business within the United States and  
are not attributable to FC's U.S.  
Example 17. FC, a foreign bank,  
receives $1,000 of gross U.S. source  
substitute interest payments with  
respect to sale repurchase agreements.  
FC also has $200 of gross U.S. source  
FC reports on Part II, line 4a, column  
permanent establishment. Under  
(a), all $2,000 of this interest income. FC substitute interest with respect to  
Regulations sections 1.861-3(a)(6) and  
1.881-2(b)(2), the substitute dividends  
reports ($700) as a permanent  
securities loans of municipal bonds in  
transactions described in section 1058.  
difference on line 4a, column (c), to  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
13  
All of the substitute interest received  
was included on FC's set(s) of books  
reported on Form 1120-F, Schedule L,  
and is reportable on Part I, line 11.  
FC must report all $1,200 of the  
substitute interest in column (e) as  
effectively connected income. The $200  
of U.S. source ECI substitute interest  
received from the municipal bond  
of certain foreign partnership interests  
from line 10,the sum of all amounts  
attributable to the corporation's  
Line 8. Income (Loss) From  
Equity Method Corporations  
Report on line 8, column (a), the income  
statement income (loss) included in Part  
I, line 11, for any corporation accounted  
for on the equity method. Remove such  
amount in column (b) or (c), as  
distributive share of income or loss from  
all U.S. and foreign partnership interests  
that are included in taxable income. The  
amount reported in column (e) of lines 9  
and 10 should reconcile with an amount  
that is:  
applicable. Include on Part II, line 3,  
columns (c) and (e), dividends received  
from any corporation accounted for on  
the equity method to the extent the  
dividends constitute effectively  
The sum of the gross income  
securities loans is not characterized as  
tax-exempt municipal bond interest, but  
is U.S. source “other income” consistent  
with the characterization provisions  
applicable only to substitute interest  
payments described in Regulations  
section 1.881-2(a)(2). Accordingly, no  
amount of the payment is reportable in  
column (c) as a permanent difference.  
amounts reported on Schedule P (Form  
1120-F), Part II, lines 2 and 3 ("Total"  
column), minus  
connected income.  
The sum of the deductions/loss  
amounts reported on Schedule P (Form  
1120-F), Part II, lines 5 and 6 ("Total"  
column), plus  
Lines 9 and 10. Net Income  
(Loss) from U.S. and Certain  
Foreign Partnerships  
The sum of the amounts reported on  
Note. The income (loss) reported in  
column (e) must reconcile with the  
effectively connected income reportable  
to the foreign corporation on all  
Schedules K-3 (Form 1065) and which  
the foreign corporation is required to  
report on Schedule P (Form 1120-F),  
Part II.  
Schedule P (Form 1120-F), Part II, lines  
7 and 8 ("Total" column).  
Line 4c. Interest Equivalents  
Other Than Substitute Interest  
Reported on Line 4b  
Exclusion of certain foreign  
partnership interests from line 10.  
Foreign corporations other than banks  
that have foreign partnership interests  
with no effectively connected income for  
the year need not separately report  
those interests on this line. If, however,  
the foreign corporation reports a  
Report on line 4c interest income  
equivalents other than substitute  
interest reportable on line 4b or other  
interest equivalents reportable on other  
lines in Part II. Interest equivalents  
reportable on line 4c generally consist of  
fees and commission income with  
respect to certain financial transactions  
that do not give rise to interest under  
section 163 (for example, financial  
guarantee fees, and acceptance  
confirmation and standby letter of credit  
fees). Do not report periodic income  
with respect to notional principal  
contracts on Part II, line 4c.  
Except as provided below for certain  
foreign partnership interests of  
corporations other than a bank, report  
amounts on Part II, line 9 or 10, as  
described below.  
partnership interest on the equity  
method in the income statement used  
for Part I, line 4, it may report such  
amounts in column (a) of this line. The  
corporation should report effectively  
connected amounts in column (e)  
consistent with the reporting equity  
method amounts in column (a). For  
example, if the foreign corporation does  
not report the partnership interest on  
Part II, line 10, column (a), it should not  
report any amounts in column (e) for the  
partnership interest. It would instead  
report the income and other items from  
the partnership interest for column (e)  
purposes based on the reporting for  
each line included in the income  
1. Report in column (a) the sum of  
the corporation's distributive shares of  
all items of income, gain, deduction, and  
loss from all U.S. and foreign  
partnership interests that are included in  
Schedule M-3, Part I, line 11.  
2. Report in column (b) or (c), as  
applicable, the sum of all differences, if  
any, attributable to the U.S. and foreign  
partnership interests. The corporation's  
distributive share of book interest  
Do not report on this line 4c, amounts  
reported in accordance with instructions  
for Part II, lines 4a, 4b, 9, 10, 11, 12, 13,  
16a, 20, and 23.  
expense from all its U.S. and foreign  
partnership interests reported in column  
(a) must be reported as a positive  
amount in column (c) as a permanent  
difference. The amount of interest  
expense, from all U.S. and foreign  
partnership interests, allowed as a  
deduction against effectively connected  
income is entered on Part III, lines 26b  
and 26c, from Schedule I (Form  
Line 5. Gross Rental Income  
Report on line 5 gross rental income  
that is treated as rental income for both  
the taxpayer's financial reporting  
purposes and for U.S. income tax  
purposes. Gross rents that are recorded  
as a sale for financial purposes and as  
rental income for federal tax purposes or  
vice versa are reportable on Part II,  
line 17, instead of line 5.  
statement. However, if a foreign  
corporation allocates interest expense  
under the separate currency pools  
method in Regulations section  
1.882-5(e) or allocates excess interest  
expense under Regulations section  
1.882-5(d)(5), and interest expense  
included in the foreign corporation's  
distributive share of a foreign  
1120-F), lines 23 and 24g, respectively.  
Line 7. Fee and Commission  
Income  
3. Report in column (d) the amounts  
of gross non-effectively connected  
income and expenses that relate to the  
distributive share of income or loss from  
all U.S. and foreign partnership  
partnership is included in such  
allocation, see the instructions for Part  
Report on line 7, column (a), any  
amounts included on Part I, line 11, as  
gross fee and commission income.  
Such income generally includes income  
with respect to services performed (for  
example, fees for brokerage service  
transactions and negotiation letters of  
credit). Do not include amounts  
III, line 26a, for the required reporting.  
Example 18. FC is a calendar year  
taxpayer that is required to file  
interests. These amounts will have been  
reported to you on columns (e), (f), and  
(g) of Schedule K-3 (Form 1065), Part X,  
Section 1, line 21, and Section 2,  
line 24.  
Schedule M-3 for the current tax year.  
FC, which is not a foreign bank, is a  
partner in foreign partnership FP. FC  
prepares income statements in  
accordance with home country GAAP. In  
its income statements, FC treats the  
reportable on Part II, line 4c.  
4. Report in column (e), except for  
amounts described below in “Exclusion  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
14  
difference between income statement  
net income and taxable income from its  
investment in FP as a permanent  
difference. For its 2023 tax year, FC's  
income statement includes $10,000 of  
income attributable to its share of FP's  
net income. FC's Schedule K-3 from FP  
reports $5,000 of ordinary income,  
$7,000 of long-term capital gains,  
$4,000 of charitable contributions, and  
$200 of section 179 expense. It has  
been determined that all of these  
amounts are effectively connected to  
FC's trade or business within the United  
States. Consequently, FC must enter  
the following amounts on Part II, line 10:  
$10,000 in column (a), a ($200)  
negative number in column (c). The  
amount of pass-through interest  
expense allowed as a deduction against  
effectively connected income is  
included on Part III, lines 26b and 26c,  
from Schedule I (Form 1120-F), lines 23  
and 24g.  
3. Report in column (d) the total  
amount of noneffectively connected  
income related to the distributive share  
of income or loss from the pass-through  
entity.  
4. Report in column (e) the sum of  
all taxable amounts of income, gain,  
loss, or deduction reportable on the  
corporation's Schedules K-3 received  
from the pass-through entity (if  
applicable).  
Line 12. Items Relating to  
Reportable Transactions  
Any amounts attributable to any  
reportable transactions (as described in  
Regulations section 1.6011-4) must be  
included on Part II, line 12, regardless of  
whether the difference, or differences,  
would otherwise be reported elsewhere  
in Part II or Part III. Thus, if a taxpayer  
files Form 8886, Reportable Transaction  
Disclosure Statement, for any reportable  
transaction described in Regulations  
section 1.6011-4, the amounts  
attributable to that reportable  
transaction must be reported on Part II,  
line 12. In addition, all income and  
expense amounts attributable to a  
reportable transaction must be reported  
on Part II, line 12, columns (a) and (e),  
even if there is no difference between  
the financial amounts and the taxable  
amounts.  
temporary difference in column (b) for  
the section 179 deduction that is  
effectively connected with FC's trade or  
business, a permanent difference of  
($2,000) in column (c), and $7,800 in  
column (e). The ($2,000) permanent  
difference reported in column (c) is  
determined as the aggregate difference  
between column (a) and column (e)  
after temporary differences in column  
(b).  
Foreign corporations other than  
banks that have interests in foreign  
pass-through entities with no effectively  
connected income for the year need not  
separately report those interests on this  
line. If, however, the foreign corporation  
reports a pass-through interest on the  
equity method in the income statement  
used for Part I, line 4, it may report such  
amounts in column (a) of this line. The  
corporation should report effectively  
connected amounts in column (e)  
consistent with the reporting equity  
method amounts in column (a). For  
example, if the foreign corporation does  
not report the pass-through interest in  
column (a), it should not report any  
amounts in column (e) for the  
Each difference attributable to a  
reportable transaction must be  
separately stated and adequately  
disclosed. A corporation will be  
considered to have separately stated  
and adequately disclosed a reportable  
transaction on line 12 if the corporation  
sequentially numbers each Form 8886  
and lists by identifying number on the  
supporting statement for Part II, line 12,  
each sequentially numbered reportable  
transaction and the amounts required  
for Part II, line 12, columns (a) through  
(e).  
Example 19. Same facts as  
Example 18 except that FC's charitable  
contribution deduction is wholly  
attributable to its partnership interest in  
FP and is limited to $90 pursuant to  
section 170(b)(2) due to other  
investment losses incurred by FC. In its  
income statements, FC treated this  
limitation as a temporary difference. FC  
must not report the charitable  
pass-through interest. It would instead  
report the income and other items from  
the pass-through interest for column (e)  
purposes based on the reporting for  
each line included in the income  
In lieu of the requirements of the  
preceding paragraph, a corporation will  
be considered to have separately stated  
and adequately disclosed a reportable  
transaction if the corporation attaches a  
supporting statement that provides the  
following for each reportable  
contribution limitation of $3,910  
($4,000 - $90) on Part II, line 9. FC must  
report the limitation on Part III, line 16,  
and report the disallowed charitable  
contributions of ($3,910) in columns (b)  
and (e).  
statement. However, if a foreign  
corporation allocates interest expense  
under the separate currency pools  
method in Regulations section  
transaction.  
Line 11. Income (Loss) From  
Other Pass-Through Entities  
For any interest in a pass-through entity  
(other than an interest in a partnership  
reportable on Part II, line 9 or 10, as  
applicable) owned by the corporation,  
report the following on line 11.  
1. Report in column (a) the sum of  
the corporation's distributive share of  
income or loss from the pass-through  
entity that is included in Part I, line 11.  
2. Report in column (b) or (c), as  
applicable, the sum of all differences, if  
any, attributable to the pass-through  
entity. In column (c), the corporation's  
distributive share of interest expense  
from all of its pass-through entities  
reported in column (a) must be reversed  
as a permanent difference. Enter the  
amount of all such interest expense as a  
1. A description of the reportable  
transaction disclosed on Form 8886 for  
which amounts are reported on Part II,  
line 12;  
1.882-5(e) or allocates excess interest  
expense under Regulations section  
1.882-5(d)(5), and interest expense  
included in the foreign corporation's  
pass-through amount is included in  
such allocation, see the instructions for  
Part III, line 26a, for the required  
2. The name and tax shelter  
registration number, if applicable, as  
reported on lines 1a and 1c,  
respectively, of Form 8886; and  
reporting.  
3. The type of reportable transaction  
(that is, listed transaction, confidential  
transaction, transaction with contractual  
protection, etc.) as reported on line 2 of  
Form 8886.  
For each pass-through entity  
reported on line 11, attach a supporting  
statement that provides that entity's  
name, EIN (if applicable), the  
corporation's end of year profit-sharing  
percentage (if applicable), the  
If a transaction is a listed transaction  
described in Regulations section  
1.6011-4(b)(2), the supporting  
corporation's end of year loss-sharing  
percentage (if applicable), and the  
amounts reported by the corporation in  
column (a), (b), (c), (d), or (e) of line 11,  
as applicable.  
statement must also include the  
information requested on line 3 of Form  
8886. In addition, if the reportable  
transaction involves an investment in the  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
15  
transaction through another entity such  
as a partnership, the supporting  
statement must include the name and  
EIN (if applicable) of that entity as  
reported on line 5 of Form 8886.  
Example 20. Corporation J is a  
calendar year taxpayer that is required  
to file Schedule M-3 for the current tax  
year. J incurred seven different  
Part II, line 12, the following amounts:  
($7 million) in column (a), zero in  
columns (b) and (c), and ($7 million) in  
column (e). The transaction will be  
adequately disclosed if K attaches a  
supporting statement for line 12 that (a)  
sequentially numbers the Form 8886  
and refers to the sequentially numbered  
Form 8886-X1 and (b) reports the  
applicable amounts required for line 12,  
columns (a) through (e). Alternatively,  
the transaction will be adequately  
disclosed if the supporting statement for  
line 12 includes a description of the  
transaction, the name and tax shelter  
registration number, if any, and the type  
of reportable transaction disclosed on  
Form 8886.  
purposes pursuant to section 1221(b)  
(2), must also be reported here if it is  
considered a hedge under the  
corporation's method of accounting.  
Transactions that are treated as hedging  
capital assets solely because the  
hedged asset gives rise to  
noneffectively connected income and is  
not eligible for ordinary treatment under  
section 582(c), are also reported on  
line 13. See Example 22.  
abandonment losses during its 2023 tax  
year. One loss of $12 million results  
from a reportable transaction described  
in Regulations section 1.6011-4(b)(5),  
another loss of $5 million results from a  
reportable transaction described in  
Regulations section 1.6011-4(b)(4), and  
the remaining five abandonment losses  
are not reportable transactions. J  
Report on Part II, line 16c, hedging  
transactions entered into by a global  
dealing operation including those that  
are “risk transfer agreements” defined in  
Proposed Regulations section  
1.475(g)-2. However, income with  
respect to a risk transfer agreement that  
is held by the foreign corporation's  
non-global dealing operations is, unless  
reported elsewhere in Part II, reported  
on line 13 to the extent it is reported on  
Part I, line 11. If a foreign bank does not  
so report a risk transfer agreement held  
by a non-global dealing operation on  
Part I, line 11, any ECI from such risk  
transfer agreement earned by the  
discloses the reportable transactions  
giving rise to the $12 million and $5  
million losses on separate Forms 8886  
and sequentially numbers them X1 and  
X2, respectively. J must separately state  
and adequately disclose the $12 million  
and $5 million losses on Part II, line 12.  
The $12 million loss and the $5 million  
loss will be adequately disclosed if J  
attaches a supporting statement for  
line 12 that lists each of the sequentially  
numbered forms, Form 8886-X1 and  
Form 8886-X2, and with respect to each  
reportable transaction reports the  
appropriate amounts required for Part II,  
line 12, columns (a) through (e).  
Line 13. Hedging Transactions  
Report on line 13, column (a), the net  
gain or loss from hedging transactions  
(including hedges of inventory) included  
in the amount reported on Part I, line 11,  
other than:  
Hedging transactions entered into by  
a global dealing operation (see line 16  
instructions);  
non-global dealing operation must be  
reported on Part II, line 23, column (d).  
Qualified integrated foreign currency  
hedging transactions under Regulations  
section 1.988-5(a) (report these  
transactions on either Part II, line 4, or in  
Part III, line 26a, column (a), as  
applicable);  
Report on this line 13 hedging gains  
and losses with respect to non-dealer  
transactions that are determined under  
the mark-to-market method of  
Hedging transactions of securities  
accounting on the income statement  
(other than those that are subject to  
mark-to-market treatment under a valid  
election under sections 475(e) or (f)).  
Alternatively, J's disclosures will be  
adequate if the description provided for  
each loss on the supporting statement  
includes the names and tax shelter  
registration numbers, if any, disclosed  
on the applicable Form 8886, identifies  
the type of reportable transaction for the  
loss, and reports the appropriate  
dealer property (other than a global  
dealing operation) that is  
marked-to-market under section 475(a)  
(see instructions for line 14a);  
Example 22. FC is a foreign bank  
that enters into a U.S. dollar interest rate  
notional principal contract to hedge a  
portfolio of securities held for investment  
on its U.S. set(s) of books that are  
reportable on Form 1120-F, Schedule L.  
The hedged portfolio consists of four  
securities of equal amounts, only two of  
which give rise to effectively connected  
income. For financial statement  
Hedging transactions entered into by  
a commodities dealer that makes a  
mark-to-market election under section  
475(e) (see instructions for line 14c);  
and  
amounts required for Part II, line 12,  
columns (a) through (e). J must report  
the losses attributable to the other five  
abandonment losses on Part II, line 21e,  
regardless of whether a difference exists  
for any or all of those abandonment  
losses.  
Example 21. Corporation K is a  
calendar year taxpayer that is required  
to file Schedule M-3 for the current tax  
year. K enters into a transaction with  
contractual protection that is a  
Hedging transactions entered into by  
a securities or commodities trader that  
makes a mark-to-market election under  
section 475(f) (see instructions for  
line 14d).  
purposes, the notional principal contract  
is treated as a hedging transaction. For  
U.S. tax purposes, the two securities  
that give rise to noneffectively  
Do not report the income from the  
hedged item(s) on line 13. For hedging  
transactions reportable on line 13,  
report in column (e) the amount of  
taxable income from hedging  
connected income are capital assets  
that are not eligible for ordinary  
transactions as defined in section  
1221(b)(2). Use columns (b) and (c) to  
report all differences caused by treating  
hedging transactions differently for  
financial accounting purposes and for  
treatment on disposition under section  
582(c). Consequently, the notional  
principal contract does not constitute a  
hedging transaction under section  
1221(b)(2). Regardless, the income  
reportable transaction described in  
Regulations section 1.6011-4(b)(4).  
This reportable transaction is the only  
reportable transaction for K's 2023 tax  
year and results in a $7 million capital  
loss for both financial statement  
U.S. income tax purposes. For example, gain or loss with respect to the notional  
if a portion of a hedge is considered  
principal contract (including any  
purposes and U.S. income tax  
ineffective under GAAP but still is a valid mark-to-market income from the hedge)  
purposes. It was determined that the  
entire amount is attributable to  
hedge under section 1221(b)(2), the  
difference must be reported on line 13.  
The hedge of a capital asset, which is  
not a valid hedge for U.S. income tax  
is reportable as a hedging transaction  
on line 13 and is not reported on line 4b  
or 14b.  
effectively connected income. Although  
the transaction does not result in a  
difference, K is required to report on  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
16  
Example 23. Foreign corporation  
FC, a broker-dealer that is not a foreign  
bank, is a dealer in securities under  
section 475(a) and conducts its entire  
securities dealing operation within the  
United States. All of the income is  
currency denominated instruments that  
are acquired and normally held for  
investment or otherwise not held by a  
global securities dealer. Foreign  
Lines 14a Through 14d.  
Mark-to-Market Income (Loss)  
Except for global dealing operations  
reportable on line 16 and for certain  
hedging transactions reported on  
line 13, report on lines 14a through 14d,  
column (a), any amount that is subject  
to mark-to-market treatment under  
section 475. Report on line 14a income  
or (loss) from securities held by a dealer  
in securities, in its capacity as a dealer  
under section 475(a). On line 14b,  
report the mark-to-market treatment of  
securities held by a dealer other than in  
its capacity as a dealer that is subject to  
the characterization provisions of  
currency transactions entered into by a  
global securities dealing operation are  
reportable exclusively on line 16c. Do  
not report on line 15 qualified integrated  
foreign currency hedging transactions,  
recorded on set(s) of books reported on  
Form 1120-F, Schedule L; is effectively  
connected with FC's trade or business  
within the United States; and constitutes as defined in Regulations section  
income of a securities dealer, as defined 1.988-5(a) (see line 13 instructions).  
in Regulations section 1.864-2(c)(2)(iv)  
Example 24. FC is a foreign  
only, and not of a global dealing  
corporation that is not a dealer or trader  
operation. The income of this securities  
in securities or commodities. FC  
dealing operation is reportable on Part  
acquires foreign interest-bearing bonds  
II, line 14. If FC engaged in a global  
issued by a corporation resident in  
securities dealing operation, however,  
Country X. The bonds are denominated  
section 475(d)(3)(B). Report on line 14c  
the mark-to-market income of a dealer  
in commodities having made a valid  
election under section 475(e), and on  
line 14d, report the mark-to-market  
income of a trader in securities or  
commodities having made a valid  
election under section 475(f).  
the income generated from that activity  
in a currency other than FC's functional  
would be reportable on line 16, columns  
currency. FC holds the bonds in  
(d) and (e), as sourced and allocated  
connection with its trade or business  
under Proposed Regulations section  
within the United States and the bonds  
1.863-3(h) between non-ECI and ECI  
give rise to effectively connected  
(see “Note” on page 8 for a clarification  
income, gain or (loss). FC accrues  
regarding Proposed Regulations section  
interest income on its set(s) of books in  
1.863-3(h)). If the global dealing  
U.S. dollars and accounts for currency  
“Securities” for these purposes are  
securities described in section 475(c)(2)  
and commodities described in section  
475(e)(2). “Securities” do not include  
any items specifically excluded from  
sections 475(c)(2) and 475(e)(2), such  
as certain contracts to which section  
1256(a) applies (which may be  
operation is of a foreign bank and is not  
gains (losses) with respect to each  
includible in column (a), the  
accrual period. When FC receives  
apportionment of the global dealing  
coupon interest payments, it records  
operation's results would be reportable  
section 988 transaction foreign currency  
in column (d) for the amount of income  
gains (losses). These gains (losses) are  
or loss that is allocable to ECI. Income  
reportable on line 15.  
would be reportable as a positive  
If FC is a foreign bank and subject to  
number and losses would be reportable  
reportable on line 13 as hedges).  
section 475, generally, these gains  
as a negative number. If the global  
(losses) are still reportable on line 15  
dealing set(s) of books are reportable in  
Report hedging gains and losses  
from transactions held in investment  
capacity or trader capacity not subject  
to a securities or commodities trading  
election, but which are determined  
under the mark-to-market method of  
accounting, on Part II, line 13 (hedging  
transactions), and not on line 14.  
and not on line 14 if the bank acquires  
column (a), either because like FC, it is  
and properly identifies the securities as  
a broker dealer and not a foreign bank,  
held for investment or if the securities  
or it is a foreign bank whose global  
are held for proprietary trading that is  
dealing operation is reportable on Form  
not subject to a section 475 trader  
1120-F, Schedule L, the apportionment  
election under section 475(f).  
of the global dealing operation's results  
would be reportable in column (d) for  
Lines 16a and 16b. Interest  
the portion that needs to be allocated to  
Income and Dividends From  
noneffectively connected income. In  
Traders in securities and commodi-  
ties. For a trader in securities or  
Global Securities Dealing  
such instance, the amount of income  
allocable to non-ECI would be  
commodities that made a valid election  
under section 475(f) to use the  
Report on lines 16a and 16b interest  
and dividends (including substitute  
interest defined in Regulations section  
1.861-2(a)(7) and substitute dividends  
defined in Regulations section  
1.861-3(a)(6)) earned with respect to  
transactions entered into in a global  
securities dealing operation, as defined  
in Proposed Regulations section  
1.482-8.  
reportable as a negative amount and the  
amount of loss would be reportable as a  
positive number in column (d). For all  
filers, columns (a), (b), (c), and (d) are  
combined to determine the ECI amount  
reportable in column (e).  
mark-to-market method to account for  
securities or commodities held in  
connection with a trading business that  
files Form 4797, any Schedule M-3  
entries required as a result of marking to  
market these securities or commodities  
are reported as follows: (a)  
Line 15. Gains (Losses) From  
Certain Section 988  
Transactions  
mark-to-market gains and losses from  
Form 4797, line 10, are included on Part  
II, line 14d, of Schedule M-3 (Form  
1120-F); (b) any other Schedule M-3  
entries required based on other results  
(non-mark-to-market gains and losses)  
included in the total reported on Form  
4797, line 17, should be reported on  
Part II, line 21d, of Schedule M-3 (Form  
1120-F), unless the instructions for  
Schedule M-3 require the amounts to be  
reported on another line.  
Line 16c. Gains (Losses) and  
Other Fixed and Determinable,  
Annual, or Periodic Income  
From Global Securities Dealing  
Report on line 15 gains or (losses) from  
certain section 988 transactions. These  
are only those section 988 transactions  
that are not reportable with respect to  
hedging transactions, mark-to-market  
gains (losses), or global securities  
Report on line 16c gains and losses and  
other fixed and determinable, annual, or  
other periodic income or expense  
dealing operations on Part II, lines 13,  
14, and 16. Section 988 gains (losses)  
reportable on line 15 will generally be  
those recognized with respect to foreign  
(FDAP) with respect to notional principal  
contracts from global securities dealing  
operations (as defined in Proposed  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
17  
Regulations section 1.482-8) that would  
be subject to source and allocation  
under Proposed Regulations section  
1.863-3(h) (see “Note” on page 8 for a  
clarification regarding Proposed  
not a global dealing operation with  
respect to currency option contracts in  
foreign currency X, that is recorded on  
set(s) of books in FC's home office. The  
foreign currency X dealing operation is  
entirely allocable to noneffectively  
connected income and is not reportable  
on Form 1120-F, Schedule L. Because  
FC is not a foreign bank described in  
Regulations section 1.882-5(c)(4), FC's  
income, gains and (losses) with respect  
to its securities dealing in foreign  
Asset transfer transactions with  
periodic payments characterized for  
financial accounting purposes as either  
a sale or a lease may, under some  
circumstances, be characterized as the  
opposite for tax purposes. If the  
Regulations section 1.863-3(h)).  
Foreign currency gains and losses with  
respect to securities transactions  
entered into by a global dealing  
transaction is treated as a lease, the  
seller/lessor reports the periodic  
payments as gross rental income and  
also reports depreciation expense or  
deduction. If the transaction is treated  
as a sale, the seller/lessor reports gross  
profit (sale price less cost of goods sold)  
from the sale of assets and reports the  
periodic payments as payments of  
principal and interest income.  
operation are also included in global  
dealing gains and (losses) on line 16c.  
The foreign corporation may be a global  
securities dealer with respect to some  
but not all of its securities dealing  
activities. Gains and losses from  
currency X is reportable on Part I,  
line 11. The income, gains and (losses)  
with respect to FC's notional principal  
contracts that allocate in part to  
securities dealing activities that would  
not be subject to source and allocation  
under Proposed Regulations section  
1.863-3(h) are reportable as  
effectively connected income are  
On Part II, line 17, column (a), report  
the gross profit or gross rental income  
for financial statement purposes for all  
sale or lease transactions that must be  
given the opposite characterization for  
tax purposes. On Part II, line 17, column  
(e), report the gross profit or gross rental  
income for federal income tax purposes.  
Interest income amounts for such  
reportable on line 16c. The periodic  
income with respect to the notional  
principal contracts is also reportable on  
line 16c. The foreign currency option  
contracts in foreign currency X are  
reportable on line 14a, column (a), as  
mark-to-market gains (losses) of a  
securities dealer and not on line 16. The  
amount reported on line 14a, column  
(a), is reversed on line 14a, column (d),  
as an apportionment allocable to  
mark-to-market income on line 14, and  
the interest, dividend, and other FDAP  
income earned in such non-global  
dealer activities is reportable on Part II,  
lines 3 and 4. Reporting on line 16 is  
determined by whether the income,  
gains and (losses) would be subject to  
allocation under Proposed Regulations  
section 1.863-3(h) and not by whether  
all or none of the amount would be  
allocable to ECI. If income of a global  
dealing operation would be entirely  
allocable to ECI or non-ECI under  
Proposed Regulations section  
transactions must be reported on Part II,  
line 4a (interest income excluding  
interest equivalents), in columns (a) and  
(e), as applicable. Depreciation expense  
for such transactions must be reported  
on Part III, line 23 (depreciation), in  
columns (a) and (e), as applicable. Use  
columns (b), (c), and (d) of Part II, lines  
4a and 17, and Part III, line 23, as  
noneffectively connected income.  
Example 26. The facts are the same  
as in Example 25 except that FC is a  
foreign bank. Because the securities  
options denominated in foreign currency  
X is not included in a set(s) of books  
reported on Form 1120-F, Schedule L,  
the amounts are not reported on Part I,  
line 11, or Part II, line 14a. If the notional  
principal contract book was not  
1.863-3(h), the amount is reportable on  
line 16 and not on line 14.  
applicable, to report the differences  
between columns (a) and (e).  
If the income or losses from global  
dealing operations of foreign banks  
reportable on any of lines 16a through  
16c are allocable in whole or in part to  
effectively connected income but not  
reportable in column (a), apportion the  
ECI amounts of the global dealing  
operation in columns (d) and (e). If the  
foreign bank does include a global  
dealing operation in column (a), then  
report the apportionment of such  
operation to non-ECI in column (d) and  
the residual ECI amount in column (e).  
Attach a statement providing a brief  
description of each global dealing  
operation (for example, interest rate  
notional principal contracts, equity  
notional principal contracts, foreign  
currency options (list each foreign  
currency separately for each foreign  
currency that constitutes a separate  
global dealing operation)).  
Example 27. Corporation M sells  
and leases property to customers. M is  
a calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
2023 tax year. For financial accounting  
purposes, M accounts for each  
reportable on a set of books reportable  
in column (a), such operation would not  
be included on line 16c, column (a). As  
a result, the amount allocable to  
effectively connected income from this  
operation is reported in column (d) and  
in column (e). If the set of books  
transaction as a sale. For U.S. income  
tax purposes, each of M's transactions  
must be treated as a lease. In its income  
statements, M treats the difference in  
the financial accounting and the U.S.  
income tax treatment of these  
reported on Form 1120-F, Schedule L,  
had included the notional principal  
contract operation, FC would have  
reported such amount in column (a),  
and the apportionment in column (d)  
would have included a negative number  
for the amount of income and gains  
allocable to noneffectively connected  
income. Losses allocable to non-ECI  
would be reported as a positive number.  
In column (e), FC combines columns  
(a), (b), (c), and (d) to report the amount  
allocable to effectively connected  
income.  
transactions as temporary. During 2023,  
M reports on its income statements  
$1,000 of sales and $700 of cost of  
goods sold with respect to 2023 lease  
transactions. M receives periodic  
payments of $500 in 2023 with respect  
to these 2023 transactions and similar  
transactions from prior years and treats  
$400 as principal and $100 as interest  
income. For financial income purposes,  
M reports gross profit of $300 ($1,000 -  
$700) and interest income of $100 from  
these transactions. For U.S. income tax  
purposes, M reports $500 of gross  
rental income (the periodic payments)  
and (based on other facts) $200 of  
depreciation deduction on the property.  
It was determined that the entire amount  
Example 25. FC, a securities  
broker-dealer, is engaged in trade or  
business within the United States. FC is  
engaged in a global securities dealing  
operation in notional principal contracts  
that allocates a portion of the income,  
gains and (losses) to effectively  
Line 17. Sale Versus Lease (for  
Sellers and/or Lessors)  
Note. See the instructions for Part III,  
line 25, later, for purchasers and/or  
lessees.  
connected income. FC is also engaged  
in a securities dealing operation that is  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
18  
of these items is effectively connected  
income/expense. On its 2023  
so reportable if the section 481(a)  
adjustment was with respect to  
accrued for either financial or U.S. tax  
purposes, FC would include $750 on  
Schedule M-3, M must report on Part II,  
line 4a (interest income), $100 in  
column (a), ($100) in column (b), and  
zero in column (e). In addition, M must  
report on Part II, line 17, $300 of gross  
profit in column (a), $200 in column (b),  
and $500 of gross rental income in  
column (e). Lastly, M must enter $200 in  
each of columns (b) and (e) on Part III,  
line 23.  
transactions recorded on set(s) of books Part II, line 19, column (a), the amount  
reportable on Form 1120-F, Schedule L.  
recognized currently for financial  
purposes. FC would then reverse the  
$750 in column (b) as a temporary  
difference since this amount was  
previously recognized for U.S. tax  
purposes.  
Line 19. Unearned/Deferred  
Revenue  
Report on line 19, column (a), amounts  
of revenues included in Part I, line 11,  
which were deferred from a prior  
financial accounting year. Report on  
line 19, column (e), revenues  
Line 20. Original Issue  
Discount, Imputed Interest, and  
Phantom Income  
Report on line 20 any amounts of  
original issue discount (OID), other  
imputed interest, phantom income, or  
OID includible on line 16a. The term  
“original issue discount and other  
imputed interest” includes, but is not  
limited to:  
1. The excess of a debt instrument's  
stated redemption price at maturity over  
its issue price, as determined under  
section 1273;  
2. Amounts that are imputed interest  
on a deferred sales contract under  
section 483;  
recognizable for federal income tax  
purposes that are recognized for  
financial accounting purposes in a  
different year. Also, report on line 19,  
column (e), any amount of revenues  
reported on line 19, column (a), that are  
recognizable for U.S. income tax  
purposes in the current tax year. Use  
columns (b), (c), and (d) of line 19, as  
applicable, to report the differences  
between column (a) and column (e). If  
Line 18. Section 481(a)  
Adjustments  
With the exception of a section 481(a)  
adjustment that is required to be  
reported on Part II, line 12, for  
reportable transactions, any difference  
between an income or expense item  
attributable to an authorized (or  
unauthorized) change in method of  
accounting made for U.S. income tax  
purposes that results in a section 481(a) the amounts are not includible on set(s)  
adjustment must be reported on Part II,  
line 18, regardless of whether a  
of books reportable on Form 1120-F,  
Schedule L, but are reportable in Part I,  
separate line for that income or expense line 11, for a foreign corporation other  
item exists in Part II or Part III.  
than a bank, then report the entire  
difference as temporary in column (b).  
Any amount allocable to noneffectively  
connected income should, to that  
extent, be included in column (d) to  
reverse some or all of the amount  
included in column (b).  
3. Amounts treated as interest or  
OID under the stripped bond rules under  
section 1286;  
4. Amounts treated as OID under  
the below-market interest rate rules  
under section 7872; and  
Example 28. Corporation N is a  
calendar year taxpayer that files and  
entirely completes Schedule M-3 for its  
2023 tax year. N was depreciating  
certain fixed assets over an erroneous  
recovery period and, effective for its  
2023 tax year, N receives IRS consent  
to change its method of accounting for  
the depreciable fixed assets and begins  
using the proper recovery period. The  
change in method of accounting results  
in a positive section 481(a) adjustment  
of $100,000 that is required to be  
spread over 4 tax years, beginning with  
the 2023 tax year. It has been  
5. Amounts recognized as phantom  
income with respect to a noneconomic  
residual interest in a Real Estate  
Line 19 must not be used to report  
income recognized from long-term  
contracts. Instead, use line 24 (other  
income (loss) items with differences).  
Mortgage Investment Conduit (REMIC),  
including inducement fees recognized  
with respect to such interests.  
Example 29. FC, a foreign  
corporation other than a bank, has  
prepaid commission income of $1,000  
recognizable for U.S. income tax  
purposes in the current tax year that is  
recognized for financial accounting  
purposes in a different year. FC treats  
this difference as a temporary difference  
on its income statements. Of this  
amount, $600 is allocable to effectively  
connected income. The amount  
recognized for income statement  
purposes in 2023 is $250. FC reports  
this amount on Part II, line 19, column  
(a). In column (b), FC reports $750 as a  
temporary book-to-tax difference to  
adjust to the amount recognized by the  
foreign corporation in 2023 under U.S.  
tax principles. In column (d), FC  
reverses $400 as income allocable to  
noneffectively connected income.  
Finally, in column (e), FC reports $600,  
the amount includible on FC's Form  
1120-F as effectively connected income  
in 2023.  
Note. Phantom income is a term used  
to describe taxable income that may be  
derived from the holding of ownership  
interests in an asset securitization  
vehicle. The income is "phantom"  
because it is not economic income (that  
is, there is no cash or other property  
actually received or available for  
determined that the entire amount is  
attributable to effectively connected  
income. In its income statements, N  
treats the section 481(a) adjustment as  
a temporary difference. N must report  
on Part II, line 18, $25,000 in columns  
(b) and (e) for its 2023 tax year and  
each of the subsequent 3 tax years  
(unless N is otherwise required to  
recognize the remainder of the section  
481(a) adjustment earlier). N must not  
report the section 481(a) adjustment on  
Part III, line 23.  
distribution to the equity holder). Income  
with respect to a residual interest in  
REMICs is referred to as excess  
inclusion income and is subject to  
special rules in the Code and  
regulations. In a non-REMIC vehicle, it  
may take the form of OID derived from  
deep-discount debt held as collateral in  
the asset securitization entity.  
If the section 481(a) adjustment was  
not effectively connected to N's trade or  
business within the United States and is  
not includible in column (a), the amount  
would be reportable for each year in  
column (b) as a temporary difference  
(for U.S. tax principles) and then  
Foreign corporations that accrue  
phantom income with respect to  
residual interests in REMICs that are not  
recognized under the foreign  
corporation's accounting regime must  
show all book-to-tax gross phantom  
income differences as permanent  
differences in column (c), whether or not  
reversed as an apportionment to  
In 2023, assuming no other  
non-ECI in column (d). If N were a  
foreign bank, the amount would only be  
commission income is earned or  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
19  
it is effectively connected with a trade or  
business and whether or not the REMIC  
interests are recorded on set(s) of  
books that are reportable on Form  
1120-F, Schedule L. Amounts that are  
not effectively connected with the  
foreign corporation's trade or business  
must be reversed and shown as a  
negative number in column (d).  
Line 21a. Income Statement  
Gain/Loss on Sale, Exchange,  
Abandonment, Worthlessness,  
or Other Disposition of Assets  
Other Than Inventory and  
Pass-Through Entities  
Line 21d. Net Gain/Loss  
Reported on Form 4797,  
Line 17, Excluding Amounts  
From Pass-Through Entities,  
Abandonment Losses, and  
Worthless Stock Losses  
Report on line 21d the net gain or loss  
reported on line 17 of Form 4797, Sales  
of Business Property, excluding  
amounts from (a) pass-through entities  
included on line 9, 10, or 11, as  
applicable; (b) abandonment losses,  
which must be reported on Part II,  
line 21e; and (c) worthless stock losses,  
which must be reported on Part II,  
line 21f.  
Report on line 21a, column (a), all gains  
and losses on the disposition of assets  
except for (a) gains and losses on the  
disposition of inventory, and (b) gains  
and losses allocated to the corporation  
from pass-through entities (for example,  
on Schedule K-3) that are included on  
line 9, 10, or 11. Reverse the amount  
reported in column (a) in column (b) or  
(c), as applicable. The corresponding  
gains and losses for U.S. income tax  
purposes are reported on Part II, lines  
21b through 21g, columns (b), (c), and  
(e), as applicable. Reverse any  
Example 30. FC is a foreign bank  
that acquires and holds noneconomic  
residual interests in a REMIC on set(s)  
of books that are reportable on Form  
1120-F, Schedule L. Under the foreign  
corporation's accounting system, the  
amounts are not recognized for financial  
income reporting purposes and are  
treated as permanent differences. FC  
reports no amounts on Part II, line 20,  
column (a), for each year that phantom  
income/deduction is recorded under  
U.S. tax principles. In column (c), FC  
records phantom income as a  
Note. Traders in securities or  
commodities that have made a valid  
election under section 475(f) to use the  
mark-to-market method to account for  
securities or commodities, see the  
instructions for Part II, lines 14a through  
14d, earlier.  
additional amounts recognizable under  
U.S. tax principles that are allocable to  
noneffectively connected income on  
Part II, lines 21b through 21g, column  
(d).  
permanent difference because such  
amounts are not recognizable under the  
foreign corporation's accounting regime.  
The amounts are effectively connected  
with FC's trade or business and,  
Line 21f. Worthless Stock  
Losses  
Line 21b. Gross Capital Gains  
From Schedule D, Excluding  
Amounts From Pass-Through  
Entities  
Report on line 21b gross capital gains  
reported on Schedule D (Form 1120),  
Capital Gains and Losses, excluding  
capital gains from pass-through entities  
that are included on line 9, 10, or 11, as  
applicable.  
therefore, are also reported in column  
(e).  
Report on line 21f any worthless stock  
loss, regardless of whether the loss is  
characterized as an ordinary loss or a  
capital loss. See Regulations section  
1.864-4(c)(2)(iii)(a) for limitations on  
effectively connected treatment under  
the asset use test and Regulations  
section 1.864-4(c)(5)(ii)(a) for limited  
effectively connected eligibility of stock  
to foreign corporations engaged in a  
banking, financing, or similar business.  
Attach a statement that separately  
states and adequately discloses each  
transaction that gives rise to a worthless  
stock loss that is treated as allocable to  
effectively connected income and the  
amount of each loss. Do not include on  
the statement any worthless stock loss  
that is wholly allocable to noneffectively  
connected income. Do not include  
worthless stock losses that are incurred  
as part of a securities dealing or global  
securities dealing operation. Report  
these securities losses as  
Example 31. The facts are the  
same as in Example 30, except that the  
phantom income is treated as  
noneffectively connected income by FC  
and subject to tax under section 881(a).  
FC must report the phantom income as  
a permanent difference on Part II,  
line 20, column (c), and then reverse the  
amount in column (d) as noneffectively  
connected income. No amount is  
reported in column (e). The full amount  
of phantom income recognized in  
column (c) is reportable on Form  
1120-F, Section I, line 10, as other fixed  
or determinable, annual, or other  
periodic income and subject to tax at  
30%.  
Line 21c. Gross Capital Losses  
From Schedule D, Excluding  
Amounts From Pass-Through  
Entities, Abandonment Losses,  
and Worthless Stock Losses  
Report on line 21c gross capital losses  
reported on Schedule D (Form 1120),  
excluding capital losses from (a)  
pass-through entities that are included  
on line 9, 10, or 11, as applicable; (b)  
abandonment losses, which must be  
reported on Part II, line 21e; and (c)  
worthless stock losses, which must be  
reported on Part II, line 21f. Do not  
report on line 21c capital losses carried  
over from a prior tax year and utilized in  
the current tax year. See the instructions  
for Part II, line 22, regarding the  
Example 32. The facts are the  
same as in Example 30, except FC  
recognizes $100 of residual excess  
inclusion income on its set(s) of books  
and records reportable on Form 1120-F,  
Schedule L, for cash received, and an  
additional $1,000 of phantom income  
not recognized for financial accounting  
purposes. FC treats $100 as effectively  
connected income. FC reports on Part  
II, line 20, $100 in column (a), $1,000 in  
column (c), ($1,000) in column (d), and  
$100 in column (e). The $1,000  
mark-to-market loss on line 14a, 14c, or  
16c.  
Line 21g. Other Gain/Loss on  
Disposition of Assets Other  
Than Inventory  
Report on line 21g any gains or losses  
from the sale or exchange of property  
other than inventory and that are not  
reported on lines 21b through 21f.  
reporting requirements for capital loss  
carryovers utilized in the current tax  
year.  
reversed in column (d) is reportable on  
Form 1120-F, Section I, line 10, as in  
Example 31.  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
20  
FC also enters into a number of forward  
contracts for customers through its U.S.  
trade or business. These contracts are  
not entered into in connection with a  
global securities dealing operation. The  
transactions are initially recorded on  
FC's set(s) of books that are reported on  
Form 1120-F, Schedule L. In a later  
year, FC transfers several of the loans,  
the forward contracts, and the municipal  
bonds to its home office in Country X to  
be held other than in connection with a  
global securities dealing operation.  
These assets are recorded in FC's  
home office on set(s) of books that do  
not give rise to U.S. booked liabilities  
under Regulations section 1.882-5(d)(2)  
(iii). As a result, the transferred assets  
are no longer reportable on Form  
reported in the total amount shown in  
column (d).  
Line 22. Capital Loss Limitation  
and Carryforward Used  
Report as a positive amount on line 22,  
column (b) or (c), as applicable, and  
column (e) the excess of the net capital  
losses over the net capital gains  
reported on Schedule D (Form 1120) by  
the corporation.  
Line 24. Other Income (Loss)  
Items With Differences  
Separately state and adequately  
disclose on Part II, line 24, all items of  
income (loss) with differences that are  
not otherwise listed on Part II, lines 1  
through 23. Attach a statement that  
describes and itemizes the type of  
income (loss) and the amount of each  
item and provides a description that  
states the income (loss) name for book  
purposes for the amount recorded in  
column (a) and describes the  
If the corporation utilizes a capital  
loss carryforward on Schedule D (Form  
1120) in the current tax year, report the  
carryforward utilized as a negative  
amount on Part II, line 22, columns (b)  
or (c), as applicable, and column (e).  
Line 23. Gross Effectively  
Connected Income of Foreign  
Banks From Books That Do Not  
Give Rise to U.S. Booked  
Liabilities  
adjustment being recorded in column  
(b), (c), or (d). The entire description  
completes the tax description for the  
amount included in column (e) for each  
item separately stated on this line.  
The attached statement should have  
six columns. The first column has the  
description for the next five columns.  
The second column is column (a),  
income (loss) per income statement.  
The third column is column (b),  
1120-F, Schedule L.  
Report on Part II, line 23, column (c),  
as a negative number, the amount of the  
effectively connected municipal bond  
interest. The municipal bond interest is  
a permanent difference that must be  
reversed in column (d) since it is no  
longer taken into account in column (a)  
on FC's set(s) of books reportable on  
Schedule L.  
Report on Part II, line 23, column (d),  
the gross income, gains and (losses)  
from the transferred loans and municipal  
bond securities and forward contracts  
that is effectively connected with the  
foreign bank's trade or business within  
the United States. Report the income  
and gains as positive numbers and  
losses as negative amounts.  
Report on Part II, line 23, column (e),  
the combined column (b), (c), and (d)  
amounts to determine the aggregate  
amount of effectively connected gross  
income, gains and (losses) from the  
transferred loan securities and forward  
contracts. The tax-exempt municipal  
bond interest is netted to zero in column  
(e).  
Line 23 applies only to foreign banks (as  
described in Regulations section  
1.882-5(c)(4)). Foreign banks report in  
columns (d) and (e) the gross effectively  
connected income or loss (other than  
income or loss from a global dealing  
operation) that is excluded from the  
set(s) of books reportable on Form  
1120-F, Schedule L, and excluded from  
the net income shown on Part I, line 11.  
Gross effectively connected income or  
loss of this type is that which is  
temporary differences. The fourth  
column is column (c), permanent  
differences. The fifth column is column  
(d), other permanent differences for  
allocations to non-ECI and ECI. The  
sixth column is column (e), income  
(loss) per tax return. For each item listed  
on the attached statement for line 24,  
columns (a) through (d) when combined  
must equal column (e). The amounts in  
columns (a) through (e) for all items  
must be totaled on the attached  
ordinarily recorded on books of  
non-U.S. branches or locations that do  
not ordinarily engage in effectively  
connected income producing activities,  
such as income from securities  
recorded in a home office that are  
attributable to a U.S. office under  
Regulations section 1.864-4(c)(5)(iii).  
Gross effectively connected income or  
loss reportable on line 23 is also income  
of a type that is recognized under  
sections 864(c)(6) and 864(c)(7) with  
respect to property that ceases to be  
held in connection with a trade or  
business within the United States (for  
example, transferred securities of a  
non-banking, financing or similar  
business or of a former banking,  
statement and the total amounts must  
be included on Part II, line 24.  
If any “comprehensive income” as  
defined by Statement of Financial  
Accounting Standards (SFAS) No. 130  
is reported on this line, describe the  
item(s) in detail. Foreign corporations  
may report on line 24 net income (loss)  
from their distributive share of foreign  
partnership interests that do not have  
any U.S. source or effectively connected  
income, that the foreign corporation  
does not report on line 10. The  
Treaty-based reporting. If a  
corporation excludes any amounts from  
column (a) on the grounds that it is  
reporting the books of a U.S. permanent  
establishment (see Adaptation of Form  
1120-F, Schedule L for treaty-based  
reporting, earlier, in these instructions  
for such reporting) and further excludes  
from the same line any amounts from  
column (e) that would otherwise be  
reportable under Code principles, the  
corporation should report the  
financing or similar business) or that is  
recognized under the Code at a time  
subsequent to cessation of the trade or  
business within the United States.  
Amounts from a global dealing  
aggregate income from such  
partnerships should be reported on  
line 24, column (d), as a negative  
number.  
operation that are apportionable in  
whole or in part to effectively connected  
income are reported on line 16 and not  
on this line 23.  
Line 26. Total Expense/  
Deduction Items  
Report on Part II, line 26, columns (a)  
through (e), as applicable, the inverse of  
the amounts reported on Part III, line 33,  
columns (a) through (e). For example, if  
Part III, line 33, column (a), reflects an  
amount of $1 million, then report on Part  
II, line 26, column (a), ($1 million).  
Code-based amount in column (c) and  
reverse the amount in column (d), with a  
footnote reference explaining that  
column (d) reports a treaty-based  
exclusion, or attach a statement which  
identifies the portion of such exclusion  
Example 33. FC, a foreign bank,  
negotiates and solicits a portfolio of  
loans and municipal bonds that are  
attributable to its U.S. office under  
Regulations section 1.864-4(c)(5)(iii).  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
21  
Similarly, if Part III, line 33, column (b),  
reflects an amount of ($50,000), then  
report on Part II, line 26, column (b),  
$50,000.  
expense in the financial statements  
(column (a)) or deducted in the U.S.  
income tax return (column (e)) other  
than amounts reportable elsewhere on  
Schedule M-3, Parts II and III (for  
example, on Part III, line 8, for stock  
options expense). Examples of amounts  
reportable on line 9 include payments  
attributable to employee stock purchase  
plans (ESPPs), phantom stock options,  
phantom stock units, stock warrants,  
stock appreciation rights, qualified  
equity grants, and restricted stock,  
regardless of whether such payments  
are made to employees or  
Line 5. Non-U.S. Withholding  
Taxes  
Report on line 5, column (a), the amount  
of non-U.S. (foreign) withholding taxes  
included in determining adjusted  
Line 27. Other Items With No  
Differences  
If there is no difference between the  
financial accounting amount and the  
taxable amount of an entire item of  
income, gain, loss, expense, or  
financial net income on Part I, line 11. If  
the corporation is deducting any foreign  
withholding tax, use column (b), (c), or  
(d), as applicable, to report any  
difference between foreign withholding  
tax included in financial accounting net  
income and the amount of any foreign  
withholding tax deduction reported in  
column (e). If the corporation is crediting  
foreign withholding taxes against its U.S.  
income tax liability, no amount is  
deduction and the item is not described  
or included in Part II, lines 1 through 24,  
or Part III, lines 1 through 32, report the  
entire amount of the item in columns (a)  
and (e) of line 27. If a portion of an item  
of income, loss, expense, or deduction  
has a difference and a portion of the  
item does not have a difference, do not  
report any portion of the item on line 27.  
Instead, report the entire amount of the  
item (that is, both the portion with a  
difference and the portion without a  
difference) on the applicable line of Part  
II, lines 1 through 24, or Part III, lines 1  
through 32. See Example 12.  
non-employees, or as payment for  
property or compensation for services.  
reported in column (e).  
Line 10. Meals and  
Entertainment  
Line 6. Corporate Officer's  
Compensation With Section  
162(m) Limitation  
Report on line 10, column (a), any  
amounts paid or accrued by the  
corporation during the tax year for  
meals, beverages, and entertainment  
that are accounted for in financial  
accounting income, regardless of the  
classification, nomenclature, or  
Report on line 6, column (a), the total  
amount of non-performance-based  
current compensation expense  
(“applicable employee remuneration”)  
for corporate officers that are “covered  
employees” under section 162(m)(3).  
Report in column (b) or (c), as  
terminology used for such amounts, and  
regardless of how or where such  
amounts are classified in the  
Specific Instructions for  
Part III. Reconciliation of  
Net Income (Loss) per  
Income Statement of  
Non-Consolidated Foreign  
Corporations With Taxable  
Income per  
applicable, the nondeductible amount of  
current compensation in excess of $1  
million ($500,000 if the corporation  
receives or has received financial  
assistance under the Treasury Troubled  
Asset Relief Program (TARP)). Report  
the noneffectively connected portion of  
the deductible compensation in column  
(d), and the deductible portion of the  
compensation allocable to effectively  
connected income in column (e). Do not  
report the “applicable employee  
corporation's financial income statement  
or the income and expense accounts  
maintained in the corporation's books  
and records. Report only amounts not  
otherwise reportable elsewhere on  
Schedule M-3, Parts II and III (for  
example, Part II, line 2).  
Return—Expense/  
Deduction Items  
Line 11. Fines and Penalties  
For column (a), report the expenses  
included on the applicable income  
statement as adjusted and reported in  
Part I, line 11.  
Report on line 11 any fines or similar  
penalties paid to a government or other  
authority for the violation of any law for  
which fines or penalties are assessed.  
All fines and penalties expensed in  
financial accounting income (paid or  
accrued) must be included on this  
line 11, column (a), regardless of the  
government or other authority that  
imposed the fines or penalties,  
remuneration” for “covered employees”  
defined under section 162(m) on line 8,  
9, or 15.  
Lines 1 Through 4. Income Tax  
Expense  
Line 7. Salaries and Other Base  
Compensation  
If the corporation does not distinguish  
between current and deferred income  
tax expense in its applicable financial  
statement described in Part I, report  
income tax expense as current income  
tax expense using lines 1 and 3, as  
applicable. U.S. current and deferred  
income taxes and non-U.S. deferred  
income taxes are not deductible and  
column (e) is inapplicable for lines 1, 2,  
and 4. Column (e) of line 3 is used to  
report only foreign income tax the  
corporation is deducting, other than the  
withholding taxes reported on line 5  
below. If the corporation is crediting  
foreign income tax against the U.S.  
income tax liability, no amount is  
Report salary and bonus compensation  
of the type reported on Form 1120-F,  
Section II, line 13, other than stock  
regardless of whether the fines and  
penalties are civil or criminal, regardless  
of the classification, nomenclature, or  
terminology used for the fines or  
option expense and other equity-based  
compensation reported on lines 8 and 9.  
Line 8. Stock Option Expense  
penalties by the imposing authority in its  
actions or documents, and regardless of  
how or where the fines or penalties are  
classified in the corporation's financial  
income statement or the income and  
expense accounts maintained in the  
corporation's books and records. In  
addition, report on line 11, column (a),  
the reversal of any overaccrual of any  
amount described in this paragraph.  
See section 162(f) for additional  
Report on line 8, column (a), amounts  
expensed on Part I, line 11, net income  
per the income statement, that are  
attributable to all stock options. Report  
on line 8, column (e), deduction  
amounts attributable to all stock options.  
Line 9. Other Equity-Based  
Compensation  
Report on line 9 any amounts for  
equity-based compensation or  
consideration that are reflected as  
reported on line 3, column (e).  
guidance.  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
22  
Report on line 11, column (e), any  
such amounts as are described in the  
preceding paragraph that are includible  
includible on Part III, line 13 (for  
example, retiree health and life  
insurance coverage, dental coverage,  
Line 17. Section 162(r)—FDIC  
Premiums Paid by Certain  
Large Financial Institutions  
in effectively connected taxable income, etc.). Complete columns (b), (c), and  
Report on line 17, column (a), the total  
amount paid or accrued as FDIC  
premiums included on Part I, line 11.  
Report on line 17, column (c), any  
disallowed amounts, subject to the  
applicable percentage, of any FDIC  
premiums paid or included by the large  
financial institution. For this purpose, the  
large financial institution includes  
members of its expanded affiliated  
group, as defined in section 162(r)(6)  
(B). This disallowance does not apply if  
the institution’s (including members of  
its expanded affiliated group’s) total  
consolidated assets (determined as of  
the close of the tax year) do not exceed  
$10 billion.  
regardless of the financial accounting  
period in which such amounts were or  
are included in financial accounting net  
income. Complete columns (b), (c), and  
(d), as appropriate.  
(d), as appropriate.  
Line 15. Deferred  
Compensation  
Report on line 15, column (a), any  
compensation expense included in the  
net income (loss) amount reported in  
Part I, line 11, that is not deductible for  
U.S. income tax purposes in the current  
tax year and that was not reported  
elsewhere on Schedule M-3, column  
(a). Report on line 15, columns (d) and  
(e), the noneffectively connected and  
effectively connected portions of any  
compensation deductible in the current  
tax year that was not included in the net  
income (loss) amount reported in Part I,  
line 11, for the current tax year and that  
is not reportable elsewhere on  
Do not report on this line 11 amounts  
required to be reported in accordance  
with instructions for Part III, line 12.  
Do not report on this line 11 amounts  
recovered from insurers or any other  
indemnitors for any fines and penalties  
described above.  
Line 12. Judgments, Damages,  
Awards, and Similar Costs  
Report on line 12, column (a), the  
amount of any estimated or actual  
judgments, damages, awards,  
settlements, and similar costs, however  
named or classified, included in  
financial accounting income, regardless  
of whether the amount deducted was  
attributable to an estimate of future  
anticipated payments or actual  
payments. Also report on line 12,  
column (a), the reversal of any  
overaccrual of any amount described in  
this paragraph.  
The applicable percentage is the  
excess of the corporation’s total  
Schedule M-3. For example, report  
originations and reversals of deferred  
compensation subject to section 409A  
on line 15.  
consolidated assets over $10 billion,  
divided by $40 billion. For taxpayers  
with total consolidated assets of $50  
billion or more, the applicable  
Line 16. Charitable  
Contributions  
percentage is 100%. See section 162(r).  
Example 34. Corporation X has total  
consolidated assets of $20 billion.  
Under section 162(r), no deduction is  
allowed for 25% ((20,000,000,000 –  
10,000,000,000) / 40,000,000,000) of  
FDIC premiums.  
Report on line 16 any charitable  
contribution of tangible or intangible  
property to a U.S. or foreign charity. For  
example, include contributions of:  
Report on line 12, column (e), any  
such amounts as are described in the  
preceding paragraph that are includible  
in taxable income, regardless of the  
financial accounting period in which  
such amounts were or are included in  
financial accounting net income.  
Complete columns (b), (c), and (d), as  
appropriate.  
Cash;  
Buildings;  
Line 18. Current Year  
Intellectual property, patents  
Acquisition or Reorganization  
Investment Banking Fees, Legal  
and Accounting Fees  
(including any amounts of additional  
contributions allowable by virtue of  
income earned by donees subsequent  
to the year of donation), copyrights,  
trademarks;  
Report on line 18 any investment  
banking fees and any legal and  
Securities (including stocks and their  
accounting fees paid or incurred in  
connection with a taxable or tax-free  
acquisition of property (for example,  
stock or assets) or a tax-free  
derivatives, stock options, and bonds);  
Conservation easements (including  
Do not report on this line 12 amounts  
required to be reported in accordance  
with instructions for Part III, line 11.  
scenic easements or air rights);  
Railroad rights of way;  
reorganization. Report on this line any  
investment banking fees incurred at any  
stage of the acquisition or  
Do not report on this line 12 amounts  
recovered from insurers or any other  
indemnitors for any judgments,  
damages, awards, or similar costs  
described above.  
Mineral rights; and  
Other tangible or intangible property.  
reorganization process including, for  
example, fees paid or incurred to  
evaluate whether to investigate an  
acquisition, fees to conduct an actual  
investigation, and fees to consummate  
the acquisition. Also, include on line 18  
investment banking fees incurred in  
connection with the liquidation of a  
subsidiary, a spin-off of a subsidiary, or  
an initial public stock offering.  
Include any temporary differences for  
the charitable contribution carryforward  
limitation in column (b). Report any net  
limitation carryforward for the current  
year as a net negative number. Report  
any utilization of a prior year limitation  
carryforward net of the current year  
limitation as a positive number in  
column (b). Report any amounts from  
column (b) that are allocable to  
Line 13. Pension and  
Profit-Sharing  
Report on line 13 the expenses and  
deductions attributable to the  
corporation's pension plans,  
profit-sharing plans, and any other  
retirement plans. Complete columns (b),  
(c), and (d), as applicable.  
noneffectively connected income in  
column (d) and the effectively  
Line 19. Current Year  
Acquisition/Reorganization  
Other Costs  
Report on line 19 any other fees paid or  
incurred in connection with a taxable or  
tax-free acquisition of property (for  
Line 14. Other Post-Retirement  
Benefits  
connected portion of the utilization of  
charitable contribution carryforward in  
column (e).  
Report on line 14 the expenses and  
deductions attributable to other  
post-retirement benefits not otherwise  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
23  
example, stock or assets) or a tax-free  
reorganization not otherwise reportable  
on Schedule M-3 (for example, Part III,  
line 18). Report on this line any fees  
paid or incurred at any stage of the  
acquisition or reorganization process  
including, for example, fees paid or  
incurred to evaluate whether to  
investigate an acquisition, fees to  
conduct an actual investigation, and  
fees to consummate the acquisition.  
Also, include on line 19 other  
treatment. If there is no temporary  
difference between the foreign bank's  
books and tax treatment, then such ECI  
amount that is not included in column  
(a) is apportioned in column (d), and its  
total is reflected in column (e).  
expense included in Part I, line 11.  
Report amounts in column (b) or (c), as  
applicable. The corresponding interest  
expense for U.S. income tax purposes is  
reported on Part III, lines 26b through  
26e, column (e). Do not report on this  
line 26a, column (a), amounts  
Line 25. Purchase versus Lease  
(for Purchasers and/or  
reportable on:  
1. Part II, lines 9, 10, and 11  
(income (loss) from U.S. partnerships,  
foreign partnerships, and other  
pass-through entities);  
Lessees)  
Note. See the instructions for Part II,  
line 17, earlier, for sellers and/or lessors.  
acquisition/reorganization costs  
incurred in connection with the  
liquidation of a subsidiary, a spin-off of a  
subsidiary, or an initial public stock  
offering.  
Note. Interest expense from  
Asset transfer transactions with  
periodic payments characterized for  
financial accounting purposes as either  
a purchase or a lease may, under some  
circumstances, be characterized as the  
opposite for tax purposes.  
partnerships and pass-through entities  
is adjusted as a permanent difference in  
column (c) of Part II, lines 9, 10, and 11.  
The deductible portion of such interest  
expense reported on Part II, lines 9, 10,  
and 11 is included in the interest  
expense allocation under Regulations  
section 1.882-5 as reported on  
Schedule I and is also included on  
Schedule M-3, Part III, lines 26b and  
26c.  
Line 20. Amortization/  
Impairment of Goodwill  
Report on line 20 amortization of  
goodwill or amounts attributable to the  
impairment of goodwill.  
If a transaction is treated as a lease,  
the purchaser/lessee reports the  
periodic payments as gross rental  
expense. If the transaction is treated as  
a purchase, the purchaser/lessee  
reports the periodic payments as  
payments of principal and interest and  
also reports depreciation expense or  
deduction with respect to the purchased  
asset.  
Line 21. Amortization of  
Acquisition, Reorganization,  
and Start-Up Costs  
Report on line 21 amortization of  
acquisition, reorganization, and start-up  
costs. For purposes of columns (b), (c),  
(d), and (e), include amounts  
amortizable under section 167, 195, or  
248.  
2. Part II, line 12 (items relating to  
reportable transactions); and  
3. Part III, lines 26b through 26e.  
Line 26b. Interest Expense  
Allocable Under Regulations  
Report on line 25, column (a), gross  
rent expense for a transaction treated as Section 1.882-5  
a lease for income statement purposes  
The interest expense deduction under  
but as a sale for U.S. income tax  
Regulations section 1.882-5 is based on  
a three-step formula required to be  
reported on Schedule I (Form 1120-F).  
Report the allocable amount of interest  
expense from Schedule I, line 23, in  
column (d) and in column (e) of line 26b.  
Line 22. Other Amortization or  
Impairment Write-Offs  
Report on line 22 any amortization or  
impairment write-offs not otherwise  
includible on Schedule M-3.  
purposes. Report on line 25, column (e),  
gross rental deductions for a transaction  
treated as a lease for U.S. income tax  
purposes but as a purchase for income  
statement purposes. Report interest  
expense for such transactions on Part  
III, lines 26a through 26e, columns (a)  
and (e), as applicable. Report  
Line 23. Depreciation  
Line 26c. Regulations Section  
1.882-5 Allocation Amount  
Subject to Deferral or  
Disallowance  
Enter in column (e) the amount reported  
on Schedule I (Form 1120-F), line 24g.  
Report on line 23 any depreciation  
expense that is not required to be  
reported elsewhere on Schedule M-3  
(for example, on Part II, line 2, 9, 10, or  
11).  
depreciation expense or deductions for  
such transactions on Part III, line 23  
(depreciation), columns (a) and (e), as  
applicable. Use columns (b), (c), and (d)  
of Part III, lines 23, 25, and 26a through  
26e, as applicable, to report the  
Line 24. Bad Debt Expense  
Enter in column (b) the combined  
amounts from Schedule I, lines 24b,  
24c, 24e, and 24f, as a positive or  
negative number as the case may be for  
the current year. In column (c), enter the  
combined amounts from Schedule I,  
lines 24a and 24d as a negative  
number.  
Report on line 24, column (a), any  
amounts attributable to an allowance for  
uncollectible accounts receivable or  
actual write-offs of accounts receivable  
included in determining net income per  
the income statement. Report in  
differences between columns (a) and (e)  
for such recharacterized transactions.  
Line 26a. Interest Expense Per  
Books  
The detail for the foreign corporation's  
interest expense is reported on  
columns (d) and (e) the respective  
noneffectively connected and the  
Schedule I (Form 1120-F). The scope of  
the interest expense lines on Part III,  
line 26, is limited to a summarization of  
the results from Schedule I that  
effectively connected portions of the  
deductible amount of bad debt expense  
determined under section 166 for  
Line 26d. Substitute Interest  
Payments  
All foreign corporations, report on  
line 26d all U.S. source substitute  
interest payments (as to the recipient)  
with respect to securities lending  
federal income tax purposes that is also  
included in column (a). If a foreign bank  
has an effectively connected bad debt  
expense that is not reportable in column  
(a), the ECI amount is included in  
reconcile the foreign corporation's book  
interest expense to effectively  
connected taxable income.  
On line 26a, no amount is allocated  
and apportioned to effectively or  
transactions described in Regulations  
sections 1.861-2(a)(7) and 1.881-2(b)  
(2). Foreign banks that record substitute  
interest payments on set(s) of books  
column (b) if it is a temporary difference  
and in column (e) to report the ECI  
noneffectively connected income.  
Report in line 26a, column (a), interest  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
24  
that are not reported on Form 1120-F,  
Schedule L, might also report foreign  
source substitute interest payments  
whether or not they are allocable in  
whole or in part to ECI. Foreign banks  
report in column (c) all U.S. source and  
allocable foreign source substitute  
interest payments not already reflected  
in column (a). The amounts reported in  
column (c) are apportioned to  
Country Y, that guarantees the  
commission expense generally includes  
amounts paid or accrued for services  
rendered to the foreign corporation  
including expenses paid for brokerage  
commissions. Fees and commissions  
reportable on line 28 do not include  
amounts that are interest equivalents  
reportable on line 26e.  
transactions in FC's global dealing  
operation. The set(s) of books in FC's  
global dealing operation are booked in  
FC's home office and are not reportable  
on Form 1120-F, Schedule L. FC  
allocates and apportions 40% of the  
income and applicable expenses from  
its global dealing operation to effectively  
connected taxable income. FC's  
Line 29. Rental Expense  
Report on line 29, column (a), the  
amount of rental expense included on  
Part I, line 11. Rental expense is the  
amount classifiable as rent under U.S.  
tax principles.  
noneffectively connected income of the  
foreign corporation in column (d) and  
reported as a negative number.  
guarantee fee expense paid to its  
foreign-related party is allocated directly  
to the income of the global dealing  
operation and apportioned 40% to FC's  
effectively connected income from such  
operation. FC must report the guarantee  
fee expense paid to FC2 in column (c).  
The amount of expense reported in  
column (c) is apportioned 60% to  
noneffectively connected income in  
column (d) and 40% to effectively  
connected income in column (e).  
Amounts included in column (a) that are  
also apportioned to non-ECI are also  
reported in column (d) as a negative  
number. The combined amounts of  
columns (a), (b), (c), and (d) are  
apportioned to effectively connected  
income in column (e) as the case may  
be.  
Line 30. Royalty Expense  
Report on line 30, column (a), the  
amount of royalty expense included on  
Part I, line 11. Include in columns (b)  
through (e) amounts that are allocable  
as imputed royalties under U.S. tax  
principles that are not included in  
financial income reported on Part I,  
line 11.  
Note. In using column (d) to apportion  
amounts to non-ECI that are not  
included in column (a), line 26d contains  
an exception to the general instructions  
for Schedule M-3 reporting by foreign  
banks.  
Line 27. Substitute Dividend  
Payments  
All foreign corporations report on line 27  
the amount of U.S. source substitute  
dividend payments with respect to  
securities lending transactions  
Line 31. Expenses Allocable  
Under Regulations Section  
1.861-8  
Line 26e. Interest Equivalents  
(Guarantee Fees)  
Line 31 applies only to foreign banks.  
For purposes of Schedule M-3, all of the  
home office and other allocations to  
U.S. effectively connected income that  
are reportable on Schedule H (Form  
1120-F) under Regulations section  
1.861-8 (including amounts that are  
subject to timing differences under U.S.  
tax principles, such as home office  
depreciation) are reportable as  
described in Regulations sections  
1.861-3(a)(6) and 1.881-2(b)(2). Foreign  
banks that record substitute dividend  
payments on set(s) of books that are not  
reported on Form 1120-F, Schedule L,  
might also report foreign source  
All foreign corporations, report on  
line 26e the foreign corporation's  
amounts with respect to deductions that  
are not interest payments but are  
sourced to the recipient in the manner of  
interest (“interest equivalents”). These  
amounts include fees expensed for  
financial guarantee and confirmation,  
acceptance, and standby letter of credit  
transactions. Foreign banks that record  
U.S. source guarantee fees on set(s) of  
books not reported on Form 1120-F,  
Schedule L, and not reported in column  
(a), must report the U.S. source fees as  
a permanent difference on line 26e,  
column (c), and allocate and apportion  
the relevant amounts to noneffectively  
connected income in column (d) even if  
there is no amount to allocate to  
substitute dividend payments whether  
or not they are allocable in whole or in  
part to ECI. Foreign banks report in  
column (c) U.S. source and allocable  
foreign source substitute dividends not  
already reflected in column (a). The  
amounts reported in column (c) are  
apportioned to noneffectively connected  
income of the foreign corporation in  
column (d) and reported as a negative  
number. Amounts included in column  
(a) that are also apportioned to non-ECI  
are also reported in column (d) as a  
negative number. The combined  
apportionments to ECI in column (d).  
Report in columns (d) and (e) the  
amount from Schedule H, line 20.  
Note. Foreign corporations other than  
banks that are required to file Form  
1120-F to report effectively connected  
income in Section II of that form are still  
required to complete and attach  
Schedule H to their U.S. income tax  
return. The amounts from Schedule H,  
line 20, are not reportable by a foreign  
corporation other than a bank on this  
line of Schedule M-3 because  
amounts of columns (a), (b), (c), and (d)  
are apportioned to effectively connected  
income in column (e) as the case may  
be.  
effectively connected amounts in  
column (e). Foreign corporations other  
than banks must record all interest  
equivalent payments in column (a).  
worldwide expenses are already  
includible in Schedule M-3, Part I,  
line 11, and in each expense line item in  
Schedule M-3, Part III. Such amounts  
are subject to individual line-item  
Note. In using column (d) to apportion  
amounts to non-ECI that are not  
included in column (a), line 27 contains  
an exception to the general instructions  
for Schedule M-3 reporting by foreign  
banks.  
Note. In using column (d) to apportion  
amounts to non-ECI that are not  
included in column (a), line 26e contains  
an exception to the general instructions  
for Schedule M-3 reporting by foreign  
banks.  
Example 35. FC is a foreign bank,  
resident in Country X, that files Form  
1120-F and Schedule M-3. FC enters  
into a guarantee arrangement with FC2,  
a wholly owned subsidiary, resident in  
apportionment to non-ECI in column (d).  
Line 28. Fee and Commission  
Expense  
Enter on Part III, line 28, column (a), the  
amounts of fees and commissions  
included on Part I, line 11. Fee and  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
25  
lease cancellation costs, loss on sale of  
equipment, etc., a supporting statement  
that lists those categories of expenses  
and their details will satisfy the  
related to reserves and contingent  
liabilities. Report on line 32, column (e),  
amounts related to liabilities for reserves  
and contingent liabilities that are  
deductible in the current tax year for  
U.S. income tax purposes. Examples of  
reserves that are allowed for book  
purposes, but not for tax purposes,  
include warranty reserves, restructuring  
reserves, reserves for discontinued  
operations, and reserves for  
Line 32. Other Expense/  
Deduction Items With  
Differences and Reconciliation  
to Eliminate Duplicate Amounts  
on Line 31  
requirement to separately state and  
adequately disclose. In order to  
separately state and adequately  
disclose the employee termination  
costs, it is not required that an  
Separately state and adequately  
disclose on line 32 all items of expense/  
deduction that are not otherwise listed  
on Part III, lines 1 through 31. Amounts  
included on line 31, column (e), from  
Schedule H (Form 1120-F), line 20, that  
are also included in this Schedule M-3,  
Part III, lines 3, 5 through 23, 25, 26d,  
26e, and 27, need to be reversed to  
avoid duplicate allocation. The  
anticipated termination cost amount be  
listed for each employee, or that each  
asset (or category of asset) be listed  
along with the anticipated loss on  
disposition.  
acquisitions and dispositions. Only  
report on line 32 items that are not  
required to be reported elsewhere on  
Schedule M-3, Parts II and III.  
The attached statement should have  
six columns. The first column has the  
description for the next five columns.  
The second column is column (a),  
expense per income statement. The  
third column is column (b), temporary  
differences. The fourth column is  
Amounts incurred as fixed or  
combined amounts for these lines  
reported in column (e) that is duplicative  
of any amount included in line 31,  
column (e), is reported and reversed on  
line 32. Report such duplicative amount  
as a negative amount includible in  
line 32, column (c) and column (e).  
Such negative amount will need to be  
combined with other expense/deduction  
items that have differences. Attach a  
statement to show the duplicative items  
that are being reversed.  
determinable or other periodic interest  
rate or equity notional principal contract  
expense that is not incurred in a  
hedging transaction, securities dealing  
or global securities dealing operation,  
each of which is reportable on Part II,  
are reportable on Part III, line 32.  
column (c), permanent differences. The  
fifth column is column (d), other  
permanent differences for allocations to  
non-ECI and ECI. The sixth column is  
column (e), deduction per tax return. For  
each item listed on the attached  
Example 36. Corporation Q is a  
calendar year taxpayer that is required  
to file Schedule M-3 for the current tax  
year. On July 1 of each year, Q has a  
fixed liability for its annual insurance  
premiums on its home office building  
that provides a 12-month coverage  
period beginning July 1 through June  
30. In addition, Q historically prepays 12  
months of advertising expense on July  
1. On July 1, Q prepays its insurance  
premium of $500,000 and advertising  
expenses of $800,000. For statutory  
accounting purposes, Q capitalizes and  
amortizes the prepaid insurance and  
advertising over 12 months. For U.S.  
income tax purposes, Q deducts the  
insurance premium when paid and  
amortizes the advertising over the  
12-month period. In its annual  
statement for line 32, columns (a)  
through (d) when combined must equal  
column (e). The amounts in columns (a)  
through (e) for all items must be totaled  
on the attached statement and the total  
amounts must be included on line 32 of  
the face of the statement.  
Attach a statement that describes  
and itemizes the type of expense/  
deduction and the amount of each item,  
and provides a description that states  
the expense/deduction name for book  
purposes for the amount recorded in  
column (a) and describes the  
Comprehensive income. If any  
“comprehensive income” as defined by  
SFAS No. 130 is reported on this line,  
describe the item(s) in detail.  
adjustment being recorded in column  
(b), (c), or (d). The entire description  
completes the tax description for the  
amount included in column (e) for each  
item separately stated on this line.  
Reserves and contingent liabilities.  
Report on line 32 amounts related to the  
change in each reserve or contingent  
liability that is not required to be  
The statement attached to the  
Schedule M-3 for line 32 must  
separately state and adequately  
disclose the nature and amount of the  
expense related to each reserve and/or  
contingent liability. The appropriate level  
of disclosure depends upon each  
taxpayer’s operational activity and the  
nature of its accounting records. For  
example, if a corporation’s net income  
amount reported in the income  
reported elsewhere on Schedule M-3.  
For example: (1) amounts relating to  
changes in reserves for litigation must  
be reported on Part III, line 12  
statement, Q treats the differences  
attributable to the annual statement  
treatment and U.S. income tax  
treatment of the prepaid insurance and  
advertising as temporary differences.  
(judgments, damages, awards, and  
similar costs); and (2) amounts relating  
to changes in reserves for uncollectible  
accounts receivable must be reported  
on Part III, line 24 (bad debt expense).  
Q also has a legal reserve where  
$300,000 was expensed for financial  
accounting purposes and a ($100,000)  
temporary difference was calculated to  
arrive at the income tax deduction of  
$200,000. The statement attached to  
Q’s return for Part III, line 32, must be  
separately stated and adequately  
disclosed, as indicated in the table  
below.  
statement includes anticipated  
Report on line 32 the amortization of  
various items of prepaid expense, such  
as prepaid subscriptions and license  
fees, prepaid insurance, etc.  
Report on line 32, column (a),  
expenses included in net income  
reported on Part I, line 11, that are  
expenses for a discontinued operation  
as a single amount, and its general  
ledger or other books, records, and  
workpapers provide details for the  
anticipated expenses under more  
explanatory and defined categories  
such as employee termination costs,  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
26  
Line 32—Example 36  
Statement Concerning Other Expense/Deduction Items With Differences  
Column (d)  
Other  
Permanent  
Column (a)  
Expense per  
Income Statement  
Column (b)  
Temporary  
Difference  
Column (c)  
Permanent  
Difference  
Differences for  
Allocations to  
non-ECI and ECI  
Column (e)  
Deduction per Tax  
Return  
Description  
Prepaid insurance  
premium expensed not  
capitalized  
$250,000  
$300,000  
$550,000  
$250,000  
($100,000)  
$150,000  
-0-  
-0-  
-0-  
-0-  
-0-  
-0-  
$500,000  
$200,000  
$700,000  
Legal expense reserve  
Total Line 32  
the amounts reported on Part III, line 33, (a), ($1 million). Similarly, if Part III,  
Line 33. Total Expense/  
Deduction Items  
Report on Part II, line 26, columns (a)  
through (e), as applicable, the inverse of  
column (a) through (e), as applicable.  
For example, if Part III, line 33, column  
(a), reflects an amount of $1 million,  
then report on Part II, line 26, column  
line 33, column (b), reflects an amount  
of ($50,000), then report on Part II,  
line 26, column (b), $50,000.  
Instructions for Schedule M-3 (Form 1120-F)(2023)  
27