Formulaire 8865 Instructions pour les annexes K-2 et K-3
Instructions pour les annexes K-2 et K-3 (formulaire 8865)
Rév. 2023
Formulaires associés
- Formulaire 8865 Tableau K-2 - Éléments de distribution des partenaires - International
- Formulaire 8865 Annexe K-3 - Part du revenu, déductions, crédits, etc. internationaux relatifs
Department of the Treasury
Internal Revenue Service
2023
Instructions for Schedules
K-2 and K-3 (Form 8865)
Partners’ Distributive Share Items—International and Partner’s Share of Income,
Deductions, Credits, etc.—International
Section references are to the Internal Revenue Code unless
otherwise noted.
Schedule K-2. The information reported on Schedule K-3 is used
to report information on a partner’s tax or information returns.
Contents
Page
Who Must File
Any person that is required to file Form 8865, Schedule K, for a
partnership that has items relevant to the determination of U.S.
tax under the international provisions of the Internal Revenue
Code (the Code) must complete the relevant parts of Schedules
K-2 and K-3. See each part and section for a more detailed
description of who must file each part and section. Penalties may
apply for filing Form 8865 without all required information. The
penalties that apply to the Form 8865 and the Schedule K-1
apply to the Schedules K-2 and K-3, respectively. See Penalties
in the Instructions for Form 8865.
Part I. Partnership's Other Current Year
Category 1 and Category 2 filers must complete
Part III. Other Information for Preparation of Form
Schedule K-1 for any direct interest they hold in the partnership.
Category 1 filers are also required to complete Schedule K-1 for
each U.S. person that directly owns a 10% or greater direct
interest in the partnership. These partners that are required to
complete a Schedule K-1 must also complete a Schedule K-3 if
the partnership has items relevant to the determination of U.S.
tax under the international provisions. Partners may also receive
Schedule K-3 from Category 1 filers who complete a
Schedule K-3 on their behalf. Partners should review the
Partner’s Instructions for Schedule K-3 (Form 1065) for how to
complete partner tax forms for items reported on Schedule K-3
(Form 8865).
Part IV. Information on Partners' Section 250
Deduction With Respect to Foreign-Derived
Part V. Distributions From Foreign Corporations to
Part VI. Information on Partner's Section 951(a)(1)
Part VIII. Partners' Information for Base Erosion and
Note. Except as otherwise required by statute, regulations, or
other IRS guidance, a U.S. person isn’t required to obtain
information from direct or indirect partners of the partnership to
determine if it needs to file each of these parts.
Future Developments
For the latest information about developments related to
Schedule K-2 (Form 8865) and Schedule K-3 (Form 8865), and
their instructions, such as legislation enacted after they were
Note. A U.S. person is only required to complete the relevant
portions of the Schedules K-2 and K-3, as applicable. For
example, if the partnership doesn’t own an interest in a foreign
corporation, the following parts are not required: Schedules K-2
and K-3, Part V and Part VI.
What’s New
Part I, box 7, (formerly required attachment of Form 8858) has
•
been reserved for future use.
Note. Schedules K-2 and K-3 consist of the most common
international tax provisions of the Code. However, not all
provisions are specifically identified on these schedules. To the
extent that an international provision is impacted and isn’t
otherwise specifically identified, check box 12 on Schedule K-2,
Part I, and Schedule K-3, Part I, and attach a statement to both
Schedules K-2 and K-3 (for distributive share).
Part II: Amounts may now be entered in lines 41–43, columns
•
(a)–(e), for interest expense.
General Instructions
See the Instructions for Form 8865, as they generally apply to
the Schedules K-2 and K-3. This document provides additional
instructions for the Schedules K-2 and K-3 for tax years
beginning in 2023.
When and Where To File
Attach Schedule K-2, and Schedule K-3, if applicable, to Form
8865 with your income tax return and file by the due date
(including extensions) for that return. See the Instructions for
Form 8865 for further information.
Purpose of Schedules K-2 and K-3
Schedule K-2 is an extension of Schedule K of the Form 8865
and is used to report items of international tax relevance from the
operation of a partnership.
See the Instructions for Form 8865 for instructions concerning
amendments or adjustments to Schedules K-2 and K-3.
Schedule K-3 is an extension of Schedule K-1 (Form 8865)
and is generally used to report the share of the items reported on
Jan 4, 2024
Cat. No. 35339Y
report income adjustments under section 743(b) by source and
separate category. Partners use the information to figure and
claim a foreign tax credit on Form 1116 or 1118.
Computer-Generated Schedules K-2
and K-3
Part IV of Schedules K-2 and K-3. Used to report the
information necessary for the partner to determine its section
250 deduction for FDII. Partners use the information to claim and
figure a section 250 deduction for FDII on Form 8993, Section
250 Deduction for Foreign-Derived Intangible Income (FDII) and
Global Intangible Low-Taxed Income (GILTI).
Generally, all computer-generated forms must receive prior
approval from the IRS and are subject to an annual review.
However, see the Exception below.
Requests for approval may be submitted electronically to
substituteforms@irs.gov or requests may be mailed to:
Part V of Schedules K-2 and K-3. Used to report
Internal Revenue Service
Attention: Substitute Forms Program
SE:W:CAR:MP:P:TP
information the partner needs, in combination with other
information known to the partner, to determine the amount of
each distribution from a foreign corporation that is treated as a
dividend or excluded from gross income because the distribution
is attributable to previously taxed earnings and profits (PTEP) in
the partner’s annual PTEP accounts for the foreign corporation,
and the amount of foreign currency gain or loss on the PTEP that
the partner is required to recognize under section 986(c).
1111 Constitution Ave. NW
Room 6554
Washington, DC 20224
Exception. If computer-generated Schedules K-2 and K-3
conform to and do not deviate from the official form and
schedules, they may be filed without prior approval from the IRS.
Partners report the dividends and foreign currency gain or
loss on Form 1040 or Form 1120. If eligible, partners also use
this information to figure and claim a dividends received
deduction under section 245A on Form 1120.
Part VI of Schedules K-2 and K-3. Used to provide
information the partner needs to determine any inclusions under
sections 951(a)(1) and 951A. Partners use the information to
complete Form 8992, U.S. Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI), and Forms 1040 and 1120
for subpart F income inclusions, section 951(a)(1)(B) inclusions,
and section 951A inclusions.
Part VII of Schedules K-2 and K-3. Used to provide
information needed by partners to complete Form 8621,
Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund, and to provide
partners with information to determine income inclusions for the
passive foreign investment company (PFIC).
Important. Be sure to attach the approval letter to
computer-generated Schedule K-2 or K-3. However, if the
computer-generated form is identical to the IRS-prescribed form,
it doesn’t need to go through the approval process, and an
attachment isn’t necessary.
Every year, the IRS issues a revenue procedure to provide
guidance for filers of computer-generated forms. In addition,
every year, the IRS issues Pub. 1167, General Rules and
Specifications for Substitute Forms and Schedules, which
reprints the most recent applicable revenue procedure. Pub.
1167 is available at IRS.gov/irb/2020-53_IRB#REV-
PROC-2020-55. The procedures relevant to Form 8865 and
Schedule K-1 (Form 8865) apply for purposes of Schedules K-2
and K-3.
Part VIII of Schedules K-2 and K-3. Used to provide
information for the partner to figure its base erosion and
anti-abuse tax (BEAT). Partners will use the information to
complete Form 8991, Tax on Base Erosion Payments of
Taxpayers With Substantial Gross Receipts.
How To Complete Schedules K-2 and K-3
Reporting currency. Report all amounts in U.S. dollars except
where specified otherwise.
Form references. These instructions refer to other forms. If the
referenced form has been succeeded by another form, the
references to those prior forms encompass any successor forms.
References to Form 1040, U.S. Individual Income Tax Return,
also include Form 1040-SR, U.S. Tax Return for Seniors. Also,
when Form 1040 is referenced, the part may be relevant for other
tax returns for noncorporate partners such as Form 1041, U.S.
Income Tax Return for Estates and Trusts.
When Form 1120, U.S. Corporation Income Tax Return, is
referenced, the part may be relevant for other tax returns for
corporate partners such as Form 1120-L, U.S. Life Insurance
Company Income Tax Return.
Specific Instructions
If the information required in a given section exceeds the
space provided within that section, do not enter “See
!
CAUTION
attached” in the section or leave the section blank.
Instead, complete all entry spaces in the section and attach the
remaining information on additional sheets. For all attachments,
include the part, section, line number, and column of the relevant
portion of Schedule K-2 and Schedule K-3. The additional
sheets must conform to the IRS version of that section.
Uses of the parts of Schedules K-2 and K-3, in general.
Part I of Schedules K-2 and K-3. Used to report
international tax items not reported elsewhere on Schedule K-2
or K-3.
Schedule K-2, Identifying Information
At the top of each new page, enter the name of the partnership
as it appears on Form 8865.
Part II of Schedules K-2 and K-3. Used to figure the
partnership’s income or loss by source and separate category of
income and to report the partner’s distributive share of such
income or loss. Partners use the information to figure and claim a
foreign tax credit on Form 1116 or 1118.
Part III of Schedules K-2 and K-3. Used to report
information necessary for the partner to determine the allocation
and apportionment of research and experimental (R&E)
expense, interest expense, and the foreign-derived intangible
income (FDII) deduction for the foreign tax credit limitation. Also
used to report foreign taxes paid or accrued by the partnership
and the partner's distributive share of such taxes. Also used to
If the foreign partnership has an employer identification
number (EIN), enter the EIN as it appears on Form 8865 at the
top of each new page. Do not enter “FOREIGNUS” or “APPLIED
FOR.” Enter the reference ID number used on Form 8865, item
G2(b). For details, see the instructions for Form 8865, item
G2(b). Do not enter “FOREIGNUS” or “APPLIED FOR” for the
reference ID number.
Item A—Part applicability. Check the “Yes” box to indicate the
applicable parts of Schedules K-2 and K-3. Complete and attach
each applicable part to the Form 8865 and the Schedule K-1
(Form 8865), respectively.
2
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Check the “No” box to indicate the inapplicable parts of
Schedules K-2 and K-3. Do not complete and attach the
inapplicable parts to the Form 8865 and the Schedule K-1 (Form
8865), respectively.
shown in Table 1. If the gain is capital, enter “long-term” or
“short-term” in column (b). Enter the two-letter code from the list
“OC” for the country code. If the property sale is taxed by more
than one country, complete a separate line for that country, but
indicate in some manner (for example, a footnote) that the
property entered on both lines is the same property.
Schedule K-3, Identifying Information
Items A and B. Items A and B should be the same as reported
on Schedule K-1, Part I, items A1 or A2 and B. Enter the
information reported on Schedule K-1, Part I, item A1. If there is
no entry in item A1, then enter the information in item A2.
Box 2. Foreign oil and gas taxes. A separate foreign tax
credit limitation is applied for foreign oil and gas taxes. See
section 907(a) and Regulations section 1.907(a)-1 for details. If
the partnership has such taxes, check box 2 and attach a
completed Schedule I (Form 1118) to the Schedules K-2 and
K-3 (with the partner’s distributive share). Do not complete
Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through
4; or Part III, lines 1 and 3. Attach Schedule I (Form 1118) even if
there are no corporate partners because the limitation applies to
individuals eligible to claim a foreign tax credit.
Items C and D. Items C and D should be the same as reported
on Schedule K-1, Part II, items C and D1.
Item E. Item E should correspond to Schedule K-2, Identifying
Information, item A.
Schedule K-2, Part I (Partnership's Other
Current Year International Information), and
Schedule K-3, Part I (Partner's Share of
Partnership’s Other Current Year International
Information)
Box 3. Splitter arrangements. Foreign taxes for a foreign tax
credit splitting event are suspended until the related income is
taken into account by the taxpayer. See section 909. There is a
foreign tax credit splitting event for foreign taxes of a payor if in
connection with a splitter arrangement, as defined in Regulations
section 1.909-2(b), the related income was, is, or will be taken
into account by a covered person. See Regulations section
1.909-2(a). A covered person, as defined in Regulations section
1.909-1(a)(4), includes, for example, any entity in which the
payor holds, directly or indirectly, at least a 10% ownership
interest (determined by vote or value). A payor, as defined in
Regulations section 1.909-1(a)(3), includes, for example, a
person that takes foreign income taxes paid or accrued by a
partnership into account pursuant to section 702(a)(6).
This part is used to report information for international tax items
not reported elsewhere on the Schedule K-2. Check the box to
indicate whether any of the following international tax items are
applicable in the tax year. If applicable, attach statements, as
described below, to the Schedule K-2.
If applicable, also complete Schedule K-3, Part I, and include
with the Schedule K-3 the attachment(s) as described below
with the partner's distributive share of the amounts.
Box 1. Gain on personal property sale. In general, income
from the sale of personal property is sourced according to the
residence of the seller. See section 865. For sourcing purposes,
personal property sold by the partnership is treated as sold by
the partners. See section 865(i)(5). A U.S. citizen or resident
alien individual with a tax home (as defined in section 911(d)(3))
in a foreign country is treated as a nonresident for the sale of
personal property only if an income tax of at least 10% of the
gain derived from the sale is actually paid to a foreign country for
that gain. See section 865(g). In addition, if a U.S. resident
maintains an office or other fixed place of business in a foreign
country, income from the sale of personal property attributable to
such office or other fixed place of business is foreign source only
if an income tax of at least 10% of the income from the sale is
actually paid to a foreign country for such income.
If the partnership has income from the sale of personal
property (other than inventory, depreciable personal property,
and certain intangible property excepted from the general rule of
section 865(a)), and the partnership pays income tax to a foreign
country for income from the sale or the income is eligible for
resourcing under an applicable treaty, check box 1 and attach a
statement to Schedules K-2 and K-3 (for distributive share) with
Table 1.
Report foreign taxes that are potentially suspended on
Schedule K-2, Part III, Section 4, line 2E, and each partner's
share of such taxes on Schedule K-3, Part III, Section 4, line 2E.
It may not be possible to determine whether taxes are
suspended and whether related income is taken into account.
However, where it is possible to determine that taxes are
potentially suspended, or potentially unsuspended, it must report
such taxes and the information requested in these instructions
for box 3.
For example, where a partnership owns a reverse hybrid and
the foreign country assesses tax on the partnership for income
earned by the reverse hybrid, such taxes are potentially
suspended taxes.
Check box 3 and attach a statement to Schedules K-2 and
K-3 that includes the following for each splitter arrangement in
which the partnership participates that would qualify as a splitter
arrangement under section 909 if one or more partners are
covered persons for an entity that took into account related
income from the arrangement.
Section 1 of attached statement—Potentially suspended
taxes.
1. Explanation of the splitter arrangement (for example,
reverse hybrid owned by partnership).
The partnership may combine sales of stock property by
country. Otherwise, don’t combine sales of property. Each item
of property sold must be listed separately with the information
2. Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement.
Table 1. Information on Personal Property Sold (For use with Sch. K-2 (Form 8865), Part I, box 1) (Also
for use with Sch. K-3 (Form 8865), Part I, box 1)
(a) Property description
(b) Long-term/short-term
(c) Gains
(d) Amount of tax paid (e) Amount of tax paid in U.S. (f) Taxing country
in local currancy
dollars
(enter two-letter
country code)
3
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Attachment 1
Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of Allocable Expenses
II. Taxes
A
B
Passive income subject to withholding tax of
15% or more
Passive income subject to withholding tax of
less than 15% but greater than zero
C
D
Passive income not subject to any foreign tax
Passive income subject to no withholding tax,
but subject to other foreign tax
Attachment 2
Reference: Regulations section 1.904-4(c)(4)
A
Name of foreign QBU
(Complete a separate Attachment 2 for each
foreign QBU)
I. Passive Income Net of Allocable Expenses
II. Taxes
B
C
Passive income subject to withholding tax of
15% or more
Passive income subject to withholding tax of
less than 15% but greater than zero
D
E
Passive income not subject to any foreign tax
Passive income subject to no withholding tax,
but subject to other foreign tax
3. Amount of related income on which such taxes were paid
or accrued.
4. The two-letter code for the country to which the taxes
not enter “various” or “OC” for the country code.
Box 5. High-taxed income. If the partnership has passive
income, check the box for item 5 and attach a statement to
Schedules K-2 and K-3 with Attachment 1 or 2, or both,
completed. This information helps to determine whether a
partner’s passive income is high-taxed passive income.
5. The separate category and source of income to which the
Income received or accrued by a U.S. person that would
otherwise be passive income isn’t treated as passive income if
the income is determined to be high-taxed income. See section
904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
a partner must group its shares of items of passive income from
a partnership according to the rules in Regulations sections
1.904-4(c)(3) and (4).The grouping rules of paragraph (c)(3)
apply separately to income attributable to each foreign qualified
business unit (QBU) as defined in section 989(a) of a foreign
partnership.
taxes are assigned.
Section 2 of attached statement—Potentially
unsuspended taxes. Include a separate section that reports
the following for each splitter arrangement for which the
partnership has taken into account any related income.
1. Origin year of the splitter arrangement.
2. Explanation of the splitter arrangement (for example,
reverse hybrid owned by partnership).
3. Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement in the origin year of the
splitter arrangement.
Note. Passive income isn’t treated as subject to a withholding
tax or other foreign tax when a credit is disallowed in full for such
foreign tax, for example, under section 901(k).
4. Amount of related income on which such taxes were paid
Example 1. Part I, box 5: high-taxed income. In Year 1, FP,
a foreign partnership, has two domestic corporate partners with
equal interests in the partnership. In Year 1, FP receives $100 of
passive dividend income from a noncontrolled 10%-owned
foreign corporation subject to a 15% withholding tax. FP also
receives $150 of passive interest income from an unrelated
person subject to a 30% withholding tax. FP incurs $80 of
expenses that are allocable to the interest income. FP also
receives $50 of passive dividend income from a controlled
foreign corporation (CFC) which isn’t subject to tax. No
expenses are allocable to the dividend income. FP's branch
operation in Country X that is treated as a QBU under section
989(a) receives $100 of passive dividend income subject to a
15% withholding tax. Finally, FP earns $400 of passive income
for its branch operation in Country X that is treated as a QBU
under section 989(a). Such income is subject to foreign tax (but
not withholding tax) of $40. Expenses of $120 are allocable to
or accrued in the origin year of the splitter arrangement.
5. The two-letter code for the country to which the taxes
Don’t enter “various” or “OC” for the country code.
6. The separate category and source of income to which the
taxes are assigned.
7. Amount of related income taken into account in the
current tax year and the amount of taxes originally paid that
relate to that portion of the related income.
Box 4. Foreign tax translation. If any foreign taxes are
reported on Schedules K-2 and K-3, Part III, Section 4, check the
box for item 4 and attach to Schedules K-2 and K-3 the
statement described in the instructions for those sections.
4
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Attachment 1 for Example 1
Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of Allocable
Expenses
II. Taxes
A
B
Passive income subject to
$170
$60
0
withholding tax of 15% or more
Passive income subject to
withholding tax of less than 15%
but greater than zero
0
C
D
Passive income not subject to
any foreign tax
50
0
0
0
Passive income subject to no
withholding tax, but subject to
other foreign tax
Attachment 2 for Example 1
Reference: Regulations section 1.904-4(c)(4)
A
Name of foreign QBU: Country X QBU
(Complete a separate Attachment 2 for each
foreign QBU)
I. Passive Income Net of Allocable Expenses
II. Taxes
B
C
Passive income subject to withholding tax of
15%
100
0
15
0
Passive income subject to withholding tax of
less than 15% but greater than zero
D
E
Passive income not subject to any foreign tax
0
0
Passive income subject to no withholding tax,
but subject to other foreign tax
280
40
the distributive share of branch income. No expenses are
allocable to the dividend income.
For Year 1, the U.S. person filing Form 8865 checks box 5 on
Part I of Schedule K-2 (Form 8865) and attaches Attachments 1
and 2 to Schedule K-2.
FP’s owner completes the same attachments with the
distributive shares and attaches those attachments to each
Schedule K-3.
Note for boxes 8 and 9. If the Form 8865 filer meets an
exception, such as the multiple filer exception, to filing Form
5471, Information Return of U.S. Persons With Respect to
Certain Foreign Corporations, the filer isn’t required to complete
and attach that form. However, the filer must still attach to the tax
return of the U.S. person filing Form 8865 any required
statements to qualify for the exception to filing the Form 5471.
Box 8. Form 5471 information. If applicable, check box 9 and
attach to Form 8865 and Schedule K-3 any Forms 5471. See the
Partnership Instructions for Schedules K-2 and K-3 (Form 1065)
for applicability.
Box 6. Section 267A disallowed deduction. Check box 6 if
the partnership paid or accrued any interest or royalty for which
the U.S. person filing the Form 8865 knows, or has reason to
know, that one or more of the partnership’s partners isn’t allowed
a deduction under section 267A. In addition, on Schedule K-3
filed for such partners, the U.S. person filing Form 8865 should
check box 6 in Part I and attach to the Schedule K-3 a statement
titled "Section 267A Disallowed Deduction" that separately lists
the following information.
Box 9. Other forms. If any other international tax forms are
applicable, check box 9 and attach the form(s) to Form 8865 and
Schedule K-3. See the Partnership Instructions for Schedules
K-2 and K-3 (Form 1065) for applicability.
Box 10. Partner loan transactions. Check this box and
append the completed attachment to Schedules K-2 and K-3 if
either the partnership (a) received a loan from its partner (or a
member of the partner’s affiliated group) (“downstream loan”), as
described in Regulations section 1.861-9(e)(8); or (b) loaned an
amount to its partner (or a member of the partner’s affiliated
group) (“upstream loan”), as described in Regulations section
1.861-9(e)(9).
Downstream loans. On an attached statement, provide the
details of any downstream loans from a partner or a member of
the partner’s affiliated group, including the amount of interest
expense paid or accrued by the partnership. Report the
information separately for each separate loan. The reporting
should be as follows in Table 2.
A. The amount of interest paid or accrued by the partnership
for which the partner isn’t allowed a deduction under section
267A.
B. The amount of royalty paid or accrued by the partnership
for which the partner isn’t allowed a deduction under section
267A.
C. The extent to which information reported on other parts of
the Schedule K-3 (for example, a line in Part II, Section 2)
reflects interest or royalty for which the partner isn’t allowed
a deduction under section 267A.
When completing other parts of Schedules K-2 and K-3
(for example, a line in Part II, Section 2), list an amount
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CAUTION
without regard to whether the partner is disallowed a
deduction under section 267A for the amount.
5
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
and K-3, Parts II and III, must be completed unless the
Table 2. Downstream Loans
partnership doesn’t have a direct or indirect partner eligible to
claim a foreign tax credit or the direct or indirect partner wouldn’t
have to file a Form 1116 or Form 1118 to claim a credit. See
section 904(j) and further discussion in the next paragraphs. This
requirement applies regardless of whether the partnership pays
or accrues foreign taxes because other information, such as the
source of the partnership’s income and the value of its assets, is
relevant in determining the partner’s foreign tax credit. A partner
that is eligible to claim a foreign tax credit includes a domestic
corporation, a U.S. citizen or resident, U.S. citizen or resident
beneficiaries of domestic trusts and estates, certain foreign
corporations, and certain nonresident individuals. See sections
901 and 906. An indirect partner includes a partner that owns the
partnership through a pass-through entity (for example, a
partnership, an S corporation, or a trust (see Regulations section
1.904-5(a)(4)(iv) for the definition of pass-through entity)). An
indirect partner also includes a partner that owns the partnership
through a foreign corporation. See sections 960 and 1293(f). If
there is insufficient information, a direct or indirect partner must
presume such partner is eligible to claim a foreign tax credit and
such partner would have to file a Form 1116 or 1118 to claim a
credit. Accordingly, the Schedules K-2 and K-3 must be
completed.
Name of
Lender
Lender’s
TIN
Date
of
Amount
of
Interest
Expense
for the
Year
Loan
Loan
If there are any partners in the same affiliated group as the
lender, attach a statement to each of the Schedules K-2 and K-3
to expand the columns in the table to include the information
requested in the first two columns for each such partner.
Upstream loans. On the attached statement, provide the
details for any upstream loans to its partner or a member of the
partner’s affiliated group, including the amount of interest income
received or accrued by the partnership. Report the information
separately for each separate loan. The reporting should be as
follows in Table 3.
Table 3. Upstream Loans
Name of
Borrower
Borrower’s
TIN
Date
of
Loan
Amount
of
Loan
Interest
Income
for the
Year
On Schedule K-2, Parts II and III, report the partnership’s
gross income, gross receipts, cost of goods sold, certain
deductions, and taxes by source and separate category. Also
report information that the partner uses to allocate and apportion
expenses and determine the source of certain items of gross
income and gross receipts. Unless specifically noted below,
report on Schedule K-3, Parts II and III, the partner's share of the
partnership's gross receipts, gross income, cost of goods sold,
certain deductions, and taxes by source and separate category.
The partner adds its share of the partnership's foreign source
gross receipts, gross income, cost of goods sold, certain
deductions, and taxes by separate category to its other foreign
source gross receipts, gross income, cost of goods sold, certain
deductions, and taxes in that separate category to figure its
foreign tax credit. Also report on the Schedule K-3 the
If there are any partners in the same affiliated group as the
borrower, attach a statement to each of the Schedules K-2 and
K-3 to expand the columns in the table to include the information
requested in the first two columns for each such partner.
Box 11. Dual consolidated loss. Check box 11 if either (a)
the partnership directly or indirectly owns a foreign branch (as
defined in Regulations section 1.367(a)-6T(g)) or an interest in a
hybrid entity (as defined in Regulations section 1.1503(d)-1(b)
(3)), or (b) the partnership is a hybrid entity (as defined in
Regulations section 1.1503(d)-1(b)(3)). However, box 11 should
not be checked if neither the U.S. person filing Form 8865 nor
any partner for which a Schedule K-3 is filed is a domestic
corporation (other than a regulated investment company (RIC), a
real estate investment trust (REIT), or an S corporation). A
domestic corporate partner’s interest in the partnership or its
indirect interest in a foreign branch or hybrid entity may be
treated as a separate unit and subject to the dual consolidated
loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1
through 1.1503(d)-8.
distributive share of expenses and the allocation and
apportionment factors the partner uses to determine expenses
allocated and apportioned to foreign source income.
Partnership determination. The source and separate
category of certain gross income, gross receipts, and cost of
goods sold, as well as the allocation and apportionment of
certain deductions, can be determined for the partnership. This
includes deductions that are definitely related to certain gross
income of the partnership. See Regulations section 1.861-8(b)
(1). See Schedule K-2, Part II, columns (a) through (e); Part III,
Section 1, columns (a) through (e); Part III, Section 3, columns
(a) through (d); and Part III, Section 5, columns (a) through (f). In
Part III, Section 2, columns (a) through (e), some partnership
assets may be characterized by source and separate category
according to the partnership. This includes certain assets that
attract directly allocated interest expense under Temporary
Regulations sections 1.861-10T(b) and (c). See Temporary
Regulations section 1.861-10T(d)(2).
Box 12. Other international items. If the partnership has
transactions, income, deductions, payments, or anything else
that is impacted by the international tax provisions of the Code
and such events aren’t otherwise reported on this part or other
parts of Schedules K-2 and K-3, report that information on a
statement attached to Schedules K-2 and K-3 and check box 12.
For box 12, file Form 926, Return by a U.S. Transferor of
•
Property to a Foreign Corporation.
Don’t report for box 12:
In Part III, Section 4, in the U.S. and Foreign columns, assign
foreign taxes paid or accrued to a separate category and source.
Form 8804, Annual Return for Partnership Withholding Tax;
•
and
The partner's distributive share of the amounts reported on
Schedule K-2 is reported on equivalent columns in
Schedule K-3, Parts II and III.
Certain gross receipts, gross income, cost of goods sold,
assets, deductions, and taxes are not assigned to a source or
separate category for the partnership. See Partner
determination, later.
Form 8805, Foreign Partner’s Information Statement of
•
Section 1446 Withholding Tax.
These forms are separately filed.
Schedules K-2 and K-3, Parts II and III
Note. This information is relevant to partners computing a
foreign tax credit on Form 1116 or Form 1118. Schedules K-2
6
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Foreign branch category income. Report all gross receipts,
gross income, cost of goods sold, and deductions that are
foreign branch category income. See Regulations section
1.904-4(f). Report all income that would be foreign branch
category income of its partners as if all partners were U.S.
persons that are not pass-through entities. See Schedule K-2,
Part II, column (b); Part III, Sections 1 and 2, column (b); and
Part III, Sections 4 and 5, column (c). The partner's distributive
share of the amounts reported on the Schedule K-2 are reported
on equivalent columns in Schedule K-3, Parts II and III.
Schedule K-3. Any amounts reported on Schedule K-2 as
foreign branch category income should be reported as general
category income on the Schedule K-3, Parts II and III, provided
to foreign individuals and foreign corporations.
Partner determination. In Schedule K-2, Part II, column (f);
Part III, Section 1, column (f); Part III, Section 3, lines 1 and 2,
column (e); and Part III, Section 5, column (g), enter the gross
income, income adjustments, and gross receipts of the
partnership that are required to be sourced by the partner. This
includes income from the sale of most personal property other
than inventory, depreciable property, and certain intangible
property sourced under section 865. This also includes certain
foreign currency gain on section 988 transactions. See the
instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax
Credit for Individuals, for additional details. In Schedule K-2, Part
II, column (f); and Part III, Section 3, lines 3 and 4, column (e),
include deductions that are allocated and apportioned by the
partner. This includes most interest expense and R&E expense.
See Regulations sections 1.861-9(e) and 1.861-17(f). In
Schedule K-2, Part III, Section 2, column (f), enter the assets that
are assigned to a source and separate category by the partner.
In Schedule K-2, Part III, Section 4, in the Partner column, enter
the foreign taxes that are assigned to a source of income by the
partner. This includes taxes imposed on certain sales income.
The partner's distributive share of the amounts reported on
Schedule K-2 are reported in equivalent columns on
Section 901(j) income. Income derived from each sanctioned
country is subject to a separate foreign tax credit limitation. If the
partnership derives such income, enter code "901j" on the line
after “category code.” See Schedule K-2, Part II, Sections 1 and
2, column (e); Part III, Sections 1 and 2, column (e); Part III,
Section 3, column (d); and Part III, Sections 4 and 5, column (f).
The partner's distributive share of the amounts reported on
Schedule K-2 are reported in equivalent columns on
Schedule K-3, Parts II and III.
Schedule K-3, Parts II and III. See the Instructions for Form 1118
for the potential countries to be listed with the section 901(j)
category of income.
Schedule K-2, Part II, and Schedule K-3, Part II
(Foreign Tax Credit Limitation)
Section 1. Lines 1 Through 24. Total Gross Income
Note. As of the date of these instructions, section 901(j) is the
only category reported on Part II, Sections 1 and 2, column (e);
Part III, Sections 1 and 2, column (e); and Part III, Section 5,
column (f).
Form 1118, Schedule A, requires a corporation to separately
report certain types of gross income and gross receipts by
source and separate category. Separate reporting is required
because each type of gross income and gross receipts has a
different sourcing rule. See sections 861 through 865 (and
section 904(h) and, in some cases, U.S. income tax treaties).
Schedules K-2 and K-3, Part II, Section 1, generally follow the
separately reported types of gross income and gross receipts on
Schedule A. Individuals must follow the same sourcing rules, but
Form 1116 only requires reporting of total gross income from
foreign sources by separate category.
Section 951A category income. Section 951A category
income is any amount of global intangible low-taxed income
(GILTI) includible in gross income under section 951A (other
than passive category income). (Section 951A category income
doesn’t include passive category income.) If the partnership
pays or accrues tax on the receipt of a distribution of PTEP
assigned to the reclassified section 951A PTEP group or section
951A PTEP group, these taxes must be assigned to section
951A category income.
The U.S. person completing Form 8865 will enter code
"951A" on Part III, Section 4, column (b). This code isn’t utilized
in other portions of Parts II and III.
So, those required to file Form 1116 will report line 24 by
country on their Form 1116, Part I, line 1a. Section 1 also
generally follows the types of gross income and gross receipts
separately reported on Form 8865, Schedule K.
Income resourced by treaty. If a sourcing rule in an
applicable income tax treaty characterizes any U.S. source
income as foreign source, and there is an election to apply the
treaty, the income will be treated as foreign source. This
category applies if the partnership pays or accrues foreign taxes
on receipt of a distribution of PTEP that is sourced from an
annual PTEP account that corresponds to the separate category
relating to U.S. source income included under section 951(a)(1)
and resourced as foreign source income under a treaty.
For each line, report the total for each country in column (g).
Country code. Forms 1116 and 1118 require the taxpayer to
report the foreign country or U.S. territory for which the gross
income and gross receipts are sourced. On lines 1 through 24,
for each gross income and gross receipts item, enter on a
separate line (A, B, or C) the two-letter code from the list at
IRS.gov/CountryCodes for the foreign country or U.S. territory
within which the gross income and gross receipts are sourced. If
a type of income is sourced from more than three countries,
attach a schedule with the information required on Schedules
K-2, Part II, and Schedule K-3, Part II, for that type of income.
The designations below are only relevant for Part III, Section
4, column (f).
Code “RBT PAS.” If an applicable income tax treaty
characterizes any U.S. source passive category income as
foreign source passive category income, and there is an election
to apply the treaty, enter code “RBT PAS.”
If income is U.S. source, enter “US.” Do not enter “various” or
“OC” for the country code.
Code “RBT GEN.” If an applicable income tax treaty
characterizes any U.S. source general category income as
foreign source general category income, and there is an election
to apply the treaty, enter code “RBT GEN.”
Note. In Part II, column (f), enter the code “XX” if the country or
U.S. territory for which the gross income and gross receipts are
sourced by the ultimate non-pass-through entity partner and the
filer can’t determine the source. However, don’t enter the code
“XX” in Part II, column (f), if an income tax of at least 10% of the
gain derived from the sale is actually paid to a foreign country for
that gain. See sections 865(e) and 865(g). Instead, enter in Part
II, column (f), the foreign country to which the partnership paid
the income tax equal to at least 10% of the gain.
Code “RBT 951A.” If an applicable income tax treaty
characterizes any U.S. source section 951A category income as
foreign source section 951A category income, and there is an
election to apply the treaty, enter code “RBT 951A.”
7
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Each gross income and gross receipts item (for example,
sales vs. interest income) may have different countries listed on
A, B, C, etc., given that the partnership might not have sales
income and interest income, for example, from the same country.
Line 24 should sum each country’s total income reported on Part
II, regardless of the line on which such income is reported,
whether A, B, C, etc.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory regarding
RICs and section 863(b). See the instructions for Forms 1116
and 1118 for these exceptions that apply in completing the
Schedules K-2 and K-3, Parts II and III. Don’t enter a foreign
country or U.S. territory (to report on a country-by-country basis)
for lines 16 through 18.
Example 3. Table 1
Short- term capital
gains/losses
Total
$900
U.S. source
$1,000
$400
Passive category
(France)
Passive category
(Canada)
($300)
($200)
Passive category
(Halti)
These amounts are reported on Schedule K-2, Part II, Section
11, as follows.
Note. Schedules K-2 and K-3 request that gross income and
gross receipts be reported by country or U.S. territory because
such information is requested on Forms 1116 and 1118. Income
and taxes are reported by country on the Forms 1116 and 1118
so that the IRS may initially evaluate whether taxpayers are
claiming credits for compulsory payments to foreign
Example 3. Table 2
(a) U.S.
source
(b) Foreign
source
passive
governments.
Example 2. In Year 1, FP, a foreign partnership, has
employees who perform services in Country X and Country Y. FP
earns $25,000 of general category services income, $10,000 for
Country X and $15,000 for Country Y. The two-letter code for
Country X is XX and the two-letter country code for Country Y is
YY. The U.S. person filing Form 8865 makes the following entries
on the first two lines of Schedule K-2, Part II, line 2.
Line 11
A US
B FR
$1,000
$400
C CA
D HA
($300)
($200)
Example 2 Table
Line 12. Net long-term capital gain. Don’t include gains
reported on lines 13, 14, and 15 on line 12.
Description
(d)
Line 13. Collectibles (28%) gain. Report collectibles gain on
A
B
XX
YY
$10,000
$15,000
line 13 and not line 12.
Line 14. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 14 and not on line 15, but
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.
Lines 3 and 4. Rental income. These lines are reported
separately because they are reported separately on Form 8865,
Schedule K. The sourcing rule may be the same for both types of
rental income.
Line 15. Net section 1231 gain. Report net section 1231 gain
on line 15 and not on line 12 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 14.
Lines 7 and 8. Ordinary dividends and qualified dividends.
Enter only ordinary dividends on line 7 and only qualified
dividends on line 8.
Lines 16 and 46. Section 986(c) gain and loss. Report the
partnership’s share of a lower-tier pass-through entity’s section
986(c) gain or loss. This isn’t reported as a net amount but rather
total section 986(c) gains for the year are reported on line 16.
Total section 986(c) losses for the year are reported on line 46.
Note. The amount of distributions which are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn’t determined by the partnership and so isn’t taken into
account for purposes of determining the ordinary dividends to be
entered on line 7 or the qualified dividends to be entered on
line 8.
Note. Don’t figure or report foreign currency gain or loss under
section 986(c) for distributed PTEP sourced from an annual
PTEP account of a person other than the partnership (for
example, a partner).
Lines 11 through 15 and 27 through 30. Capital gains and
losses. These lines generally match the types of gains and
losses reported separately on Form 8865, Schedule K. Further,
section 904(b)(2)(B) contains rules regarding adjustments to
account for capital gain rate differentials (as defined in section
904(b)(3)(D)) for any tax year.
Lines 17 and 47. Section 987 gain and loss. The source of
section 987 gain or loss is generally determined by reference to
the source of the income or asset giving rise to such gain or loss.
It’s also possible to obtain section 987 gain or loss information
from Form 8858. This isn’t reported as a net amount but rather
total section 987 gains for the year are reported on line 17. Total
section 987 losses for the year are reported on line 47.
Example 3. Part II and III: capital gains and losses.
Partnership has the following amounts for the tax year 2023.
Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer
8
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
partner, the section 988 gain and loss would be reported in
column (f).
certain exceptions, and included in column (f). See Temporary
Regulations section 1.861-9T(e)(1).
Interest expense incurred by certain individuals, estates, and
trusts is characterized based on the categories of interest
expense in sections 163 and 469: active trade or business
interest, investment interest, or passive activity interest, adjusted
for any interest expense directly allocated under Temporary
Regulations section 1.861-10T. See Regulations section
1.861-9T(d). The amounts in each category of interest expense
are reported on lines 41 through 43. See the Partnership
Instructions for Schedules K-2 and K-3 (Form 1065) for an
example. Also see the Partnership Instructions for Schedules
K-2 and K-3 (Form 1065) for instances when interest expense
may reduce passive category income or income in other
categories and an attachment may be necessary. If the
partnership's only partners are corporate partners, do not report
the partnership’s interest expense by the categories of interest
expense in sections 163 and 469. All such interest expense may
be reported as business interest expense on line 41.
Line 20. Other income. Attach a statement to both Schedules
K-2 and K-3 describing the amount and type of other income.
The statement must conform to the format of Part II.
Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then, add the gross income
on lines 1 through 23 by country or U.S. territory and enter the
total by country in rows A, B, and C (and additional rows if more
than three countries). The sum of the amounts in rows A, B, C,
etc., doesn’t need to equal the amount on line 24 given that not
every gross income amount is required to be reported by
country.
Line 28. Net long-term capital loss. Don’t include losses
reported on line 29.
Line 29. Collectibles loss. Report collectibles loss on line 29
and not on line 28.
Exception. See Regulations sections 1.861-9(e)(8) and (9)
for a special rule for partnership loans. See also the instructions
for box 10 of Part I.
Section 2. Lines 25 Through 54. Total Deductions
Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
type of deduction may be allocated and apportioned according
to a different methodology. See, for example, Regulations
sections 1.861-8 through -20 and Temporary Regulations
sections 1.861-8T and -9T. For purposes of allocating and
apportioning expenses, in general, a partner adds the
distributive share of the partnership's deductions to its other
deductions incurred directly by the partner. See Regulations
section 1.861-8(e)(15). Generally, Section 2 follows the
separately reported types of deductions and losses on Form
1118, Schedule A. Individuals must generally follow the same
expense allocation and apportionment rules, but Form 1116 only
requires separate reporting of certain deductions by separate
category. See Form 1116, Part I, lines 2 through 5. Generally,
Section 2 also corresponds to the deductions separately
reported on Form 8865, Schedule K.
Note. Interest expense is always included on lines 39 through
43 and not on other lines.
Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of foreign
taxes that are not creditable but deductible.
Note. Foreign taxes that are creditable (even if a partner
chooses to deduct such taxes) are not reported as expenses on
Part II. Creditable taxes are reported on Part III, Section 4.
Lines 49 and 50. Other deductions. Attach to the Schedules
K-2 and K-3 a statement describing the amount and type of
other deductions. The statement must conform to the format of
Part II.
Schedule K-2, Part III, and Schedule K-3, Part III
(Other Information for Preparation of Form 1116
or 1118)
Line 32. R&E expenses. In general, R&E expenses are
allocated and apportioned by the partner and reported in column
(f). See Regulations section 1.861-17(f). R&E expenses, as
described in section 174, are ordinarily definitely related to gross
intangible income reasonably connected with relevant broad
product categories of the taxpayer and are allocable to gross
intangible income as a class related to such product categories.
The product categories are determined by reference to the
three-digit classification of the Standard Industrial Classification
Section 1. R&E Expenses Apportionment Factors
This information is relevant to partners to allocate and apportion
its R&E expense for foreign tax credit limitation purposes.
A Form 8865 filer isn’t required to complete Section 1 of Part
III unless either (a) the partnership incurs R&E expense; or (b)
the partner is expected to license, sell, or transfer its intangible
property to the partnership (as provided in Regulations section
1.861-17(f)(3)).
Line 38. Charitable contributions. Charitable contribution
deductions are apportioned solely to U.S. source gross income.
See Regulations section 1.861-8(e)(12). So, this deduction
should be reported in column (a).
Deductible R&E expenses, as described in section 174, are
ordinarily definitely related to gross intangible income
reasonably connected with relevant broad product categories of
the taxpayer and are allocable to gross intangible income as a
class related to such product categories. The product categories
are determined by reference to the three-digit classification of
the SIC code. In general, R&E expenses are apportioned based
on gross receipts.
Lines 39 and 40. Interest expense specifically allocable un-
der Regulations sections 1.861-10 and -10T. Apart from
interest expense entered on line 39, enter on line 40 interest
expense that is directly allocable under Temporary Regulations
section 1.861-10T to income from specific partnership property.
Such interest expense is treated as directly allocable to income
generated by such partnership property. See Temporary
Regulations section 1.861-9T(e)(1).
R&E expenses are allocated and apportioned by the partner.
See Regulations section 1.861-17(f)(1). This requires that Form
8865 reports to its partners the gross receipts by SIC code
according to source and separate category of income. This also
requires that the Form 8865 reports the amount of R&E expense
performed in the United States and outside the United States to
Lines 41 through 43. Other interest expense. A partner's
distributive share of a partnership's interest expense that isn’t
directly allocable to income from specific partnership property is
generally allocated and apportioned by the partner, subject to
9
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
apply exclusive apportionment. See Regulations section
1.861-17(f)(2).
Note. Attach to Form 1065 a second Part III, Section 2, if the
filer reports both the tax book value and the alternative tax book
value of its assets.
Column (e). As of the date of these instructions, the only
separate category that could be included in column (e) is the
section 901(j) category of income. See the Instructions for Form
1118 for the potential countries to be listed with the section
901(j) category of income.
Column (b). Characterize the pro rata share of the partnership
assets that give rise to foreign branch category income as assets
in the foreign branch category. See Regulations section
1.861-9(e)(10).
Line 1. Enter the gross receipts by SIC code for each grouping.
Such gross receipts include both the partnership's gross receipts
and certain other parties' gross receipts. See Regulations
sections 1.861-17(d)(3) and (4). Sales of parties controlled by
the partnership should be included on line 1 if such controlled
parties can reasonably be expected to benefit from the R&E
expense connected with the product categories. This includes
sales that benefit from the partner's R&E expenses if licensed
through the partnership. Sales of uncontrolled parties are also
taken into account if such sales involve intangible property that
was licensed or sold to the uncontrolled party if the uncontrolled
party can reasonably be expected to benefit from the R&E
expense.
Column (e). As of the date of these instructions, the only
separate category that could be included in column (e) is the
section 901(j) category of income. See the Instructions for Form
1118 for the potential countries to be listed with the section
901(j) category of income.
Line 1. On Schedule K-2, report the average of the
beginning-of-year and end-of-year inside bases in the
partnership’s total assets. See Regulations section 1.861-9(g)(2)
(i)(A). On Schedule K-3, report the partner’s distributive share of
the assets reported on Schedule K-2.
Line 2. On Schedule K-2, report the partnership’s average of
the beginning-of-year and end-of-year inside bases adjustments
under sections 734(b) and 743(b). On Schedule K-3, report the
partner’s distributive share of the adjustments reported on
Schedule K-2.
Line 2. Report the amount of R&E expense related to activity
performed in the United States and the amount of R&E expense
related to activity performed outside the United States by SIC
code. The total of the amounts on Schedule K-2, Part III, Section
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the
total of the amounts on Schedule K-3, Part III, Section 1, line 2,
must equal Schedule K-3, Part II, line 32.
Lines 3 and 4. On Schedule K-2, report reductions in the
partnership's asset values to reflect the partnership's directly
allocable interest under Regulations section 1.861-10(e) and
Temporary Regulations section 1.861-10T. See also Temporary
Regulations section 1.861-9T(e)(1). On Schedule K-3, report the
partner’s distributive share of the reduction in asset values
reported on Schedule K-2.
Note. Line 2 isn’t reported according to source or separate
category.
Line 5. On Schedule K-2, report the average value of
partnership assets excluded from the apportionment formula.
See section 864(e)(3). On Schedule K-3, report the partner’s
distributive share of the excluded assets reported on
Schedule K-2.
Note. The SIC code for line 2B(i) doesn’t need to be the same
SIC code for line 2A(i).
Section 2. Interest Expense Apportionment
Factors
Line 6. Individual partners who are general partners or who are
limited partners with an interest in the partnership of 10% or
more follow the same rules as corporate partners whose interest
in the partnership is 10% or more except that their interest
expense must be apportioned according to the interest expense
classifications under sections 163 and 469. See Regulations
section 1.961-9T(d). This includes reporting the assets
according to such classifications. If the partnership has no such
partners, don’t complete Schedule K-2, Part III, Section 2, lines
6b through d; or Schedule K-3, Part III, Section 2, lines 6b
through d. Include the total amount on line 6a.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
and 6d if the partnership has partners other than corporate
partners. See the Partnership Instructions Schedules K-2 and
K-3 (Form 1065) for an example.
This information is relevant to a partner to allocate and apportion
interest expense for foreign tax credit limitation purposes.
Complete this Section 2 only if the partnership or the partners
have interest expense or stewardship expense.
Stewardship expenses. In the case of the partner’s
stewardship expenses incurred to oversee the partnership, the
partnership's value is determined and characterized under the
asset method in Regulations section 1.861-9 (taking into
account any adjustments under sections 734(b) and 743(b)).
See Regulations section 1.861-8(e)(4)(ii)(C). So, the reporting
below for Part III, Section 2, for interest expense apportionment
factors generally applies to the partner’s stewardship expense
apportionment.
Schedule K-3. If the partnership's partners aren’t limited to
corporate partners, when completing Schedule K-3, Part III,
Section 2, for the corporate partners with an interest of 10% or
more in the partnership, don’t complete lines 6b through d.
Include the total distributive share on line 6a.
For corporate partners with an interest in the partnership of
10% or more, interest expense, including the partner's
distributive share of partnership interest expense, is apportioned
by reference to the partner's assets, including the partner's pro
rata share of partnership assets. See Regulations section
1.861-9(e)(2). Interest expense is apportioned based on the
average value of assets. See Regulations section 1.861-9(g)(2)
(i)(A). A taxpayer can use either the tax book value or the
alternative book value of its assets. See Regulations section
1.861-9(i). Under both methods, the partner uses the
Lines 7 and 8. The amounts reported on lines 7 and 8 are
subsets of the amounts reported on line 6 representing the value
of stock held by the partnership in certain foreign corporations. In
determining its foreign tax credit limitation, a partner should
disregard interest expense that is “properly allocable'' to stock of
a 10%-owned foreign corporation that has been characterized as
a section 245A asset. See section 904(b)(4) and Regulations
section 1.904(b)-3(a)(1)(ii). The amount of properly allocable
deductions is determined by treating the section 245A subgroup
for each separate category as a statutory grouping for purposes
partnership's inside basis in its assets, including adjustments
required under sections 734(b) and 743(b). See Regulations
sections 1.861-9(e)(2) and (3). When reporting the basis in an
asset which is stock in nonaffiliated 10%-owned corporations,
adjust such amount for earnings and profits (E&P). See
Regulations section 1.861-12(c)(2)(i)(A).
10
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
of allocating and apportioning interest deductions on the basis of
assets. Assets in a section 245A subgroup only include stock of
a specified 10%-owned foreign corporation that has been
characterized as a section 245A asset.
The stock is characterized as a section 245A asset to the
extent it generates income that would generate a dividends
received deduction under section 245A if distributed. This
doesn’t include income that is included as GILTI, subpart F
income, or a section 951(a)(1)(B) inclusion or income described
in section 245(a)(5) (which gives rise to a dividends received
deduction under section 245 instead of section 245A).
In the case of a specified 10%-owned foreign corporation that
isn’t a CFC, all of the value of its stock is potentially in a section
245A subgroup because the stock generally generates
dividends eligible for the section 245A deduction (and cannot
generate an inclusion under section 951(a)(1) or 951A(a)) if the
partner meets the requirements for eligibility. See Regulations
section 1.904(b)-3(c)(2). However, because there may not be
information to determine if a partner is eligible for a section 245A
deduction (for example, due to tiered ownership), the partner
must determine to what extent the stock is treated as an asset in
a section 245A subgroup.
For a partnership-owned specified 10% foreign corporation
that isn’t a CFC, report on line 7, columns (a) through (e), the
total value of the stock in all such foreign corporations. The value
of the stock is the partnership's basis in the stock adjusted to
take into account the E&P of the foreign corporations as
explained in Regulations section 1.861-12(c)(2). Attach to the
Schedules K-2 and K-3 a statement with the following
information for each foreign corporation for which adjusted basis
is reported on line 7.
This information is relevant to partners to allocate and
apportion their FDII deduction under section 250(a)(1)(A) for
foreign tax credit limitation purposes. The deduction is definitely
related and allocable to the class of gross income included in the
partner’s foreign-derived deduction eligible income (FDDEI) (as
defined in section 250(b)(4)) and is apportioned within the class,
if necessary, ratably between the statutory grouping (or among
the statutory groupings) of gross income and the residual
grouping of gross income based on the relative amounts of
FDDEI in each grouping. See Regulations section 1.861-8(e)
(13). If the partner is a member of a consolidated group, see
Regulations section 1.861-14(e)(4). Accordingly, this section
requires information that its partners use to determine the source
and separate category of its income such that partners may
allocate and apportion the FDII deduction under section 250(a)
(1)(A) for purposes of the foreign tax credit limitation.
Lines 1 and 2. Report the partnership’s foreign-derived gross
receipts and cost of goods sold, respectively, by source and
separate category.
Lines 3 and 4. Report the partnership’s deductions allocable
to foreign-derived gross receipts and other partnership
deductions apportioned to foreign-derived gross receipts,
respectively. See Part IV, Section 2, lines 11 and 12. Although
these deduction amounts are necessary to figure the partner’s
FDII deduction, once this amount is determined, the actual FDII
deduction itself is allocated and apportioned as described in
Regulations section 1.861-8(e)(13).
Column (d). As of the date of these instructions, the only
separate category that could be included in column (d) is the
section 901(j) category of income. See the Instructions for Form
1118 for the potential countries to be listed with the section
901(j) category of income.
Name of foreign corporation.
•
EIN or reference ID number. Do not enter “FOREIGNUS” or
•
“APPLIED FOR.”
Section 4. Foreign Taxes
Percentage of voting and value of stock owned by the
•
partnership in such foreign corporation.
Note. Don’t complete this Section 4 if the partnership doesn’t
Value of the stock in such corporation included in each of the
•
pay or accrue foreign taxes.
groupings on lines 6b through 6d (identify separately each of
those groupings).
In Part III, Section 4, assign foreign taxes paid or accrued
(including on U.S. source income) to a separate category and
source. Include taxes paid or accrued to foreign countries or to
U.S. territories.
If the specified 10%-owned foreign corporation is a CFC, a
portion of the value of stock in each separate category and in the
residual grouping for U.S. source income is subdivided between
a section 245A and non-section 245A subgroup under the rules
described in Regulations section 1.861-13(a)(5). However,
because there will generally not be information to apply the stock
characterization rules described in Regulations section
1.861-13(a)(5), the partner must apply those rules to
characterize the stock.
For partnership-owned CFCs, report on line 8, column (f), the
total value of its stock in all such foreign corporations. The value
of the stock is the partnership's inside basis in the stock adjusted
to take into account the E&P of the foreign corporations as
explained in Regulations section 1.861-12(c)(2). Attach to the
Schedules K-2 and K-3 a statement with the following
information for each foreign corporation for which basis is
reported on line 8.
Attachment. As previously mentioned in the instructions for
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for
distributive share), for each of the amounts listed in lines 1
through 3, attach to the Schedules K-2 and K-3 a statement
reporting the following information.
The dates on which the taxes were paid or accrued.
The exchange rates used.
•
•
•
The amounts in both foreign currency and U.S. dollars. See
section 986(a).
Column (a). Enter the code for the type of tax.
Name of foreign corporation.
•
EIN or reference ID number. Do not enter “FOREIGNUS” or
•
“APPLIED FOR.”
Percentage of voting and value of stock owned by the
•
partnership in such foreign corporation.
Value of the stock in such corporation.
•
Section 3. Foreign-Derived Intangible Income
(FDII) Deduction Apportionment Factors
Note. Don’t complete this Section 3 if there are no domestic
corporate partners (whether direct or indirect).
11
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Codes for Types of Tax
Line 1. Enter in U.S. dollars the total foreign taxes (described in
section 901 or section 903) that were paid or accrued by the
partnership (according to its method of accounting for such
taxes). Don’t reduce the amount that you report on line 1 by the
reductions reported on line 2. Don’t report redetermined taxes on
line 1. Report such taxes on line 3.
Code
Type of Tax
WHTD
WHTP
Withholding tax on dividends
Withholding tax on distributions of
PTEP
Note. Don’t include on line 1 any foreign taxes not creditable but
WHTB
WHTR
Withholding tax on branch
remittances
deductible as reported on Part II, Section 2, line 45.
If the partnership uses the cash method of accounting, check
the "Paid" box and enter foreign taxes paid during the tax year on
line 1. Report each partner's share on Schedule K-3, Part III,
Section 3, line 1.
If the partnership uses the accrual method of accounting,
check the "Accrued" box and enter foreign taxes accrued on
line 1. Report each partner's share on Schedule K-3, Part III,
Section 4, line 1.
Withholding tax on rents, royalties,
and license fees
WHTI
ECI
Withholding tax on interest
Taxes paid or accrued to foreign
countries or U.S. territories on certain
effectively connected income
OTHS
OTHR
OTH
Other foreign taxes paid or accrued
on sales income
Note. Check only one box “Paid” or “Accrued” depending on the
method of accounting the partnership has to take into account
foreign taxes.
Enter on a separate line (that is, after A, B, and C), taxes paid
or accrued to each country. Enter the two-letter code from the list
country code.
Exceptions The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory regarding
RICs and section 863(b). These exceptions apply as well to
reporting of taxes in this section.
Example 4. Part III, Section 4: multiple country sources:
foreign taxes The facts are the same as in Example 2, earlier.
FP uses the cash method of accounting and pays taxes of
$1,000 and $3,000 to Countries XX and YY, respectively. The
U.S. person completes Part III, Section 4, line 1, as follows.
Other foreign taxes paid or accrued
on services income
Other foreign taxes paid or accrued
If there are multiple types of tax for the same country,
generate multiple alpha rows for the same country, one row for
each type of tax. For example, see below.
Codes for Multiple Types of Tax
Description
(a)
Type of tax
A
B
AA
BB
WHTD
OTH
Column (b). Taxes assigned to section 951A category.
Taxes assigned to section 951A category income are taxes paid
or accrued on distributions of PTEP assigned to the reclassified
section 951A PTEP and section 951A PTEP groups. This might
not be able to be completed due to lack of information regarding
the treatment of the current year distributions.
Example 4 Table
(a)
(e)
Direct (section
901/903)
foreign taxes
Type of tax
Foreign
Paid
Column (f). Other category.
Foreign taxes paid or accrued to sanctioned countries.
No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries.
A
B
XX
YY
OTHR
OTHR
1,000
3,000
Foreign taxes related to PTEP resourced by treaty. If the
partnership pays or accrues foreign taxes on receipt of a
distribution of PTEP that is sourced from an annual PTEP
account that corresponds to the separate category relating to
U.S. source income included under section 951(a)(1) and
resourced as foreign source income under a treaty, such taxes
are included in column (f).
Line 2. Enter on line 2 a negative number for the sum of the
taxes in the following categories.
A. Taxes on foreign mineral income (section 901(e)).
B. Reserved.
C. Taxes attributable to boycott operations (section 908).
D. Reduction in taxes for failure to timely file (or furnish all of
the information required on) Form 8865 (section 6038(c)).
E. Foreign income taxes paid or accrued during the current
tax year for splitter arrangements under section 909.
F. Foreign taxes on foreign corporate distributions. For
example, report taxes on dividends eligible for a deduction
under section 245A and ineligible for credit under section
245A(d). Also, include taxes on a distribution of PTEP
assigned to the following PTEP groups: reclassified section
965(a) PTEP, reclassified section 965(b) PTEP, section
965(a), and section 965(b) PTEP, a portion of which isn’t
creditable. It may not be possible to determine the amount of
a distribution that is attributable to non-previously taxed E&P
or PTEP for which a foreign tax credit may be partially or
entirely disallowed. However, it’s important to track this
amount as a tax on a distribution.
On the line after "category code," enter one of the following
codes.
Code “RBT PAS.” If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
category income, and the partner elected to apply the treaty,
enter code “RBT PAS.”
Code “RBT GEN.” If an applicable income tax treaty treats any
U.S. source general category income as foreign source general
category income, and the partner elected to apply the treaty,
enter code “RBT GEN.”
Code “RBT 951A.” If an applicable income tax treaty treats any
U.S. source section 951A category income as foreign source
section 951A category income, and the partner elected to apply
the treaty, enter code “RBT 951A.”
12
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
G. Other. Attach a statement to the Schedules K-2 and K-3
indicating the reason for the reduction.
There is no need to report the amounts on line 2 by country.
contested foreign income tax. If it’s unknown whether the
partners are corporations, individuals, estates, or trusts, provide
the information necessary for the partners to complete both
Schedule L (Form 1118), Parts I and II (as applicable); and
Schedule C (Form 1116) Parts I and II (as applicable).
Partnerships must also file a statement each year for which
there are one or more contested liabilities outstanding or in
which a contested tax is resolved that includes information
necessary for partners to complete both Schedule L (Form
1118), Part V, and Schedule C (Form 1116), Part V.
Line 3. Enter in U.S. dollars the change in foreign tax as a
result of a foreign tax redetermination. See section 905(c) and
Regulations sections 1.905-3 through -5. If the amount is less
than the original foreign tax, report the change as a negative
amount. If the amount is more than the original foreign tax, report
the change as a positive amount.
Note. Payment of additional foreign taxes that relate to an
earlier tax year by a partnership that uses the cash method of
accounting doesn’t result in a foreign tax redetermination. See
Regulations section 1.905-3(a). Such amounts should be
reported on line 1 as foreign taxes paid by the partnership in the
current year. Report the U.S. tax year to which the foreign tax
relates. This would be the U.S. tax year that includes the close of
the foreign tax year to which the tax relates. Report the date on
which the tax was paid. If there is more than one date tax is paid,
enter one of the dates paid on the schedule itself and then attach
to the Schedules K-2 and K-3 a statement including all of the
information reported on the schedule with the other dates paid.
If there is more than one redetermination in a year for different
countries, report such redeterminations on separate lines. Enter
Similarly, if there is more than one redetermination in a year for
the same country, but the redeterminations are related to
different years, report such redeterminations on separate lines.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory for RICs
and section 863(b). Don’t enter “various” or “OC” for the country
code.
In addition, if the direct or indirect partners are corporations,
attach a statement that includes the information on Schedule L
(Form 1118), Parts I and II, as applicable, for each foreign tax
redetermination. If the direct or indirect partners are individuals,
estates, or trusts, attach a statement that includes the
information on Schedule C (Form 1116), Parts I and II, as
applicable, for each foreign tax redetermination. If the indirect
partners are unknown, attach a statement that includes both the
information on Schedule L (Form 1118), Parts I and II, as
applicable; and Schedule C (Form 1116), Parts I and II, as
applicable.
Contested taxes. In general, a contested foreign income tax
liability doesn’t accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
contested foreign income tax liability isn’t a reasonable
approximation of the final foreign income tax liability and so isn’t
considered an amount of tax paid for purposes of section 901
until the contest is resolved. So, a partnership generally doesn’t
take into account a contested liability as a creditable foreign tax
expenditure until the contest is resolved and the liability has
been paid. See Regulations section 1.905-1(f)(1). However, to
the extent that a partnership has remitted a contested foreign
income tax liability to a foreign country, partners may elect to
claim a provisional foreign tax credit for its distributive share of
such contested foreign income tax liability. See Regulations
section 1.905-1(f)(2).
Section 5. Other Tax Information
This information is relevant to partners computing a foreign tax
credit.
Column (b). Don’t report any amounts in this column.
Column (f). As of the date of these instructions, this column
will only include the section 901(j) category and the countries
relevant to that category. See the Instructions for Form 1118 for
the potential countries to be listed with the section 901(j)
category of income. No credit is allowed for taxes paid or
accrued to a country described in section 901(j). However, a
deduction is generally allowed for a tax described in section
901(j).
Line 1. For partnerships other than publicly traded partnerships
(PTPs), report the total of all partners’ shares of the net positive
income adjustments resulting from all section 743(b) basis
adjustments. Net positive income adjustments from all section
743(b) basis adjustments means the excess of all section 743(b)
adjustments allocated to the partner that increase the partner's
taxable income over all section 743(b) adjustments that
decrease the partner's taxable income. Attach to the Schedules
K-2 and K-3 a statement showing each section 743(b) basis
adjustment making up the total and identify the assets to which it
relates and the separate category and source of the income
generated by the assets. Make sure to include the class of gross
income or deduction, for example, sales income, interest
income, or depreciation deduction. You may group these section
743(b) basis adjustments by asset category or description in
cases where multiple assets are affected if the assets generate
the same separate category and source of income. The section
743(b) positive income adjustments should be included as
relevant in other parts of the Schedule K-2. For example, the
section 743(b) income adjustments should be reflected as part
of the total depreciation reported on Part II, Section 2.
Line 2. For partnerships other than PTPs, report the total of all
partners' shares of the net negative income adjustment resulting
from all section 743(b) basis adjustments. Net negative income
adjustments from all section 743(b) basis adjustments means
the excess sum of all section 743(b) adjustments allocated to the
partner that decrease the partner’s taxable income over all
section 743(b) adjustments that increase the partner’s taxable
income. Attach to the Schedules K-2 and K-3 a statement
showing each section 743(b) basis adjustment making up the
total and identify the assets to which it relates and the separate
category and source of the income generated by the assets.
Make sure to include the class of gross income or deduction, for
example, sales income, interest income, or depreciation
deduction. You may group these section 743(b) basis
For partnerships that are contesting a foreign income tax
liability with a foreign country, but have remitted all or a portion of
such contested liability, report information about the contested
tax on line 3, and check the “Contested tax” box. In addition,
attach a statement and include information necessary for
partners to complete Form 7204 and Schedule L (Form 1118)
(for direct or indirect corporate partners), or Schedule C (Form
1116) (for direct or indirect individual, trust, or estate partners),
including a description of the contest and a description of the
adjustments by asset category or description in cases where
multiple assets are affected if the assets generate the same
separate category and source of income. The section 743(b)
negative income adjustments should be included as relevant in
other parts of the Schedule K-2. For example, the section 743(b)
income adjustments should be reflected as part of the total
depreciation reported on Part II, Section 2.
13
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
the underlying item of income, gain, deduction, and loss of the
partnership.
Schedules K-2 and K-3, Part IV (Information on
Partners’ Section 250 Deduction With Respect
to Foreign-Derived Intangible Income (FDII))
Section 1. Information To Determine Deduction
Eligible Income (DEI) and Qualified Business
Asset Investment (QBAI) on Form 8993
Note. This information is relevant to partners that figure a
section 250 deduction for FDII on Form 8993. This part is
relevant for a direct domestic corporate partner (other than
REITs, RICs, and S corporations) or a partner which is a
partnership that has a direct or indirect domestic corporate
partner (other than REITs, RICs, and S corporations) that
determines the domestic corporate partner's FDII. If there is
insufficient information, a partner must presume the indirect
partner is a domestic corporate partner or a partnership that has
a direct or indirect domestic corporate partner and the partner
must complete the Schedules K-2 and K-3, Part IV, accordingly.
These schedules are required to be completed if the foreign
partnership has direct or indirect domestic corporate partners,
though the partnership doesn’t have foreign-derived gross
receipts. Even if a partnership has no foreign activities, and so
has no FDDEI as reported in Section 2 of this part, still report the
information required by Sections 1 and 3 of this part so that any
domestic corporate partner can correctly determine its section
250 deduction. For example, a domestic corporate partner would
still need information about the partnership’s qualified business
asset investment (see the instructions for Section I, line 8, of this
part) in such a case to determine its deemed tangible income
return and deemed intangible income. See section 250(b)(2).
Line 1. Net income (loss). This amount may equal Form 8865,
Schedule M-1, line 9, Income (loss).
Line 2a. DEI gross receipts. Enter all gross receipts from
whatever source derived except for amounts included on lines 3
through 7.
Line 2b. DEI cost of goods sold. Enter the amount of cost of
goods sold attributable to the amount on line 2a.
Line 2c. DEI properly allocated and apportioned deduc-
tions. Enter the amount of deductions (including taxes) properly
allocable to the amount on line 2a. See Regulations section
1.250(b)-1(d)(2) for more details. Deductions properly allocable
to gross DEI are determined without regard to sections 163(j),
170(b)(2), 172, 246(b), and 250.
Lines 3 through 7 are exclusions from DEI used to determine
the partner’s DEI.
Line 4. CFC dividends. Enter the amount of any dividend
received from a CFC for which the partner is a U.S. shareholder
as defined under section 951(b).
Section 250 allows a domestic corporation a deduction for its
FDII, and a direct or indirect domestic corporate partner must
take into account certain activities of a partnership in computing
the domestic corporation's FDII. For the treatment of a domestic
corporation that is a partner in a partnership, see Regulations
sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These
instructions generally indicate how to complete Part IV (of both
Schedules K-2 and K-3). However, Schedule K-2 includes the
total of all partners’ amounts and Schedule K-3 includes each
partner’s share.
Enter each amount and total amounts in U.S. dollars.
Determine and report the partner's share of each item of the
partnership contained on this form in accordance with the
partner's distributive share of the underlying item of income,
gain, deduction, and loss of the partnership. Report these
amounts based on the best information available about how its
partners might use this information to determine their FDII
deduction. Certain information may be reported differently to
each partner depending on federal income tax determinations
that the partner makes. Each partner must then calculate its FDII
deduction using Form 8993 including the information reported on
Schedule K-3, Part IV. A partner must obtain any further
necessary information from the partnership to correctly
determine its FDII deduction.
Note. The amount by which distributions are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn’t taken into account for purposes of determining the CFC
dividends to be entered on line 4.
Line 5. Financial services income. Enter the amount of net
financial services income (as defined in section 904(d)(2)(D))
before interest and R&E deductions.
Line 6. Domestic oil and gas extraction income. Enter the
amount of net domestic oil and gas extraction income before
interest and R&E deductions. The term “domestic oil and gas
extraction income” means income described in section 907(c)(1)
determined by substituting “within the United States” for “outside
the United States.”
Line 7. Foreign branch income. Enter the amount of net
foreign branch income before interest and R&E deductions (as
defined in section 904(d)(2)(J)). Report all income that would be
foreign branch income of its partners as if all partners were U.S.
persons.
Line 8. Partnership QBAI. Enter the amount, if any, of the
partnership QBAI.
A domestic corporation’s QBAI is its share of the average of
the aggregate adjusted bases, determined as of the close of
each quarter of the tax year, in certain specified tangible
property. See Regulations section 1.250(b)-2(b). The adjusted
basis is determined by using the alternative depreciation system
under section 168(g) and allocating depreciation deductions for
such property ratably to each day during the period in the tax
year to which such depreciation relates. See Regulations section
1.250(b)-2(e). The specified tangible property is that which is
used in the trade or business of the corporation in the production
of gross income included in the domestic corporation’s gross
DEI and is of a type for which a deduction is allowable under
section 167. See Regulations section 1.250(b)-2(b). If a
domestic corporation holds an interest in one or more
Special rules for determining foreign use apply to transactions
that involve property or services provided to related parties (see
section 250(b)(5)(C) and Regulations section 1.250(b)-6).
For special substantiation requirements under the
regulations, see sections 1.250(b)-3(f), 1.250(b)-4(d)(3), and
1.250(b)-5(e)(4). In all other cases, a taxpayer claiming a
deduction under section 250 will still be required to substantiate
that it is entitled to the deduction even if it isn’t subject to the
specific substantiation requirements contained in the
regulations. See section 6001 and Regulations section
1.6001-1(a). So, the partner must be able to satisfy the general
or special substantiation requirements to be eligible for the
deduction.
partnerships during a tax year (including indirectly through one
or more partnerships that are partners in a lower-tier
As described above, determine the partner's share of each
partnership), the QBAI of the domestic corporation for the tax
year is increased by the sum of the domestic corporation’s
partnership QBAI for each partnership for the tax year. See
item below in accordance with the partner's distributive share of
14
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Regulations section 1.250(b)-2(g)(1). Partnership QBAI is the
sum of the domestic corporation’s proportionate share of the
partnership’s adjusted basis in the property and the domestic
corporation’s partner specific QBAI basis in the property for the
partnership tax year that ends with or within the tax year. See
Regulations section 1.250(b)-2(g)(2). Partnership specified
tangible property means, for a domestic corporation, tangible
property that is used in the trade or business of the partnership,
of a type for which a deduction is allowable under section 167
and used in the production of gross income included in the
domestic corporation’s gross DEI. See Regulations section
1.250(b)-2(g)(5).
If the portion of partnership specified tangible property cannot
be determined (for example, if it isn’t known if property gives rise
to the production of gross income in one of the excluded
categories from DEI that is determined by the partner, which
would cause such property to not be classified as partnership
specified tangible property), then in reporting the amount of a
partner's share of the partnership QBAI, separately state any
information so a direct or indirect domestic corporate partner can
distinguish between the amount of the adjusted bases in a
partnership's tangible property that the domestic corporation
would include in its adjusted bases in the partnership specified
tangible property and the amount of the adjusted bases in the
partnership's tangible property that the domestic corporation
would not include in its adjusted bases in the partnership
specified tangible property.
used to figure the amount of gross FDDEI as defined in
Regulations section 1.250(b)-1(c)(16) for gross FDDEI.
Each place where general property is listed refers to amounts
connected to the sale, lease, exchange, or other disposition of
general property to a foreign person and is for a foreign use as
defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d).
The term “general property” means any property other than
intangible property; a security (as defined in section 475(c)(2));
an interest in a partnership, trust, or estate; or a commodity
described in section 475(e)(2)(A) that isn’t a physical commodity
or a commodity described in sections 475(e)(2)(B) through (D).
See Regulations section 1.250(b)-3(b)(10).
Each place where intangible property is listed refers to
amounts connected to the sale, license, exchange, or other
disposition of intangible property to a foreign person and is for a
foreign use as defined in Regulations sections 1.250(b)-3 and
1.250(b)-4(d)(2).
Each place where services are listed refers to amounts
connected to services that, as established to the satisfaction of
the Secretary, are provided to any person, or for property,
located outside the United States as defined in Regulations
section 1.250(b)-5.
If tangible property was used in the production of DEI and in
the production of income that is non-DEI, then it is considered
dual-use property and treated as specified tangible property in
the same proportion that the amount of the gross income
included in DEI produced for the property bears to the total
amount of gross income produced for the property. See
Example 2 of Regulations section 1.250(b)-2(g)(8) for guidance
on how to calculate the partner adjusted basis. If specified
tangible property is only partially depreciable, then only the
depreciable portion is QBAI. See Regulations section
If a transaction includes both a sales component and a
service component, the transaction is classified as either a sale
or as a service according to the overall predominant character of
the transaction. See Regulations section 1.250(b)-3(d).
For purposes of determining a domestic corporation’s
deductions that are properly allocable to gross FDDEI, the
corporation’s deductions are allocated and apportioned to gross
FDDEI under the rules of Regulations sections 1.861-8 through
1.861-14T and 1.861-17 by treating section 250(b) as an
operative section described in Regulations section 1.861-8(f).
See Regulations section 1.250(b)-1(d)(2).
1.250(b)-2(b).
Example 5. Specified tangible property. X and Y are both
domestic corporations which are partners in FP, a partnership
that holds three types of assets—A, B, and C. All types of assets
are tangible property used in the trade or business of FP and for
which a deduction is allowable under section 167. The
production of income from A assets is DEI for X and Y. Thus, the
A assets are partnership specified tangible property for X and Y,
and FP includes a proportionate amount of the adjusted bases of
all A assets in calculating each partner’s partnership QBAI. The
production of income from B assets is DEI for X. However, for Y,
the production of income from B assets is non-DEI. Thus, the B
assets are partnership specified tangible property for X only, and
FP includes a proportionate amount of the adjusted bases of all
B assets only in calculating X’s partnership QBAI. The C assets
are dual-use property because the production of only part of the
income from the C assets is DEI for X and Y. Thus, the C assets
are partnership specified tangible property for both X and Y, but
FP includes a proportionate amount of the adjusted bases of all
C assets in calculating each partner’s partnership QBAI only in
the proportion that the amount of the gross income included in
DEI produced for the C assets bears to the total amount of gross
income produced for the C assets.
Line 9. Gross receipts. Enter the amount, if any, of the
partnership's foreign-derived gross receipts separately for
aggregate sales of general property, aggregate sales of
intangible property, and aggregate services. Foreign-derived
gross receipts mean gross receipts that are used to figure gross
FDDEI as defined in Regulations section 1.250(b)-1(c)(16).
Line 10. COGS. Enter the amount of cost of goods sold
attributable to the amount(s) on line 9.
For purposes of this form, when figuring FDDEI, cost of goods
sold includes the cost of goods sold to customers, and the
adjusted basis of non-inventory property sold or otherwise
disposed of in a trade or business.
In making that determination, attribute costs of goods sold to
gross receipts using a reasonable method in accordance with
Regulations section 1.250(b)-1(d)(1).
Cost of goods sold must be attributed to gross receipts for
gross DEI or gross FDDEI regardless of whether certain costs
included in cost of goods sold can be associated with activities
undertaken in an earlier tax year (including a year before the
effective date of section 250).
Section 2. Information To Determine
Foreign-Derived Deduction Eligible Income
(FDDEI) on Form 8993
Line 11. Allocable deductions. Enter the amount of the
allocable deductions. See Regulations section 1.250(b)-1(d)(2)
for more details. Enter the amounts of interest and R&E
expenses on lines 13 and 16, respectively. Deductions are
determined without regard to sections 163(j),170(b)(2), 172,
246(b), and 250.
Foreign-derived gross receipts means, for a partnership, gross
receipts of the partnership for the partnership's tax year that are
15
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Column (a). General property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of general property.
Line 14A. Enter the amount of the average of the
beginning-of-year and end-of-year inside bases in the
partnership's total assets. See Regulations section 1.861-9(g)(2)
(i)(A).
Column (b). Intangible property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of intangible property.
Line 14B. Enter the amount of the average of the
beginning-of-year and end-of-year inside bases adjustments
under sections 734(b) and 743(b).
Column (c). Services. Enter the amount of the deductions that
are allocated and apportioned to gross FDDEI from all services.
Lines 14C and 14D. Enter the amount of the reductions in the
partnership's asset values to reflect the partnership's directly
allocable interest under Regulations section 1.861-10(e) and
Temporary Regulations section 1.861-10T. See also Temporary
Regulations section 1.861-9T(e)(1).
Line 12. Other apportioned deductions. Enter all other
apportioned deductions that relate to gross FDDEI that are not
otherwise included on lines 11, 13, and 16. If a deduction
doesn’t bear a definite relationship to a class of gross income
constituting less than all of gross income, it shall ordinarily be
treated as definitely related and allocable to all of the taxpayer's
gross income, including gross DEI and gross FDDEI, except
where otherwise directed in the regulations.
Line 14E. Enter the amount of the average value of assets
excluded from the apportionment formula. See section 864(e)
(3).
Lines 15 and 16. R&E expenses apportionment factors.
These lines require information that a partner will use to allocate
and apportion its R&E expense for FDII purposes. Lines 15 and
16 aren’t required to be completed unless either (a) the
partnership incurs R&E expense; or (b) the partner is expected
to license, sell, or transfer its intangible property to the
Section 3. Other Information for Preparation of
Form 8993
Line 13. Interest deduction. The term “interest” refers to the
gross amount of interest expense incurred by a partnership in a
given year. Generally, interest expense includes any expense
that is currently deductible under section 163 (including original
issue discount), and interest equivalents. See Regulations
section 1.861-9(b) for the definition of interest equivalents and
Temporary Regulations section 1.861-9T(c) for section that
disallow, suspend, or require the capitalization of interest
deductions. Include excess business interest expense
determined under section 163(j)(4) on this line. Under
Regulations section 1.250(b)-1(d)(2)(ii), deductions are
determined without regard to section 163(j).
partnership (as provided in Regulations section 1.861-17(f)(3)).
R&E expenses deducted, or amortized and deducted, under
section 174 are definitely related to all gross intangible income
reasonably connected with relevant broad product categories of
the taxpayer and are allocable to all items of gross intangible
income as a class related to such product categories. The
product categories are generally determined by reference to the
three-digit SIC code. R&E expenses are apportioned between
the statutory and residual groupings based on an analysis of the
taxpayer’s gross receipts from certain sales, leases, licenses,
and services. See Regulations section 1.861-17. The exclusive
apportionment rule in Regulations section 1.861-17(c) doesn’t
apply for purposes of apportioning R&E to gross DEI and gross
FDDEI.
R&E expenses are allocated and apportioned by the partner.
This requires the reporting to the partners of the gross receipts
related to certain income within the statutory and residual
groupings within a SIC code and the partner’s distributive share
of the partnership’s R&E deductions, if any, connected with the
SIC codes.
Lines 13A and 13B. Interest expense specifically allocable
under Regulations sections 1.861-10(e) and -10T. Apart
from interest expense entered on line 13A, enter on line 13B
interest expense that is directly allocable under Temporary
Regulations section 1.861-10T to income from specific
partnership property. Such interest expense is treated as directly
allocable to income generated by such partnership property. See
Temporary Regulations section 1.861-9T(e)(1).
Line 13C. Enter all interest deductions not otherwise included
on lines 13A and 13B.
Line 15. R&E gross receipts by SIC code. Enter the gross
receipts that resulted in gross income for each category, DEI,
FDDEI, and then total gross receipts. Note that the Total column
isn’t a sum of DEI and FDDEI but rather refers to all the
partnership’s gross receipts. Such gross receipts include both
the partnership's sales and certain other parties' sales. See
Regulations section 1.861-17(d). Gross receipts from certain
transactions of parties both controlled or uncontrolled by the
partnership may be included on line 15. See, generally,
Regulations section 1.861-17(d).
Line 14. Interest expense apportionment factors. Report
information that a partner will use to allocate and apportion its
interest expense for FDII purposes.
Interest deductions are apportioned to gross DEI and FDDEI
based ordinarily on the tax book value of the taxpayer’s assets.
See Regulations section 1.861-9T(g)(1)(i). A taxpayer can use
either the tax book value or the alternative tax book value of its
assets. See Regulations section 1.861-9(i). Under both
methods, the partner uses the partnership's inside basis in its
assets, including adjustments required under sections 734(b)
and 743(b). See Regulations sections 1.861-9(e)(2) and -9(e)
(3). When reporting the asset that is the basis of stock in
nonaffiliated 10%-owned corporations, adjust such amount for
E&P. See Regulations section 1.861-12(c)(2)(i)(A).
Line 16. Enter the amount of R&E expense by SIC code.
Schedules K-2 and K-3, Part V (Distributions From
Foreign Corporations to Partnership)
The total interest deductions for the members of the
corporation's affiliated group are allocated and apportioned to
the statutory and residual groupings under proposed, final, and
Temporary Regulations sections 1.861-8 through 1.861-14.
Note. The following information, in combination with other
information known to the partners, including Schedule P (Form
5471), is relevant for certain partners to exclude from gross
income distributions to the extent that they are attributable to
PTEP in their annual PTEP accounts and report foreign currency
gain or loss for the PTEP on Forms 1040 and 1120. If eligible,
partners use this information for purposes of a dividends
received deduction under section 245A on Form 1120.
Note. The Total column isn’t a sum of DEI and FDDEI but rather
refers to the partnership’s specific line totals (that is, that would
also include non-DEI).
16
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Use Part V of the Schedule K-2 to report the distributions
made by foreign corporations to the partnership.
Each row should relate to the partnership’s direct ownership
of stock in the foreign corporation or direct ownership of the
ownership interests in a pass-through entity that (directly or
through other pass-through entities) owns (within the meaning of
section 958) stock in the foreign corporation other than solely by
reason of applying section 318(a)(3) (providing for downward
attribution) as provided in section 958(b). For example, if a
partnership (upper-tier partnership) directly owns 50% of the
foreign corporation's stock and owns 50% of the foreign
corporation's stock through another partnership (lower-tier
partnership), then distributions by the foreign corporation to each
of the upper-tier partnership and the lower-tier partnership are to
be reported on separate rows on the upper-tier partnership's Part
V (Form 8865). If the partnership owns stock of a foreign
corporation through another partnership (lower-tier partnership)
from which it receives a Part V of Schedule K-3 (Form 1065 or
8865), the partnership must replicate each line of the Part V of
Schedule K-3 (Form 1065 or 8865) on its Part V (Form 8865).
Rows for distributions for a partnership's direct ownership of
foreign corporation stock should be listed before rows for
distributions for a partnership’s ownership of foreign corporation
stock through a pass-through entity.
If the partnership received a Schedule K-3 from another
partnership with an attachment related to net investment income
PTEP (NII PTEP), append Attachment 3 to Schedule K-2 and
Attachment 4 to each Schedule K-3 in the following format,
adding additional rows as necessary for each distribution by a
foreign corporation. For more information about net investment
income and net investment income tax relating to CFCs and
qualified electing funds (QEFs), see Regulations section
1.1411-10.
Use Part V of the Schedule K-3 to report the partner's share
of the amounts reported on Part V of the Schedule K-2.
Exception. Part V of the Schedule K-2 isn’t required to be
completed for distributions by a foreign corporation if the U.S.
person filing Form 8865 knows that (a) none of the distributions
by the foreign corporation are attributable to PTEP in annual
PTEP accounts of any direct or indirect partner, and (b) none of
the partnership’s direct or indirect partners are eligible to claim a
deduction under section 245A for any distribution by the foreign
corporation. Nevertheless, the filer may be required to append
Attachment 3 to the Schedule K-2 (discussed below).
Exception. Part V of the Schedule K-3 for a partner doesn’t
need to be completed for distributions by a foreign corporation if
the filer of Form 8865 knows that (a) none of the distributions by
the foreign corporation are attributable to PTEP in annual PTEP
accounts of the partner or any U.S. person that is treated as
indirectly owning stock of the foreign corporation through the
partner (“relevant indirect partners”), and (b) the partner and
relevant indirect partners aren’t eligible to claim a deduction
under section 245A for any distributions by the foreign
corporation. Nevertheless, the filer may be required to append
Attachment 4 to the Schedule K-3 for the partner (discussed
below). If this exception is applicable for a foreign corporation,
the sum of the amounts reported on Part V of the Schedules K-3
for the foreign corporation may not equal the amounts reported
on Part V of the Schedule K-2 for the foreign corporation.
Rows A–O. Use rows A–O to report information for each
distribution by a foreign corporation for its stock that the
partnership (directly or through pass-through entities) owns
(within the meaning of section 958) other than solely by reason
of applying section 318(a)(3) (providing for downward attribution)
as provided in section 958(b).
Attachment 3 (Schedule K-2)
(a) Name of
distributing foreign
corporation
(b) EIN or reference
(c) Date of
distribution
(d) Functional
currency of
distributing foreign
corporation
(e) Amount of NII
PTEP in functional
currency
(f) Spot rate
(functional currency
to U.S. dollars)
(g) Amount of NII
PTEP in U.S. dollars
ID number
Attachment 4 (Schedule K-3)
(a) Name of
distributing foreign
corporation
(b) EIN or reference
(c) Date of
distribution
(d) Functional
currency of
distributing foreign
corporation
(e) Partner’s share of
NII PTEP in
functional currency
(f) Spot rate
(functional currency
to U.S. dollars)
(g) Partner’s share of
NII PTEP in U.S.
dollars
ID number
Note. If additional rows are required, attach statements to
ISO 4217 standard. These codes are available at iso.org/
Schedules K-2 and K-3 that look like the current version of Part
V.
Note. Columns (e) and (f) are reported in functional currency.
Column (b). Enter the EIN or reference ID number of the
distributing foreign corporation. Do not enter “FOREIGNUS” or
“APPLIED FOR.” For basic information about reference ID
numbers (including the requirements as to the characters
permitted), see the Instructions for Form 1118.
Column (e). This represents the partnership's share of the
amount distributed in functional currency. See Schedule R (Form
5471), column (c).
Column (f). This represents the partnership's share of the
amount of E&P distributed in functional currency. See
Column (c). Enter the year, month, and day on which the
Schedule R (Form 5471), column (d). The total of the amounts
reported in column (f) for a distributing foreign corporation
should equal the partnership’s share of the total of the amounts
reported on line 9, column (f), of Schedules J (Form 5471) on a
distribution was made using the format YYYYMMDD.
Column (d). Enter the applicable three-character alphabet
code for the foreign corporation’s functional currency using the
17
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
separate category of income basis filed for the distributing
foreign corporation, as reported on line 9, column (f), of the
Schedule J (Form 5471) with code “TOTAL” entered on line a that
is filed for the distributing foreign corporation. If a Schedule J
(Form 5471) with code “TOTAL” entered on line a isn’t filed for
the distributing foreign corporation, then the total of the amounts
reported in column (f) for a distributing foreign corporation
should equal the partnership's share of the amount reported on
line 9, column (f), of the Schedule J (Form 5471) filed for the
distributing foreign corporation.
section 951(a)(1)(B) inclusion for the CFC, or figure section
951A inclusions by taking into account GILTI items (defined
below) of the CFC. If the filer doesn’t complete Part VI of
Schedule K-3 for a partner for a CFC, the sum of each partner’s
share of the CFC’s subpart F income, section 951(a)(1)(B)
inclusion for the CFC, and share of the CFC’s GILTI items
(defined below) reported on all Schedules K-3 may not equal the
aggregate share of subpart F income of the CFC, the aggregate
section 951(a)(1)(B) inclusion for the CFC, and the aggregate
share of the CFC’s GILTI items (defined below), respectively,
reported on the Schedule K-2.
Column (g). Enter the exchange rate on the date of distribution
used to translate the amount of the distribution in functional
currency to U.S. dollars. See section 989(b)(1). Report the
exchange rate using the "divide-by convention" specified under
Reporting exchange rates on Form 5471 in the Instructions for
Form 5471.
Use Schedule K-2, Part VI, to report the information on the
partnership’s share of the amounts its partners will need to figure
their subpart F income inclusions, section 951(a)(1)(B)
inclusions, and GILTI inclusions, for CFCs owned (within the
meaning of section 958) by the partnership. Use Schedule K-3,
Part VI, to report the partner’s share of the amounts needed to
determine its subpart F income inclusions, section 951(a)(1)(B)
inclusions, and GILTI inclusion, for CFCs owned (within the
meaning of section 958) by the partnership.
Column (h). Enter the amount of the distribution in U.S. dollars.
Translate column (e) using the spot rate reported in column (g).
Column (i). Enter the amount of E&P distributed in U.S. dollars.
Translate column (f) using the spot rate reported in column (g).
The U.S. person completing Form 8865 must complete Part
VI of Schedules K-2 and K-3 by assuming that each partner in
the partnership is a U.S. shareholder of the CFC and is required
to include in gross income its share of the CFC's subpart F
income, its section 951(a)(1)(B) inclusion, and its GILTI.
Column (j). If the distributing foreign corporation is a qualified
foreign corporation, determined without regard to section 1(h)
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).
Schedules K-2 and K-3, Part VI (Information on
Partners' Section 951(a)(1) and Section 951A
Inclusions)
A partner's GILTI is calculated based upon its share of the
following amounts for each CFC for which it is a U.S.
shareholder: tested income, tested loss, QBAI, tested loss QBAI
amount, tested interest income, and tested interest expense
(collectively, GILTI items) (a CFC's subpart F income and GILTI
items, CFC items).
Note. This information is relevant to partners completing Form
8992 and Forms 1040 and 1120 for income inclusions under
section 951(a) (subpart F inclusions), section 951(a)(1)(B)
inclusions, and section 951A inclusions.
A partner's share of a CFC's subpart F income, amounts used
to determine its section 956 amount for a CFC, and a CFC's
GILTI items may not be limited to the partner's share of such
income, amounts, or items through its ownership in the
partnership. However, for purposes of completing Part VI of
Schedules K-2 and K-3, use only the partner's share of a CFC's
subpart F income, amounts used to determine its section 956
amount for a CFC, and a CFC's GILTI items through the partner's
ownership in the partnership.
Schedules K-2 and K-3, Part VI, must be completed for a
CFC if the partnership owns (within the meaning of section 958)
stock of the CFC, unless the partnership owns stock of the CFC
solely by reason of applying section 318(a)(3) (providing for
downward attribution) as provided in section 958(b).
Generally, a foreign corporation is a CFC if more than 50% of
either the total combined voting power of all classes of stock
entitled to vote or the total value of the stock of the corporation is
owned (within the meaning of section 958(a)) or is considered as
owned by applying the rules of section 958(b) by U.S.
A partner's share through its ownership in the partnership of
subpart F income and GILTI items is generally anticipated to be
calculated by multiplying the percentage in column (d) by the
amount of subpart F income or GILTI item, respectively. For
example, in general, a partner's share through its ownership
interest in the partnership of tested income in column (i) is
anticipated to be calculated by multiplying the percentage in
column (d) by the amount of tested income in column (g). If the
partner’s share through its ownership in the partnership of
subpart F income or GILTI items isn’t calculated by multiplying
the percentage in column (d) by the amount of subpart F income
or GILTI items, respectively (for example, because of special
allocations), then, instead of entering a percentage in column (d)
for that CFC, attach a statement to the Schedules K-2 and K-3
explaining the partner’s share through its ownership in the
partnership of the CFC’s subpart F and GILTI items.
shareholders. For this purpose, a U.S. shareholder is a U.S.
person (as defined in section 957(c)) who owns (within the
meaning of section 958(a)), or is considered as owning by
applying the rules of ownership of section 958(b), 10% or more
of the total combined voting power of all classes of stock entitled
to vote, or 10% or more of the total value of shares of all classes
of stock of such foreign corporation.
Exception. Part VI of Schedule K-2 doesn’t need to be
completed for a CFC if the partnership doesn’t have a direct or
indirect partner (through pass-through entities only) that is a U.S.
shareholder of the CFC required to include in gross income a
subpart F income inclusion and/or section 951(a)(1)(B) inclusion
for the CFC, or calculate section 951A inclusions by taking into
account GILTI items (defined below) of the CFC.
Exception. Part VI of Schedule K-3 for a partner doesn’t need
to be completed for a CFC if the filer of Form 8865 knows that (a)
the partner isn’t a U.S. shareholder of the CFC required to
include in gross income a subpart F income inclusion and/or
section 951(a)(1)(B) inclusion for the CFC, or figure section
951A inclusions by taking into account GILTI items (defined
below) of the CFC; and (b) no U.S. person that indirectly owns
(through pass-through entities only) an interest in the CFC
through the partner is a U.S. shareholder of the CFC required to
include in gross income a subpart F income inclusion and/or
Line a. Complete a separate Part VI for each applicable
separate category of income. However, all GILTI items must be
reported on only one Part VI. If GILTI items include passive
category income, report all GILTI items on the Part VI completed
for passive category income; otherwise, report all GILTI items on
the Part VI completed for general category income. Enter the
appropriate code on line a.
Note. The other reporting requirements for reporting income by
separate category don’t change by reason of reporting GILTI
18
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
items that include general category income on a Part VI
completed for passive category income.
a CFC's earnings invested in U.S. property, see Worksheet B in
the Instructions for Form 5471.
Column (g). Enter the CFC's tested income, if any, from line 6
Codes for Categories of Income
of Schedule I-1 (Form 5471) for each CFC.
Column (h). Enter the CFC's tested loss, if any, from line 6 of
Schedule I-1 (Form 5471) for each CFC. The loss amounts
should be shown as negative numbers.
Code
Category of Income
PAS
901j
GEN
Passive Category Income
Section 901(j) Income
Column (i). Enter the aggregate share of the tested income
listed in column (g) for each CFC with tested income.
General Category Income
Column (j). Enter the aggregate share of the tested loss listed
in column (h) for each CFC with tested loss. The loss amounts
should be shown as negative numbers.
Line b. If any portion of a CFC item is U.S. source, complete a
separate Part VI for U.S.-source CFC items, and check the box
on line b on such separate Part VI.
Column (k). If the CFC has a tested loss in column (h), enter
zero. If the CFC has tested income in column (g), enter the
aggregate share of QBAI. A CFC's QBAI is reported on
Schedule I-1 (Form 5471), line 8.
Line 1. Use lines A through K to report information for CFCs
owned (within the meaning of section 958) by the partnership,
and for which Part VI of Schedules K-2 and K-3 must be
completed. If the partnership owns a CFC through another
partnership (lower-tier partnership) from which it receives a
Schedule K-3 (Form 1065 or 8865), Part VI, replicate each line of
the Schedule K-3 (Form 1065 or 8865), Part VI, that is related to
the CFC on Schedule K-2 (Form 8865), Part VI. For example, if a
partnership directly owns 50% of the CFC's stock and owns 50%
of the CFC's stock through a lower-tier partnership, the CFC
should be listed on two lines with one line related to the
partnership's direct ownership and the other line related to the
partnership's ownership through the lower-tier partnership. Lines
related to a partnership's direct ownership of CFCs should be
listed before lines related to a partnership's non-direct ownership
of CFCs. If additional lines are required, attach to the Schedules
K-2 and K-3 a schedule that looks like the current version of Part
VI.
Column (l). If the CFC has tested income in column (g), enter
zero. If the CFC has a tested loss in column (h), enter as a
negative number the aggregate share of the CFC's tested loss
QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A
CFC's tested loss QBAI amount is reported on Schedule I-1
(Form 5471), line 9c, which must be translated to U.S. dollars.
Column (m). Enter the aggregate share of the CFC's tested
interest income. A CFC's tested interest income is reported of
Schedule I-1 (Form 5471), line 10c.
Column (n). Enter the aggregate share of the CFC's tested
interest expense. A CFC's tested interest expense is reported on
Schedule I-1 (Form 5471), line 9d.
Schedules K-2 and K-3, Part VII (Information
Regarding Passive Foreign Investment
Companies)
Column (a). Enter the name of each CFC for which Part VI
must be completed.
Column (b). Enter the EIN or reference ID number of the CFC.
Do not enter “FOREIGNUS” or “APPLIED FOR.” For basic
information about reference ID numbers (including the
requirements as to the characters permitted), see the
Instructions for Form 1118.
Note. This information is relevant to partners completing Form
8621 and/or that determine income inclusions for the PFICs
reported on Schedule K-2, Part VII, and Schedule K-3, Part VII.
Except as otherwise provided, Schedules K-2 and K-3, Part
VII, must be filed for every partnership that owns PFIC stock
directly or indirectly. However, the following exceptions apply.
Column (c). Enter the end of the CFC’s tax year using the
format YYYYMMDD.
The U.S. person filing the Form 8865 isn’t required to
•
Column (d). Enter the partners' share of CFC items through the
partners' ownership in the partnership (aggregate share). See
Regulations sections 1.951-1(b), 1.951-1(e), and 1.951A-1(d)(1)
for rules on determining the partners' share.
complete Schedules K-2 and K-3, Part VII, for a foreign
corporation if the U.S. person knows that all of the foreign
partnership’s direct and indirect partners that are U.S. persons
(including itself) are either (a) not subject to the PFIC rules for
the corporation under section 1297(d) because they are subject
to the subpart F rules for the corporation, (b) tax-exempt entities
that aren’t subject to the PFIC rules for the corporation under
Regulations section 1.1291-1(e), or (c) pass-through entities
with no indirect U.S. taxable partners.
Column (e). Enter the aggregate share of the amount of the
CFC's subpart F income, if any. Note that an amount determined
under section 956(a) isn’t considered subpart F income. For
guidance on computing a CFC's subpart F income and the
partners' share of a CFC's subpart F income, see Worksheet A in
the Instructions for Form 5471.
The U.S. person filing the Form 8865 isn’t required to
•
complete Schedules K-2 and K-3, Part VII, for a foreign
corporation if the U.S. person knows that the foreign corporation
is treated as a qualifying insurance corporation (QIC) (as defined
in section 1297(f)(1)) that isn’t treated as a PFIC by reason of
section 1298(b)(1).
Column (f). Enter the amount determined under section 956 for
the partners that relates to the partners' ownership in the
partnership, as described in these instructions for column (f)
(aggregate section 951(a)(1)(B) inclusion). In determining the
section 956 amount, use only the partners' share through their
ownership in the partnership of:
The U.S. person filing the Form 8865 isn’t required to
•
complete Schedules K-2 and K-3, Part VII, for a PFIC the stock
of which has been marked to market as described in Regulations
section 1.1291-1(c)(4). Instead, the U.S. person filing the Form
8865 should report the partnership’s mark-to-market (MTM) gain
or loss on Form 8865, Schedule K, (if required) and report the
partners’ shares of those amounts on Part III of Schedule K-1
(Form 8865) (if required). Note, however, there may be instances
in which the U.S. person filing the Form 8865 will need additional
information for the PFIC the stock of which has been marked to
The average of the amounts of U.S. property held (directly or
•
indirectly) by the CFC as of the close of each quarter of the
CFC’s tax year, and
The applicable earnings of the CFC.
•
Don’t reduce the amount reported in column (f) for any reduction
to the partners' section 956 amount under Regulations section
1.956-1(a)(2). For guidance on computing the partners' share of
19
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
market as described in Regulations section 1.1291-1(c)(4) to
meet its tax obligations, such as when the section 1291 rules
apply to the U.S. person filing the Form 8865 because the stock
wasn’t marked to market in the first year of its holding period. In
such instances, the U.S. person filing the Form 8865 may use
Part VII to report the needed information.
Codes for Classes of PFIC Shares
Code
Class of PFIC Shares
COM
PRE
OTH
VAR
Common or Ordinary Shares
Preferred Shares
Use Schedule K-2, Part VII, to report certain information for
any PFIC owned, directly or indirectly, by the partnership for
which reporting is required, including PFICs for which no QEF or
section 1296 MTM election has been made and unpedigreed
QEFs (section 1291 funds), and PFICs for which pedigreed QEF,
section 1296 MTM, or other elections have been, or may be,
made.
Other Equity Interest
Multiple Classes of Shares or Equity
Interests
Column (g). If the partnership acquired any PFIC shares
during its tax year, provide the date(s) of acquisition of those
shares using the format YYYYMMDD. If the partnership acquired
no shares in a particular PFIC during its tax year, leave this
column blank for that PFIC.
The U.S. person filing the Form 8865 must also use
Schedule K-2, Part VII, to report information for any PFIC for
which the U.S. person is making an MTM election under section
1296 in the current tax year if the current tax year isn’t the first
year of the U.S. person’s holding period in the stock (“non-initial
section 1296 MTM election”). See section 1296(j)(1)(A) and
Regulations section 1.1296-1(i) for more information.
Reminder. If the partnership acquired shares in a PFIC on
multiple dates during the tax year, append a completed
Attachment 5 to Schedule K-2, Part VII, and its corresponding
Schedules K-3, Part VII, providing those dates.
Attachment 5
Use Schedule K-3, Part VII, to report the partner's share,
through its ownership in the partnership, of the amounts reported
on Schedule K-2, Part VII.
Additional Information for Section 1
General Information
Annual Information
Complete only one line on both Sections 1 and 2 for each
PFIC for which reporting on Schedules K-2 and K-3, Part VII, is
required. Each line completed for a PFIC in Section 1 should
correspond to the same line on Section 2. If there is no
(a)
Name of PFIC
(b)
(g)
EIN or reference ID
number
Dates PFIC shares
acquired during tax year
(if applicable)
information to report for a PFIC in Section 2, columns (c) through
(o), only complete the name and EIN of the PFIC in Section 2,
columns (a) and (b), and leave columns (c) through (o) blank for
that PFIC. For additional information on determining indirect
ownership of PFICs, see Regulations section 1.1291-1(b)(8).
The partnership may have additional required information for
a PFIC for certain columns (for example, scenarios where the
partnership may have multiple different events for the PFIC in the
same tax year, such as multiple dates of acquisitions of, or
distributions for, the PFIC stock). In that case, complete
Schedules K-2, and K-3, Part VII, with the first of those entries for
a PFIC and attach a statement including the remaining entries
for each of those PFIC to Schedule K-2, Part VII, and its
corresponding Schedules K-3, Part VII, with Attachments 5
and/or 6 completed.
Column (h). Enter the total number of all classes of shares of
the PFIC the partnership owned at the end of its tax year.
Column (i). Enter the total value of all shares in the PFIC held
by the partnership at the end of the tax year. If the PFIC shares
are not publicly traded, it is possible to rely upon periodic
account statements provided at least annually to determine the
value of a PFIC unless there is actual knowledge or reason to
know based on readily accessible information that the
statements do not reflect a reasonable estimate of the PFIC's
value and the information provides a more reasonable estimate
of the PFIC's value.
If the partnership has additional PFICs for which to report
information that don’t fit on single Schedules K-2 and K-3, Part
VII, attach additional Parts VII of Schedules K-2 and K-3, as
needed.
Section 1. General Information
Note. A partner may need additional information not required to
be reported on this Schedule K-2, Part VII, (or the partner’s
Schedule K-3, Part VII) from the partnership for the value of the
PFIC shares as of a particular date to aid the partner in making
certain elections under Regulations section 1.1291-10,
1.1297-3, or 1.1298-3.
Columns (a) through (c). Enter the name, U.S. EIN or
reference ID number, and address of each PFIC held directly or
indirectly by the partnership during its tax year. Do not enter
“FOREIGNUS” or “APPLIED FOR.”
For basic information about reference ID numbers (including
the requirements as to the characters permitted), see the
Instructions for Form 8621.
Column (j). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations section 1.1297-4 for
additional information on QICs.
Columns (d) and (e). Enter the beginning and end of the
PFIC's tax year using the format YYYYMMDD.
Column (f). Enter each class of shares in the PFIC owned by
Column (k). Check the box if the PFIC has indicated that its
shares are "marketable stock" as defined in section 1296(e) and
Regulations section 1.1296-2.
the partnership using the following codes.
Column (l). Check the box if the PFIC also constitutes a CFC
within the meaning of section 957 (PFIC/CFC).
20
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Note. Certain partners may need additional information not
required to be reported on this Schedule K-2, Part VII, (or the
partner’s Schedule K-3, Part VII) from the QEF for its
computation of its net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) to make certain computations under
section 1061 or the regulations thereunder. The U.S. person
preparing the Form 8865 may request, or the foreign partnership
for which the Form 8865 is filed may aid the U.S. person filing the
Form 8865 in obtaining, such information from the QEF, though
the QEF isn’t required to provide such information. See section
1061 and Regulations sections 1.1061-4 and 1.1061-6 for more
information.
Reminder. If the U.S. person filing the Form 8865 knows that all
of the partnership's direct and indirect partners that are U.S.
persons (including itself) aren’t subject to the PFIC rules for a
PFIC/CFC under section 1297(d) because they are subject to
the subpart F rules for the corporation, it’s not required to
complete Schedules K-2 and K-3, Part VII, for the PFIC/CFC.
Note. If the PFIC is a PFIC/CFC, a partner may need certain
additional information for the PFIC/CFC’s E&P not required to be
reported on this Schedule K-2, Part VII, (or the partner’s
Schedule K-3, Part VII) from the partnership to aid the partner in
making certain elections under Regulations section 1.1291-9,
1.1297-3, or 1.1298-3.
Section 1296 MTM Information
Column (m). Complete column (m) in the following manner.
Columns (e) and (f). Enter the fair market value of the PFIC
stock at the beginning and end of the partnership’s tax year in
columns (e) and (f), respectively. If any shares of the PFIC were
acquired during the tax year for which the Form 8865 is being
filed, the fair market value in column (e) should reflect the fair
market value of those shares as of the date of acquisition. This
information must be provided unless the U.S. person filing the
Form 8865 hasn’t made, or doesn’t intend to make, a section
1296 MTM election for the PFIC, including a non-initial section
1296 MTM election.
IF...
THEN...
• this is the first year of the
check the box.
partnership's holding period in stock
of the foreign corporation, and
• the foreign corporation is a PFIC
under the income test or asset test of
section 1297(a)
• the foreign corporation was a PFIC
in a prior tax year of the partnership's
holding period, and
check the box.
Reminder. The U.S. person filing the Form 8865 isn’t required
to complete Schedules K-2 and K-3, Part VII, for a PFIC the
stock of which has been marked to market as described in
Regulations section 1.1291-1(c)(4), though it may use Part VII to
provide the partners with additional information to meet their tax
obligations for the PFIC in certain instances, such as when the
section 1291 rules apply because the stock wasn’t marked to
market the first year of the shareholder’s holding period.
• the foreign corporation isn’t a
"former PFIC" within the meaning of
Regulations section 1.1291-9(j)(2)(iv)
• the foreign corporation was a PFIC
in a prior tax year of the partnership's
holding period, and
• the foreign corporation is a "former
PFIC" within the meaning of
Regulations section 1.1291-9(j)(2)(iv)
don’t check the box.
Section 1291 and Other Information
Note. Generally, the information in columns (g) through (o) is to
assist shareholders of section 1291 funds in satisfying any
information reporting obligations and in computing income
inclusions for section 1291 funds. However, this information may
be relevant to PFICs for which a QEF election (pedigreed or
unpedigreed), section 1296 MTM election (including a non-initial
section 1296 MTM election), or other election has been made by
a partner or other indirect PFIC shareholder. Accordingly,
complete columns (g) through (o) for each PFIC for which
reporting on Schedule K-2, Part VII, and Schedule K-3, Part VII,
is required. However, note the instructions for column (k)
regarding reporting distributions from PFICs for which the U.S.
person filing the Form 8865 has made a pedigreed QEF election
or section 1296 MTM election (other than a non-initial section
1296 MTM election).
Note. If the foreign corporation is a “former PFIC” within the
meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may
need additional information not required to be reported on this
Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)
from the partnership for the PFIC to aid the partner in making
certain elections under Regulations section 1.1298-3.
Section 2. Additional Information on PFIC or QEF
General Information
Columns (a) and (b). Enter the name and U.S. EIN (or
reference ID number) of each PFIC held directly or indirectly by
the partnership during its tax year. Don’t enter “FOREIGNUS” or
“APPLIED FOR.”
Reminder. If the partnership has additional required information
for a PFIC for any of columns (g) through (j) or (l) through (m) (for
example, multiple distributions for the PFIC stock), the U.S.
person filing the Form 8865 must complete those columns with
the first of those entries and attach a statement including the
remaining entries to Schedule K-2, Part VII, and its
QEF Information
Columns (c) and (d). Enter the partnership's share of the total
ordinary earnings and net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year
in which or with which the tax year of the PFIC ends in columns
(c) and (d), respectively. The PFIC should provide a statement
that provides information to assist in determining these amounts.
See Regulations section 1.1295-1(g) for additional information
on annual PFIC statements.
Provide the information received in an annual information
statement for the PFIC, unless the U.S. person filing the Form
8865 hasn’t made, or doesn’t intend to make, a QEF election for
the PFIC.
corresponding Schedules K-3, Part VII, with the information
contained in Attachment 6.
Column (g). Enter the date(s) on which the partnership initially
acquired each block of stock in the PFIC using the format
YYYYMMDD.
Column (h). Enter the amount of each distribution of cash
and/or the fair market value of any other property distributed to
the partnership by the PFIC during the tax year, if any.
21
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Note. Deemed distributions by QEFs don’t need to be reported
on this Schedule K-2, Part VII (or the partner’s Schedule K-3,
Part VII). However, partners which have made, or intend to make,
an election under section 1294, and which are deemed to have
received a distribution from the QEF, may require this information
to complete any computations under section 1294 (including for
Form 8621, if required). See section 1294(f) and Regulations
section 1.1294-1T for additional information.
“base erosion percentage test.” Partnerships aren’t subject to the
BEAT; however, corporate partners of a partnership that are
applicable taxpayers under Regulations section 1.59A-2 may be
subject to the BEAT. Except for purposes of determining a
partner's base erosion tax benefits under Regulations section
1.59A-7(d)(1), and whether a taxpayer is a registered securities
dealer, BEAT determinations are made by the partner. See
Regulations section 1.59A-7 for further information regarding the
application of section 59A to partnerships and the Instructions
for Form 8991 for additional information on whether a corporate
partner is an applicable taxpayer subject to the BEAT.
Column (i). Enter the date(s) of distribution of the amounts
entered in column (h) using the format YYYYMMDD.
Column (j). Enter the total creditable foreign taxes attributable
to a distribution from the PFIC. See section 1291(g) and the
instructions for Form 8621, Part V, line 16d, for additional
information on creditable foreign taxes attributable to PFIC
distributions, including apportioning creditable foreign taxes to
the portion of a distribution which constitutes an excess
distribution and certain rules related to creditable foreign taxes
on a disposition of PFIC stock.
To complete Schedules K-2 and K-3, Part VIII, the foreign
related parties of each partner must be identified, subject to the
exception for small partners. It’s expected that the partners will
collaborate to identify the foreign related parties of each partner.
A foreign related party of the partner is a foreign person that is:
Any 25% owner of the applicable taxpayer (as defined in
•
Regulations section 1.59A-1(b)(17)(ii)(A)),
Any person who is related (within the meaning of section
•
267(b) or 707(b)(1)) to the applicable taxpayer or any 25%
owner of the applicable taxpayer, or
Column (k). Enter the total amount of distributions the
partnership received from the PFIC in the 3 preceding tax years,
or, if shorter, the total amount of distributions the partnership
received during its holding period of the PFIC stock. However,
don’t enter any amount in this column for a PFIC for which the
U.S. person filing the Form 8865 has made a pedigreed QEF
election or section 1296 MTM election (other than a non-initial
section 1296 MTM election).
Any other person who is related to the applicable taxpayer
•
within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).
Exception for small partners. Part VIII of Schedule K-3
isn’t required to be prepared for small partners meeting the
following 3 requirements.
1. The partner's interest in the partnership represents less
than 10% of the capital and profits of the partnership at all times
during the tax year.
2. The partner is allocated less than 10% of each
partnership item of income, gain, loss, deduction, and credit for
the tax year.
3. The partner's interest in the partnership has a fair market
value of less than $25 million on the last day of the partner's tax
year, determined using a reasonable method.
Column (l). Enter the date(s) on which the partnership
disposed of any block of stock in the PFIC during the
partnership's tax year, if any, using the format YYYYMMDD.
Column (m). If the partnership disposed of any block of stock
in the PFIC during the partnership's tax year, enter the amount
realized by the partnership on each disposition.
Column (n). If the partnership disposed of any block of stock in
the PFIC during the partnership's tax year, enter the
partnership's tax basis in the shares of the PFIC on the date of
disposition.
Schedule K-3. Enter the partner's share, through its
ownership in the partnership, of the partnership's tax basis in the
PFIC shares. The partner's share of the basis in the PFIC shares
should include any applicable adjustments specific to the
partner, such as section 743(b) adjustments or adjustments
made under the PFIC regime. See sections 1293(d) and
1296(b), and Regulations sections 1.1297-3 and 1.1298-3 for
adjustments made under the PFIC regime.
See Regulations section 1.59A-7(d)(2) for further information
regarding the application of the exception for small partners.
Exception for certain other partners. Don’t complete
Schedule K-3, Part Vlll, for a partner that is an individual.
Don’t complete Schedule K-3, Part VIII, for a partner that is an
S corporation.
Complete Section 1, lines 1–4, of Schedule K-3, Part VIII, for
partners that are RICs and REITs but don’t complete Section 2
for these partners.
Column (o). Enter the partnership's gain or loss on the
disposition of PFIC shares. This equals column (m) minus
column (n).
Section 1. Applicable Taxpayer
Lines 1a through 4a. Enter the partnership's total gross
receipts for the current year and each of the 3 preceding tax
years. The determination of the partnership's gross receipts is
made in accordance with Regulations section 1.448-1T(f)(2)(iv).
Schedules K-2 and K-3, Part VIII (Partners’
Information for Base Erosion and Anti-Abuse
Tax (Section 59A))
Lines 1b through 4b. Complete lines 1b through 4b if the
partnership has a foreign partner or there is reason to know it
has a foreign partner through a partner that is a pass-through
entity. Enter the partnership’s total gross receipts on income
effectively connected with a U.S. trade or business (ECI) for the
current year and each of the 3 preceding tax years which the
foreign partner(s) would take into account as income that is ECI.
If the foreign partner(s) is subject to tax on a net basis pursuant
to an applicable income tax treaty of the United States, enter the
gross receipts that would be attributable to transactions taken
into account in determining its net taxable income.
Note. This information is relevant for partners completing Form
8991.
This Part VIII of Schedules K-2 and K-3 must be completed
for corporate partners who are determining if they are subject to
the BEAT, and to figure their BEAT, if any. This information
includes the partner's share of the partnership's gross receipts,
the partner's amount of base erosion payments made through
the partnership, and the partner's base erosion tax benefits. The
BEAT is generally levied on certain large corporations that have
deductions and certain other items paid or accrued to foreign
related parties (a base erosion payment) that are 3% of their
total deductions or higher (2% in the case of certain banks or
registered securities dealers), a determination referred to as the
Lines 1c through 4c. Complete lines 1c through 4c if the
partnership has a foreign partner or has reason to know it has a
foreign partner through a partner that is a pass-through entity.
22
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Enter the total non-ECI gross receipts as the difference between
column (a) and column (b).
is subject to the allowance for depreciation (or amortization in
lieu of depreciation).
Schedule K-3. For purposes of section 59A, each partner in
a partnership includes on its Schedule K-3, Part VIII, the share of
partnership gross receipts in proportion to the partner's
distributive share (as determined under sections 704(b) and (c))
of items of gross income that were taken into account by the
partnership under section 703 or 704(c) (such as remedial or
curative items under Regulations sections 1.704-3(c) or (d)).
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to deductions allowed under chapter 1
for the tax year for depreciation (or amortization in lieu of
depreciation) for intangible property rights acquired in the current
year or prior years from all foreign persons that are related
parties of any of the partners.
Line 9. Rents, royalties, and license fees.
Line 5. Amounts included in the denominator of the base
erosion percentage as described in Regulations section
1.59A-2(e)(3). Enter the amount of deductions and other items
allocated to the partners from the partnership that will be
included in the denominator of the partners' base erosion
percentage. For a description of deductions that aren’t included
in the denominator, see Regulations section 1.59-2(e)(3)(ii).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the use or right to use tangible or
intangible property resulting in rents, royalties, and/or license
fees.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property resulting in rents,
royalties, and/or license fees.
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property that results in rents,
royalties, and/or license fees.
Section 2. Base Erosion Payments and Base
Erosion Tax Benefits
Column (b). Base erosion payments. For purposes of
determining whether a payment or accrual by a partnership is a
base erosion payment, any amount paid or accrued by the
partnership is treated as paid or accrued by each partner based
on the partner's distributive share of the item of deduction for
that amount. A partner that is an applicable taxpayer has a base
erosion payment for any amount paid or accrued by the
partnership to a foreign person (as defined in Regulations
section 1.59A-1(b)(10)) that is a related party to the partner (as
defined in Regulations section 1.59A-1(b)(12)) for which a
deduction is allowable under chapter 1 and for certain other
items on lines 13 and 15. See Regulations section 1.59A-3 and
the Instructions for Form 8991 for more information on the
definition of a base erosion payment.
Line 10a. Compensation/consideration paid for services
NOT excepted by section 59A(d)(5).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year as compensation or consideration for
services, excluding any amount that qualifies for the services
cost method exception in section 59A(d)(5).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners as
compensation or consideration for services, excluding any
amount that qualifies for the services cost method exception in
section 59A(d)(5).
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners
representing compensation or consideration paid for services,
excluding amounts qualifying for the services cost method
exception in section 59A(d)(5).
Column (c). Base erosion tax benefits. A partner's
distributive share of any deduction or reduction in gross receipts
attributable to a base erosion payment is the partner's base
erosion tax benefit. A partner's base erosion tax benefits are
determined separately for each asset, payment, or accrual, as
applicable, and aren’t netted with other items. A partner's base
erosion tax benefit may be more than the partner's base erosion
payment (for example, in the case of special allocations made by
the partnership). See the Instructions for Form 8991 and
Regulations section 1.59A-7(d) for further information
Line 10b. Compensation/consideration paid for services
excepted by section 59A(d)(5).
Column (a). Enter the amounts paid or accrued by the
partnership to any foreign person that is a related party of any of
the partners for services qualifying for the services cost method
exception in section 59A(d)(5).
concerning a partner's base erosion tax benefits.
General. For line 8, columns (b) and (c); line 9, columns (b)
and (c); line 10a, columns (b) and (c); line 11, columns (b) and
(c); line 12, columns (b) and (c); line 13, columns (b) and (c);
line 14a, columns (b) and (c); line 15, columns (b) and (c); and
line 16, columns (b) and (c), don’t include amounts that a partner
doesn’t take into account pursuant to the exception for certain
small partners. See Regulations section 1.59A-7(d)(2) and
Exception for small partners, earlier. For Schedule K-2, Part VIII,
report the total allocated to all partners, and for Schedule K-3,
Part VIII, report the amount allocated to each individual partner.
Line 11. Interest expense.
Column (a). Enter the amount of interest paid or accrued by
the partnership for the tax year (excluding interest paid or
accrued in a prior year treated as paid or accrued in the current
year under section 163(j) or similar provisions).
Column (b). Enter the amount of interest expense paid or
accrued to all foreign persons that are related parties of any of
the partners (excluding interest paid or accrued in a prior year
treated as paid or accrued in the current year under section
163(j) or similar provisions).
Line 8. Purchase or creation of property rights for intangi-
bles (patents, trademarks, etc.).
Column (a). Enter the amount paid or accrued by the
partnership in connection with the acquisition or creation of
intangible property rights (patents, copyrights, trademarks, trade
secrets, etc.) that is subject to the allowance for depreciation (or
amortization in lieu of depreciation) for the tax year.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners in
connection with the acquisition or creation of intangible property
rights (patents, copyrights, trademarks, trade secrets, etc.) that
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to interest expense paid or accrued by
the partnership that is allowed as a deduction in the current tax
year. If the partner is a foreign person, include the individual lines
from column (c) of Worksheet A on the applicable Schedule K-3.
Schedule K-3. When completing line 11 on the
Schedule K-3, if the partner is a foreign person, enter the total
from column (a) of Worksheet A on the partner's Schedule K-3 in
column (a) of line 11, enter the total from column (b) of
Worksheet A on the Schedule K-3 in column (b) of line 11, and
23
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
enter the total from column (c) of Worksheet A on the
Schedule K-3 in column (c) of line 11.
payment isn’t a qualified derivative payment if it’s properly
allocable to the nonderivative component.
Complete Worksheet A for all partnership-related items and
complete a Worksheet A for each foreign partner's share of the
amounts reported on the partnership Worksheet A and attach a
statement containing the partner’s share of the information in
Worksheet A to the Schedule K-3.
Line 15. Payments reducing gross receipts made to surro-
gate foreign corporation.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year to certain expatriated entities
described in section 59A(d)(4)(C)(i).
Column (b). Enter the amount paid or accrued to certain
expatriated entities that results in a reduction of the gross
receipts of the partnership. This amount includes payments to a
surrogate foreign corporation that is a related party to the
partner, but only if the entity first became a surrogate foreign
corporation after November 9, 2017. The amount also includes
payments to a foreign person that is a member of the same
expanded affiliated group, as defined in section 7874(c)(1), as
the surrogate foreign corporation. A surrogate foreign
corporation is defined in section 7874(a)(2)(B) but doesn’t
include a foreign corporation that is treated as a domestic
corporation under section 7874(b).
Line 12. Payments for the purchase of tangible personal
property.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the purchase of tangible personal
property.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the
purchase of tangible personal property.
Column (c). Enter the amount of base erosion tax benefits
attributable to amounts paid or accrued to any foreign persons
that are related parties of any of the partners for the purchase of
tangible property.
Column (c). Enter the base erosion tax benefits attributable
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross receipts
of the partnership.
Line 13. Premiums and/or other considerations paid or ac-
crued for reinsurance as covered by section 59A(d)(3) and
section 59A(c)(2)(A)(iii).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for reinsurance.
Line 16. Other payments—specify.
Column (a). Enter the amount paid or accrued for the tax
year by the partnership that hasn’t been included on lines 8
through 15 above.
Column (b). Enter the amount of any premiums or other
consideration paid or accrued to all foreign persons that are
related parties of any of the partners for reinsurance taken into
account under section 803(a)(1)(B) (relating to return premiums
and premiums or other consideration arising out of indemnity
reinsurance that reduces life insurance gross income) or section
832(b)(4)(A) (relating to amounts deducted from gross premiums
written on insurance contracts for return premiums and
premiums paid for reinsurance).
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to premiums or other consideration as
described in section 59A(c)(2)(A)(iii) paid or accrued to any
foreign person that is a related party of any of the partners for
reinsurance.
Column (b). Enter the amount paid or accrued to any foreign
person that is a related party of any of the partners that is a base
erosion payment that hasn’t otherwise been included on lines 8
through 15 above.
Column (c). Enter the amount of the partners' base erosion
tax benefits related to other specified base erosion payments not
listed in any of the categories on lines 8 through 15 above.
Attachment. For amounts reported on line 16, attach a
statement to both Schedules K-2 and K-3 (for distributive share)
describing the type and amount of other payments, using the
same column headings as specified in this schedule: “Total Base
Erosion Payment,” “Total Base Erosion Tax Benefit.” For each
type of payment, the attachment must identify the relationship of
a partner to the foreign related party consistent with the
categories and instructions for columns (b) and (c) of this
schedule.
Line 14a. Nonqualified derivative payments.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year attributable to derivative contracts as
defined in section 59A(h)(4).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for
derivative contracts that are not eligible for the qualified
derivative payment exception under section 59A(h) and
Regulations section 1.59A-6. Don’t include any amount paid that
is a qualified derivative payment on line 14a, column (b).
Column (c). Enter the amount of base erosion tax benefits
attributable to nonqualified derivative payments paid or accrued
to any foreign person that is a related party of any of the
partners.
Line 17, column (c). Base erosion tax benefits related to
payments reported on lines 6 through 16, on which tax is
imposed by section 871 or 881, with respect to which tax
has been withheld under section 1441 or 1442 at 30%
(0.30) statutory withholding tax rate. Enter the aggregate
amount of the partners' base erosion tax benefits, reported on
lines 8 through 16, on which tax is imposed under section 871 or
881 and for which tax has been deducted and withheld under
section 1441 or 1442 at a 30% statutory withholding tax rate.
Line 18, column (c). Portion of base erosion tax benefits re-
ported on lines 6 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been
withheld under section 1441 or 1442 at a reduced with-
holding rate pursuant to an income tax treaty. Multiply the
ratio of percentage withheld divided by 30% (0.30) times base
erosion tax benefit. Complete Worksheet B for all
Line 14b. Qualified derivative payments excepted by sec-
tion 59A(h). Enter the total amount of qualified derivative
payments paid or accrued by the partnership. Generally, a
qualified derivative payment is any payment made by the
taxpayer pursuant to a derivative contract, provided that the
taxpayer recognizes gain or loss on the derivative contract as if it
were sold for its fair market value on the last business day of the
tax year; treats the gain or loss as ordinary; and treats the
character of all other items of income, deduction, gain, or loss for
a payment pursuant to the derivative as ordinary. A payment isn’t
a qualified derivative payment if the payment would be treated as
a base erosion payment if it weren’t made pursuant to a
partnership-related items and attach a Worksheet B to the
Schedule K-3 for each partner's share of the amounts reported
on the partnership Worksheet B.
Complete Worksheet B to determine the portion of the base
erosion tax benefits, reported on lines 8 through 16, on which tax
is imposed under section 871 or 881 and for which tax has been
deducted and withheld at a reduced withholding tax rate (but not
exempt from tax) pursuant to a U.S. income tax treaty. Keep a
derivative (such as interest, royalty, or services income). For a
contract with both derivative and nonderivative components, a
24
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Worksheet A—Interest Paid or Accrued by the Partnership
(a)
(b)
(c)
Total Interest Paid or Accrued in the Interest Paid or Accrued to Foreign Interest Expense Paid or Accrued to
Current Year
Related Parties of the Foreign
Partner in the Current Year
Foreign Related Parties of the
Foreign Partner That Is Allowed as a
Deduction in the Current Year
(1) Interest Expense on Liabilities
Described in Regulations Section
1.882-5(a)(1)(ii)(A) or (B) (Direct
Allocations)
(2) Interest Paid on U.S.- Booked
Liabilities Under Regulations Section
1.882-5(d)(2)(vii)
(3) Interest Paid on All Other Liabilities
of the Partnership
Totals. Combine line (1) through line (3)
Worksheet B—Section 2, Line 18, Column (c)
Section 2, Line 18
A
B
C
D
E
Type of base erosion
payment
Amount of base erosion tax Treaty-reduced withholding Divide column C by 30%
benefit rate (0.30) (round to 4 decimal
places)
Multiply column B by
column D
%
%
%
%
%
%
Add the amounts in column E and enter the total on line 18, column (c)
copy of the completed Worksheet B for the partnership’s
records.
25
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)
Index
A
Foreign-Derived Intangible Income
(FDII) Deduction apportionment
factors 11
Parts of Schedules K-2 and K-3, in
general 2
Form 8621, Information to
Complete 19
Purchase or creation of property
G
R
B
Base Erosion Payments and Base
H
S
Schedule K-2, Identifying
Box 1. Gain on personal property
Information 2
sale. 3
I
Schedule K-3, Identifying
Information 3
C
Section 1291 and Other
Information 21
Interest expense apportionment
factors 10
N
Section 951(a)(1) and Section 951A
Computer-Generated Schedules K-2
Inclusions 18
Currency 2
O
Ordinary dividends and qualified
D
dividends 8
Distributions from foreign
T
Table 1. Information on Personal
E
EIN 2
P
Taxes assigned to section 951A
category 12
Part III. Other Information for
Preparation of Form 1116 or
1118 9
Part IV. Information on Partners’
Section 250 Deduction With
Respect to Foreign-Derived
U
F
Part VI. Information on Partners'
Section 951(a)(1) and Section
W
Part VII. Information To Complete
Foreign taxes not creditable but
Part VIII. Partners' Information for
Base Erosion and Anti-Abuse Tax
deductible 9
Foreign taxes paid or accrued to
Worksheet A, Interest Paid or Accrued
Foreign taxes related to PTEP
Worksheet B, Sec. 2, Line 18, Column
Partner’s section 250 deduction re
(c) 25
FDII 14
26