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1065 Շվեյցարական Kil-ը եւ K33-ը

Շվեյցարական K2 եւ C (F33)

2023 թ.

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Department of the Treasury  
Internal Revenue Service  
2023  
Partnership Instructions for  
Schedules K-2 and K-3 (Form  
1065)  
Partners’ Distributive Share Items—International Partner’s Share of Income,  
Deductions, Credits, etc.—International  
Section references are to the Internal Revenue Code unless  
otherwise noted.  
Part 1, box 11. Certain partnerships are now required to report  
information concerning dual consolidated losses with Schedules  
K-2 and K-3.  
Contents  
Page  
General Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 1  
Purpose of Schedules K-2 and K-3 . . . . . . . . . . . 1  
Who Must File . . . . . . . . . . . . . . . . . . . . . . . . . . 1  
When and Where To File . . . . . . . . . . . . . . . . . . . 3  
How To Complete Schedules K-2 and K-3 . . . . . . 4  
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 4  
Schedule K-2, Identifying Information . . . . . . . . . . 5  
Schedule K-3, Identifying Information . . . . . . . . . . 5  
Part I, box 13. The new qualified intermediary agreement in  
Rev. Proc. 2022-43 (the QIA), 2022-52 I.R.B. 570, applies  
beginning January 1, 2023, including to qualified intermediaries  
that are qualified derivatives dealers (QDDs) as defined under  
the QIA. For more information, see the note, later.  
Part II. Amounts may now be entered in lines 41 through 43,  
columns (a) through (e), with respect to interest expense.  
Part VIII. Part VIII includes two new columns: (i) the foreign  
corporation's total net income, and (ii) the foreign corporation's  
current year foreign taxes for which credit is allowed. Part VIII  
also requests the functional currency of the foreign corporation.  
These additions will allow the preparer to include all information  
necessary for the section 960 computation on Part VIII without  
attaching Schedule Q (Form 5471).  
Part I. Partnership's Other Current Year  
International Information . . . . . . . . . . . . . . . . . 5  
Part II. Foreign Tax Credit Limitation . . . . . . . . . . 12  
Part III. Other Information for Preparation of  
Form 1116 or 1118 . . . . . . . . . . . . . . . . . . . . 14  
Part XIII. New lines have been added to Part XIII to provide  
additional information a nonresident alien, foreign trust, or  
foreign estate needs to complete Schedule P (Form 1040-NR) to  
report information and calculate gain or loss on the transfer of an  
interest in a partnership that directly or indirectly is engaged in  
the conduct of a trade or business within the United States.  
Part IV. Partners' Section 250 Deduction with  
Respect to FDII . . . . . . . . . . . . . . . . . . . . . . 19  
Part V. Distributions From Foreign  
Corporations to Partnership . . . . . . . . . . . . . . 23  
Part VI. Information on Partners' Section  
951(a)(1) and Section 951A Inclusions . . . . . . 24  
Domestic filing exception. A domestic filing exception that  
allows an exception for filing and furnishing Schedules K-2 and  
K-3 applies for 2023. See Domestic Filing Exception, later.  
Part VII. Information to Complete Form 8621 . . . . 26  
Part VIII. Partnership's Interest in Foreign  
Corporation Income (Section 960) . . . . . . . . . 30  
General Instructions  
Part IX. Partners' Information for Base Erosion  
and Anti-Abuse Tax (Section 59A) . . . . . . . . . 33  
The Instructions for Form 1065 and Instructions for Schedule K-1  
(Form 1065) generally apply to Schedules K-2 and K-3. These  
instructions provide additional information needed to complete  
Schedules K-2 and K-3 for tax years beginning in 2023.  
Part X. Foreign Partners' Character and  
Source of Income and Deductions . . . . . . . . . 37  
Part XI. Section 871(m) Covered Partnerships . . . 41  
Part XIII. Foreign Partner's Distributive Share  
Purpose of Schedules K-2 and K-3  
of Deemed Sale Items on Transfer of  
Schedule K-2 is an extension of Form 1065, Schedule K, and is  
used to report items of international tax relevance from the  
operation of a partnership.  
Partnership Interest . . . . . . . . . . . . . . . . . . . . 41  
Future Developments  
Schedule K-3 is an extension of Schedule K-1 (Form 1065)  
and is generally used to report to partners their shares of the  
items reported on Schedule K-2. Partners must include the  
information reported on Schedule K-3 on their tax or information  
returns, if applicable.  
For the latest information about developments related to  
Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and  
their instructions, such as legislation enacted after they were  
published, go to IRS.gov/Form1065.  
Who Must File  
What’s New  
Any partnership required to file Form 1065 that has items  
relevant to the determination of the U.S. tax or certain  
Part I, box 7, reserved. Box 7 requiring attachment of Form  
8858 has been reserved. Instead, box 13 now requires, in certain  
instances, information that a partner (whether direct or indirect)  
needs to complete Form 8858 with respect to a foreign branch or  
foreign disregarded entity owned by the partnership.  
withholding tax or reporting obligations of its partners 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  
Jan 3, 2024  
Cat. No. 74375Q  
     
must file each part and section. Penalties may apply for filing  
Form 1065 without all required information or for furnishing  
Schedules K-3 to partners without all required information. The  
penalties that apply with respect to Form 1065 and Schedule K-1  
apply with respect to Schedules K-2 and K-3, respectively. See  
Penalties in the Instructions for Form 1065.  
exception. See Regulations section 1.59A-3(b)(3)(i). DC’s  
distributive share of the $100 payment to the foreign subsidiary  
is $50.  
For purposes of determining whether a payment or accrual by  
a partnership is a base erosion payment, any amount paid or  
accrued by USP is treated as paid or accrued by each partner  
based on the partner’s distributive share of the item of deduction  
with respect to that amount. See Regulations section 1.59A-7(d)  
(2). Therefore, DC is treated as having paid $50 to the foreign  
subsidiary.  
DC must complete Form 8991, Tax on Base Erosion  
Payments of Taxpayers With Substantial Gross Receipts, to  
compute its base erosion minimum tax amount (if any);  
therefore, USP must complete the relevant portions of Schedules  
K-2 and K-3, Part IX.  
Except as otherwise required by statute, regulations, or other  
IRS guidance, a partnership isn't required to obtain information  
from its direct or indirect partners to determine if it needs to file  
each of these parts.  
A partnership is only required to complete and file the  
relevant portions of Schedules K-2 and K-3, as applicable. For  
example, if the partnership doesn't own (within the meaning of  
section 958) stock of a foreign corporation other than solely by  
reason of applying section 318(a)(3) (providing for downward  
attribution) as provided in section 958(b), it isn't required to  
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.  
Domestic Filing Exception (Exception to Filing  
Schedules K-2 and K-3)  
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, the partnership should check  
box 13 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).  
A domestic partnership (as defined under sections 7701(a)(2)  
and (4)) doesn't need to (a) complete and file Schedules K-2 and  
K-3, or (b) furnish to a partner Schedule K-3 (except where  
requested by a partner after the 1-month date (defined in criteria  
number 4, below)) if each of the following four criteria are met  
with respect to the partnership’s tax year 2023.  
1. No or limited foreign activity. During the domestic  
partnership’s tax year 2023, the domestic partnership either has  
no foreign activity (as defined below), or, if it does have foreign  
activity, such foreign activity is limited to (a) passive category  
foreign income (determined without regard to the high-taxed  
income exception under section 904(d)(2)(B)(iii)); (b) upon which  
not more than $300 of foreign income taxes allowable as a credit  
under section 901 are treated as paid or accrued by the  
partnership; and (c) such income and taxes are shown on a  
payee statement (as defined in section 6724(d)(2)) that is  
furnished or treated as furnished to the partnership.  
Note. A partnership that is, or has a branch that is, a QDD (a  
QDD partnership) must file Form 1065 even if it wouldn’t be  
required to file if it wasn’t a QDD partnership and must attach a  
statement to its Form 1065 with certain required information as  
provided in section 7.01(C) of the QIA. If the QDD partnership is  
filing Form 1065 solely because it’s a QDD partnership and  
wouldn’t otherwise be required to file Form 1065, then the QDD  
partnership isn’t required to complete Schedules K-2 and K-3.  
A partnership with no foreign source income, no assets  
generating foreign source income, no foreign partners, and no  
foreign taxes paid or accrued may still need to report information  
on Schedules K-2 and K-3. For example, if the partner claims a  
credit for foreign taxes paid or accrued by the partner, the  
partner may need certain information from the partnership to  
complete Form 1116, Foreign Tax Credit; or Form 1118, Foreign  
Tax Credit—Corporations. Also, a partnership that has only  
domestic partners may still be required to complete Part IX when  
the partnership makes certain deductible payments to foreign  
related parties of its domestic partners. The information reported  
in Part IX will assist any domestic corporate partner in  
Foreign activity. For purposes of the domestic filing  
exception, foreign activity means any of the following: (a) foreign  
income taxes paid or accrued (as defined in section 901 and the  
regulations thereunder); (b) foreign source income or loss (as  
determined in sections 861 through 865, and section 904(h), and  
the regulations thereunder); (c) ownership interest in a foreign  
partnership (as defined in sections 7701(a)(2) and (5)); (d)  
ownership interest in a foreign corporation (as defined in  
sections 7701(a)(3) and (5)); (e) ownership of a foreign branch  
(as defined in Regulations section 1.904-4(f)(3)(vii)); or (f)  
ownership interest in a foreign entity that is treated as  
determining the amount of base erosion payments made through  
the partnership, and in determining if the partners are subject to  
the base erosion and anti-abuse tax (BEAT). Further, if the  
domestic partnership with no foreign activity or foreign partners  
has direct or indirect domestic corporate partners, Part IV  
(concerning foreign-derived intangible income (FDII)) must be  
completed. A domestic or foreign publicly traded partnership  
(PTP) as defined in section 7704(b) with no foreign activity or  
foreign partners may need to complete Part XI. See each part for  
applicability.  
Example 1—Part IX required to determine base erosion  
payments. Foreign corporation wholly owns DC, a domestic  
corporation, and foreign corporation (foreign subsidiary). DC  
satisfies the gross receipts test. See Regulations section  
1.59A-2(d). In Year 1, DC owns a 50% interest in a domestic  
partnership, USP. An unrelated domestic corporation owns the  
remaining 50% interest in USP. DC’s investment in USP doesn't  
qualify for the small partner exception. See Regulations section  
1.59A-7(d)(2).  
disregarded as an entity separate from its owner (as defined in  
Regulations section 301.7701-3).  
2. U.S. citizen/resident alien partners. During tax year 2023,  
all the direct partners in the domestic partnership are (a)  
individuals that are U.S. citizens; (b) individuals that are resident  
aliens (as defined in section 7701(b)(1)(A) and the regulations  
thereunder); (c) domestic decedents’ estates (that is, decedents’  
estates that aren't foreign estates as defined in section 7701(a)  
(31)(A)), with solely U.S. citizen and/or resident alien individual  
beneficiaries; (d) domestic grantor trusts (that is, trusts  
described under sections 671 through 678) that aren't foreign  
trusts as defined in section 7701(a)(31)(B)) and that have solely  
U.S. citizen and/or resident alien individual grantors and solely  
U.S. citizen and/or resident alien individual beneficiaries; (e)  
domestic non-grantor trusts (that is, trusts subject to tax under  
section 641 that aren't foreign trusts as defined in section  
7701(a)(31)(B)) with solely U.S. citizen and/or resident alien  
individual beneficiaries; (f) S corporations with a sole  
shareholder; or (g) single-member limited liability companies  
(LLCs), where the LLC’s sole member is one of the persons in  
In Year 1, USP pays the foreign subsidiary $100 for services.  
The services aren't eligible for the services cost method  
2
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
     
subparagraphs (a) through (f), and the LLC is disregarded as an  
entity separate from its owner (as defined in Regulations section  
301.7701-3).  
receives the request from the partner. See Examples 3 and 4,  
later.  
Example 2—domestic filing exception met; issuance of  
Schedule K-3 not required. A married couple, U.S. citizens,  
each own a 50% interest in USP, a domestic partnership. USP  
and the married couple have a tax year end of December 31.  
USP invests in a regulated investment company (RIC). With  
respect to tax year 2023, USP receives Form 1099 from the RIC  
reporting $100 of creditable foreign taxes paid or accrued on  
passive category foreign source income. USP doesn't have any  
foreign activity other than that from the RIC. The married couple  
receive notification from USP on an attachment to Schedule K-1  
that they won't receive Schedule K-3 unless they request it. The  
married couple don't request Schedule K-3 from USP for tax  
year 2023. USP qualifies for the domestic filing exception, and,  
as such, USP doesn’t need to complete Schedules K-2 and K-3.  
3. Partner notification. With respect to a partnership that  
satisfies criteria 1 and 2, partners receive a notification from the  
partnership at the latest when the partnership furnishes the  
Schedule K-1 to the partner. The notice can be provided as an  
attachment to Schedule K-1. The notification must state that  
partners won't receive Schedule K-3 from the partnership unless  
the partners request the schedule.  
4. No 2023 Schedule K-3 requests by the 1-month date.  
The partnership doesn't receive a request from any partner for  
Schedule K-3 information on or before the 1-month date. The  
1-month date is 1 month before the date the partnership files the  
Form 1065. For tax year 2023 calendar year partnerships, the  
latest 1-month date is August 15, 2024, if the partnership files an  
extension. Any request from a partner for Schedule K-3  
information for a year prior to tax year 2023 will be considered a  
request for a tax year 2023 Schedule K-3 as well.  
Example 3—domestic filing exception not met. The facts  
are the same as in Example 2, except that each spouse owns a  
40% interest in USP, and A, a U.S. citizen, owns a 20% interest  
in USP. A requests Schedule K-3 from USP for tax year 2023 and  
USP receives this request on February 1, 2024. After requesting  
an extension, USP files Form 1065 on August 31, 2024. USP  
doesn't qualify for the domestic filing exception because A  
requested the Schedule K-3 by the 1-month date (July 31,  
2024). As such, USP must complete and file the parts and  
sections of Schedules K-2 and K-3 that are relevant to A. With  
respect to Schedules K-2 and K-3, USP doesn't need to  
complete, attach, or file any parts or sections relevant to the  
married couple. USP must provide a copy of the filed  
Note. If a partnership receives a request from a partner for  
Schedule K-3 information after the 1-month date for tax year  
2023 and hasn't received a request from any other partner for  
Schedule K-3 information on or before the 1-month date, the  
domestic filing exception is met and the partnership isn't required  
to file the tax year 2023 Schedules K-2 and K-3 or furnish the tax  
year 2023 Schedule K-3 to the non-requesting partners.  
However, the partnership is required to provide the tax year 2023  
Schedule K-3, completed with the requested information, to the  
requesting partner on the later of the date on which the  
partnership files Form 1065 or 1 month from the date on which  
the partnership receives the request from the partner. See  
Example 4, later. The partnership must complete and file tax  
year 2024 Schedules K-2 and K-3 with respect to the requesting  
partner by the tax year 2024 Form 1065 filing deadline if that  
partner is still a partner in tax year 2023.  
Schedule K-3 to A on the date that USP files its Form 1065. USP  
doesn't need to furnish Schedule K-3 to the married couple.  
Example 4—domestic filing exception met; Schedule K-3  
issuance still required. The facts are the same as in  
Example 3, except that USP receives the request from A on  
August 20, 2024. USP qualifies for the domestic filing exception  
because A requested Schedule K-3 after the 1-month date. USP  
isn't required to file the tax year 2023 Schedules K-2 and K-3 or  
furnish Schedule K-3 to the married couple. However, USP is  
required to provide Schedule K-3, completed with the requested  
information, to A on September 20, 2024, the later of the date on  
which USP files Form 1065 or 1 month from August 20, 2024.  
Because A requested Schedule K-3 for tax year 2023, USP must  
file tax year 2024 Schedules K-2 and K-3 with respect to the  
information requested by A to the extent that A is still a partner in  
tax year 2024.  
Note for partnerships that satisfy criteria 1 through 3, but  
don't satisfy criterion 4. If the partnership received a request  
from a partner for Schedule K-3 information on or before the  
1-month date and therefore the partnership doesn't satisfy  
criterion 4, the partnership is required to file Schedules K-2 and  
K-3 and furnish Schedule K-3 to the requesting partner.  
Schedules K-2 and K-3 are required to be completed only with  
respect to the parts and sections relevant to the requesting  
partner. For example, if a partner requests the information  
reported on Part III, Section 2, the partnership is required to  
complete and file Schedule K-2, Part III, Section 2, with respect  
to the partnership’s total assets and Schedule K-3, Part III,  
Section 2, with respect to the requesting partner’s distributive  
share of the assets. On the date that the partnership files  
Schedules K-2 and K-3, the partnership must provide a copy of  
the filed Schedule K-3 to the requesting partner. The partnership  
doesn't need to complete, attach, file, or furnish any other parts  
or sections of Schedules K-2 and K-3 to the IRS, the requesting  
partner, or any other partner. The partnership should keep  
records of the information requested by the partner. See  
Example 3, later.  
Note. If a partnership doesn't meet the domestic filing  
exception, it may meet the Form 1116 exemption exception to  
filing Schedules K-2 and K-3.  
When and Where To File  
Attach Schedules K-2 and K-3 to the partnership’s Form 1065  
and file both by the due date (including extensions) for that  
return.  
Provide Schedule K-3 to the partners of the partnership  
according to the timeline for providing Schedule K-1. See the  
Instructions for Form 1065.  
If a partnership receives requests from partners for  
Schedule K-3 information both on or before the 1-month date  
and after the 1-month date, the partnership is required to file  
Schedules K-2 and K-3 as described in the prior paragraph only  
with respect to the partner requests received on or before the  
1-month date. With respect to requests received after the  
1-month date, the partnership is required to provide  
Also, see the Instructions for Form 1065 for recordkeeping  
requirements and amendments or adjustments to Schedules K-2  
and K-3.  
Computer-Generated Schedules K-2 and K-3  
If a computer-generated Schedule K-2 or Schedule K-3  
conforms to and doesn't deviate from the official form and  
schedules, it may be filed with the IRS.  
Schedule K-3, completed with that partner’s requested  
information, on the later of the date on which the partnership files  
Form 1065 or 1 month from the date on which the partnership  
Important. Be sure to attach the approval letter to a  
computer-generated Schedule K-2 or K-3. However, if the  
3
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
           
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.  
information to figure and claim a foreign tax credit on Form 1116  
or 1118.  
Part VI of Schedule K-2 (and Part VI of Schedule K-3).  
Used to provide information the partner needs to determine any  
inclusions under sections 951(a)(1) and 951A. Partners will use  
the information to complete Form 8992, U.S. Shareholder  
Calculation of Global Intangible Low-Taxed Income (GILTI), and  
Forms 1040 and 1120 with respect to subpart F income  
inclusions, section 951(a)(1)(B) inclusions, and section 951A  
inclusions.  
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/pub/irs–pdf/p1167. For purposes of  
Schedules K-2 and K-3, the procedures relevant to Form 1065  
and Schedule K-1 (Form 1065) should be conformed with, to the  
extent possible.  
Part VII of Schedule K-2 (and Part VII of Schedule 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  
with respect to the passive foreign investment company (PFIC).  
Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).  
Used to provide the foreign corporation's net income in the  
income groups for purposes of the partner's deemed paid taxes  
computation with respect to inclusions under sections 951A,  
951(a)(1), and 1293(f). Partners will use the information to figure  
and claim a deemed paid foreign tax credit on Form 1118.  
Part IX of Schedule K-2 (and Part IX of Schedule K-3).  
Used to provide information for the partner to figure its BEAT.  
Partners will use the information to complete Form 8991.  
Part X of Schedule K-2 (and Part X of Schedule K-3).  
Used to provide information for the partner to figure its tax  
liability with respect to income effectively connected with a U.S.  
trade or business (ECI) or with respect to fixed, determinable,  
annual, or periodical (FDAP) income. Partners will use the  
information to figure and report any U.S. tax liability on Form  
1040-NR, U.S. Nonresident Alien Income Tax Return; and Form  
1120-F, U.S. Income Tax Return of a Foreign Corporation, or  
other applicable forms.  
How To Complete Schedules K-2 and K-3  
Reporting currency. Report all amounts in U.S. dollars except  
where specified otherwise.  
References to other forms. References in these instructions to  
Form 1040, U.S. Individual Income Tax Return, are intended, if  
applicable, to include Form 1040-SR, U.S. Tax Return for  
Seniors, as well as other tax returns for noncorporate partners  
such as Form 1041, U.S. Income Tax Return for Estates and  
Trusts. Similarly, references to Form 1120, U.S. Corporation  
Income Tax Return, are intended, if applicable, to apply to other  
forms in the 1120 series. References to forms which have been  
replaced are intended, if applicable, to include the replacement  
forms.  
Uses of the parts of Schedules K-2 and K-3, in general.  
Part I of Schedule K-2 (and Part I of Schedule K-3). Used  
to report international tax items not reported elsewhere on  
Schedule K-2 or K-3.  
Part II of Schedule K-2 (and Part II of Schedule 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 will use the  
information to figure and claim a foreign tax credit on Form 1116  
or 1118.  
Part XI of Schedule K-2 (and Part XI of Schedule K-3).  
Used to provide certain information to U.S. and foreign partners  
with respect to section 871(m) by a PTP that satisfies certain  
other requirements. Certain partners will use the information to  
determine their U.S. withholding tax obligations and to figure and  
report any U.S. tax liability on Form 1042, Annual Withholding  
Tax Return for U.S. Source Income of Foreign Persons; and  
Form 1042-S, Foreign Person's U.S. Source Income Subject to  
Withholding.  
Part III of Schedule K-2 (and Part III of Schedule 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 FDII  
deduction for purposes of 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. Additionally, it’s  
used to report income adjustments under section 743(b) by  
source and separate category. Partners will use the information  
to figure and claim a foreign tax credit on Form 1116 or 1118.  
Part IV of Schedule K-2 (and Part IV of Schedule K-3).  
Used to report the information necessary for the partner to  
determine its section 250 deduction with respect to FDII.  
Partners will use the information to claim and figure a section  
250 deduction with respect to FDII on Form 8993, Section 250  
Deduction for Foreign-Derived Intangible Income (FDII) and  
Global Intangible Low-Taxed Income (GILTI).  
Part V of Schedule K-2 (and Part V of Schedule K-3).  
Used to report 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’s  
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 with  
respect to 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).  
Part XII. Reserved for future use.  
Part XIII of Schedule K-3. Used to provide information for a  
foreign partner to figure its distributive share of deemed sale  
items on a transfer of an interest in a partnership that is engaged  
in the conduct of a trade or business in the United States.  
Partners will use this information as follows. A partner that:  
Is a nonresident alien individual, foreign trust, or foreign estate  
completes Schedule P (Form 1040-NR), Foreign Partner’s  
Interests in Certain Partnerships Transferred During Tax Year;  
Is a foreign corporation completes Schedule P (Form 1120-F),  
List of Foreign Partner Interests in Partnerships, Parts IV and V;  
Is a foreign partnership completes Form 4797, Sales of  
Business Property; and Form 8949, Sales and Other  
Dispositions of Capital Assets, as needed; or  
Had an installment sale, see Form 6252, Installment Sale  
Income.  
Specific Instructions  
If the information required in a given section exceeds the  
space provided within that section, don't enter “See  
!
CAUTION  
attached” in the section or leave the section blank.  
Partners will report the dividends and foreign currency gain or  
loss on Form 1040 or 1120. If eligible, partners will also use this  
information to figure and claim a dividends received deduction  
under section 245A on Form 1120. Partners will also use the  
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  
4
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
portions of Schedules K-2 and K-3. The additional sheets must  
conform to the IRS version of that section.  
taking into account that under section 267A they aren’t allowed  
deductions for the amounts listed in the statement with respect  
to box 6.  
Certain partners will use the information reported in  
Schedule K-2, Identifying Information  
attachments with respect to boxes 8 and 9 to identify any  
international tax information reporting forms or other international  
tax forms that may impact the partners’ tax returns.  
At the top of each new page, enter the name of the partnership  
and the employer identification number (EIN) of the partnership  
as they appear on Form 1065.  
Certain partners may use the information reported in  
attachments with respect to box 11 to determine any dual  
consolidated losses which may not be deducted on Form 1120.  
This part is used to report information for international tax  
items not reported elsewhere on 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 Schedule K-2. If applicable, the partnership  
must also complete Schedule K-3, Part I, and include with  
Schedule K-3 the attachment(s) as described below with the  
partner's distributive share of the amounts.  
Item A—Withholding foreign partnership. If the partnership  
is a withholding foreign partnership under Rev. Proc. 2017-21,  
2017-6 I.R.B. 791, check the “Yes” box. Otherwise, check the  
“No” box.  
If the “Yes” box is checked, provide the partnership's  
withholding foreign partnership employer identification number  
(WP-EIN). Enter the partnership's WP-EIN regardless of whether  
the partnership filed this Form 1065 using its WP-EIN.  
Item B—Qualified derivatives dealer (QDD). If the  
partnership (including the home office or any branch) is a QDD,  
check the “Yes” box. Otherwise, check the “No” box.  
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 with respect to  
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 with respect to 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  
with respect to such income; see section 865(e)(1).  
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 with respect to income from the sale or the income is  
eligible for re-sourcing under an applicable treaty, it must check  
box 1 and attach a statement to Schedules K-2 and K-3 (for  
distributive share) reflecting all the information shown in Table 1.  
Each item of property sold must be listed separately with the  
information shown in Table 1. The partnership may combine  
sales of stock property by country. Otherwise, don't combine  
sales of property. If the gain is capital, enter “long-term” or  
“short-term” in column (b). Enter the two-letter code from the list  
at IRS.gov/CountryCodes in column (f). Don't enter "various" or  
"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.  
If the “Yes” box is checked, provide the partnership's qualified  
intermediary employer identification number (QI-EIN).  
Item C—Part applicability. Check the “Yes” box to indicate the  
applicable parts of Schedules K-2 and K-3. Complete each  
applicable part.  
Check the “No” box to indicate the inapplicable parts of  
Schedules K-2 and K-3. Don't complete, file, or attach to Form  
1065 or Schedule K-3 the inapplicable parts.  
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 A and B.  
Items C and D. Items C and D should be the same as reported  
on Schedule K-1, Part II, items E and F.  
Item E. Item E should correspond to Schedule K-2, item C.  
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)  
Notes.  
Certain partners will use the information reported in the  
attachments with respect to boxes 1 through 5 and 10 to claim  
and figure a foreign tax credit on Form 1116 or 1118.  
Certain partners will also use the information reported in the  
attachments with respect to box 6 to prepare their tax returns  
(Forms 1040, 1120, 1040-NR, and 1120-F, as applicable) by  
Table 1. Information on Personal Property Sold (For use with Schedules K-2 and K-3 (Form 1065), 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 local currency in U.S. dollars  
(f) Taxing country  
(enter two-letter  
country code)  
distributive share). The partnership doesn’t need to complete  
Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through  
4; or Part III, lines 1 and 3. The partnership must 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.  
Box 2. Foreign oil and gas taxes. A separate foreign tax credit  
limitation is applied with respect to foreign oil and gas taxes. See  
section 907(a) and Regulations section 1.907(a)-1 for details. If  
the partnership has such taxes, it must check box 2 and attach a  
completed Schedule I (Form 1118), Reduction of Foreign Oil and  
Gas Taxes, to Schedules K-2 and K-3 (with the partner’s  
5
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
                   
The partnership attaches a partially completed Schedule I  
(Form 1118) so that the partner has the information it needs to  
complete Schedule I (Form 1118) or Form 1116. The partnership  
isn't attaching Schedule I (Form 1118) as a form required to be  
filed by the partnership for purposes of the partnership  
determining creditable taxes because a partnership can't claim a  
foreign tax credit.  
The separate category and source of income to which the  
taxes are assigned if determinable by the partnership.  
Section 2 of attached statement—potentially  
unsuspended taxes.  
Origin year of the splitter arrangement.  
Explanation of the splitter arrangement (for example, reverse  
hybrid owned by the partnership).  
Amount of taxes paid or accrued by the partnership in  
Box 3. Splitter arrangements. Foreign taxes with respect to 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 with respect to 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).  
The partnership must 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. A partnership may not be able to determine  
whether taxes are suspended and whether related income is  
taken into account. However, where the partnership is able 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, the partnership should report such taxes as  
potentially suspended taxes.  
connection with the splitter arrangement in the origin year of the  
splitter arrangement.  
Amount of related income on which such taxes were paid or  
accrued in the origin year of the splitter arrangement.  
The two-letter code for the country to which the taxes were  
paid or accrued from the list at IRS.gov/CountryCodes. Don't  
enter “various” or “OC” for the country code.  
The separate category and source of income to which the  
taxes are assigned if determinable by the partnership.  
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 if determinable by the partnership.  
Box 4. Foreign tax translation. Check box 4 if the partnership  
reports any foreign taxes on Schedules K-2 and K-3, Part III,  
Section 4. Attach the statement described in the instructions for  
those sections to Schedules K-2 and K-3.  
Box 5. High-taxed income. Check box 5 if the partnership has  
passive income and attach a statement to Schedules K-2 and  
K-3 with Worksheet 1 or Worksheet 2, or both, completed. The  
partner will use this information to determine whether its passive  
income is high-taxed passive income.  
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 section  
1.904-4(c)(3), except that the portion, if any, of the share of  
income attributable to income earned by a domestic partnership  
through a foreign qualified business unit (QBU) is separately  
grouped under the rules of Regulations section 1.904-4(c)(4);  
see also Regulations section 1.904-4(c)(5)(ii). For this purpose,  
a foreign QBU is a QBU (as defined in section 989(a)), other  
than a CFC or noncontrolled 10%-owned foreign corporation,  
that has its principal place of business outside the United States;  
see Regulations section 1.904-4(c)(3).  
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 with respect to an entity that took into account  
related income from the arrangement.  
Section 1 of attached statement—potentially suspended  
taxes.  
Explanation of the splitter arrangement (for example, reverse  
hybrid owned by the partnership).  
Amount of taxes paid or accrued by the partnership in  
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).  
connection with the splitter arrangement.  
Amount of related income on which such taxes were paid or  
accrued.  
The two-letter code for the country to which the taxes were  
paid or accrued from the list at IRS.gov/CountryCodes. Don't  
enter “various” or “OC” for the country code.  
Worksheet 1 for Schedule K-2, Part 1, Box 5  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(3).  
6
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
Worksheet 2 for Schedule K-2, Part 1, Box 5  
Name of foreign QBU:  
Complete a separate Worksheet 2 for each foreign QBU.  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(4).  
Example 5—Part I, box 5; high-taxed income. In Year 1,  
USP, a domestic partnership, has two domestic corporate  
partners with equal interests in the partnership. In Year 1, USP  
receives $100 of passive dividend income from a noncontrolled  
10%-owned foreign corporation subject to a 15% withholding  
tax. USP also receives $150 of passive interest income from an  
unrelated person subject to a 30% withholding tax. USP incurs  
$80 of expenses that are allocable to the interest income. USP  
also receives $50 of passive dividend income from a CFC, which  
isn't subject to foreign tax. No expenses are allocable to the  
dividend income. USP’s branch operation in Country X is treated  
as a QBU under section 989(a), receives $100 of passive  
dividend income subject to a 15% withholding tax. Finally, USP  
earns $400 of passive income with respect to 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 the distributive  
share of branch income. No expenses are allocable to the  
dividend income.  
For Year 1, USP checks box 5 on Schedule K-2 (Form 1065),  
Part I, and attaches Worksheet 1 and Worksheet 2 to  
Schedule K-2.  
Example 5. Worksheet 1  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
$170  
$60  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
0
50  
0
0
0
0
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(3).  
Example 5. Worksheet 2  
Name of foreign QBU: Country X QBU  
Complete a separate Worksheet 2 for each foreign QBU.  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
$100  
$15  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
0
0
0
0
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
280  
40  
Reference: Regulations section 1.904-4(c)(4).  
USP completes the same worksheets with the distributive  
shares and attaches those worksheets to each Schedule K-3  
provided to the partners.  
titled “Section 267A Disallowed Deduction” that separately lists  
the following information.  
The amount of interest paid or accrued by the partnership for  
which the partner isn't allowed a deduction under section 267A.  
The amount of royalty paid or accrued by the partnership for  
Box 6. Section 267A disallowed deduction. Check box 6 if  
the partnership paid or accrued any interest or royalty for which  
the partnership knows, or has reason to know, that one or more  
of its partners aren't allowed a deduction under section 267A.  
See the instructions for Form 1065, Schedule B, line 22, and  
additional information regarding section 267A. In addition, for  
each partner that is disallowed a deduction under section 267A,  
the partnership should check box 6 in Part I of the specific  
partner’s Schedule K-3 and attach to Schedule K-3 a statement  
which the partner isn't allowed a deduction under section 267A.  
The extent to which information reported on other parts of  
Schedule K-3 (for example, a line in Part II, Section 2; or Part IX,  
Section 2) reflects interest or royalty for which the partner isn't  
allowed a deduction under section 267A.  
7
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
When completing other parts of Schedules K-2 and K-3  
(for example, a line in Part II, Section 2; or Part IX,  
Section 2), list an amount without regard to whether the  
If the partnership attached any of the forms identified in  
box 8 or box 9 to Form 1065, the partnership doesn’t  
need to attach them again to Schedule K-2.  
TIP  
!
CAUTION  
partner is disallowed a deduction under section 267A for the  
amount.  
Box 10. Partner loan transactions. Check box 10 and attach  
a statement with the information in the applicable Table 2 or  
Table 3 if the partnership knows or has reason to know that it (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, the  
partnership will provide the details with respect to any  
downstream loans from its 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 on separate  
lines for each separate loan. The reporting should be as follows  
in Table 2.  
Note for boxes 8 and 9. If the 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; or Form 8865, Return of U.S. Persons With  
Respect to Certain Foreign Partnerships, the filer isn't required to  
complete and attach those forms. However, the filer must still  
attach to Form 1065 any required statements to qualify for the  
exception to filing Form 5471 or Form 8865.  
Box 8. Form 5471 information. Check box 8 and attach  
Form(s) 5471 to Form 1065 and Schedule K-1 (Form 1065) if  
either of the following apply.  
The partnership filed one or more Forms 5471.  
The partnership received Form(s) 5471 as an attachment to a  
Schedule K-3 issued to the partnership,  
Table 2. Downstream Loans  
Form 5471 doesn't need to be attached to Schedule K-1 or  
K-3 if the partnership knows or has reason to know that its direct  
partner (and any indirect partners) doesn't need the information  
on Form 5471 to prepare its tax return. For example, the  
partnership wouldn't need to attach Form 5471 to Schedules K-3  
for certain tax-exempt partners. A pass-through entity partner  
that receives Form 5471 with Schedule K-1 or Schedule K-3  
must provide the relevant portions of Form 5471 to its partner  
unless the pass-through entity knows or has reason to know that  
its direct partner (and any indirect partners) doesn't need the  
information on the Form 5471 to prepare its tax return.  
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 to each of the Schedules K-2 and K-3 a statement  
to expand the columns in the table to include the information  
requested in the first two columns for each such partner.  
Upstream loans. On an attached statement, the partnership  
will provide the details with respect to 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 on separate lines for each  
separate loan. The reporting should be as follows in Table 3.  
If a partner only needs certain information from Form 5471,  
such as Schedule Q, the partnership needs only to attach that  
portion to Schedule K-3 and not the complete Form 5471.  
Box 9. Other forms. Check box 9 and attach any applicable  
forms to Form 1065 and Schedule K-1 if any of the following  
apply.  
The partnership filed any other international tax forms.  
Another person filed these forms on behalf of the partnership.  
The partnership received these forms as an attachment to  
Schedule K-1 or Schedule K-3 issued to the partnership.  
This includes, but isn't limited to, the following forms.  
Table 3. Upstream Loans  
Form 5713, International Boycott Report.  
Name of  
Borrower  
Borrower’s  
TIN  
Date  
of  
Amount  
of  
Interest  
Income  
for the  
Year  
Form 8833, Treaty-Based Return Position Disclosure Under  
Section 6114 or 7701(b).  
Loan  
Loan  
Form 8621.  
Exception for Form 8621. With respect to Schedule K-3,  
the partnership should check box 9 if the partnership checked  
box 9 on Schedule K-2. The partnership should indicate in an  
attachment to Schedule K-3 that Form(s) 8621 is attached to  
Schedule K-2. The partnership doesn’t need to attach Form  
8621 to Schedule K-1 or K-3.  
If there are any partners in the same affiliated group as the  
borrower, attach to each of the Schedules K-2 and K-3 a  
statement to expand the columns in the table to include the  
information requested in the first two columns for each such  
partner.  
Form 8990. If the partnership has filed Form 8990, check  
box 9 and provide on Schedule K-1 the information needed to  
complete Form 8990, Schedule A, for foreign partners which are  
required to report their distributive share of excess business  
interest expense, excess taxable income, and excess business  
interest income, if any, that is attributable to income effectively  
connected with a U.S. trade or business. See the instructions for  
Schedule K-1 (Form 1065), line 20, code AH.  
Box 11. Dual consolidated loss. Check box 11 if either the  
reporting partnership (a) 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) is a hybrid entity (as defined in Regulations section  
Withholding tax returns. Don’t include any withholding tax  
returns required to be filed under chapters 3 and 4 (sections  
1441 through 1474).  
1.1503(d)-1(b)(3)). However, box 11 should only be checked if  
the reporting partnership knows that one or more of its direct or  
indirect partners are domestic corporations (other than a RIC, a  
real estate investment trust (REIT), or an S corporation). A  
domestic corporate partner's interest in the reporting 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  
See Other Forms, Returns, and Statements That May Be  
Required in the Instructions for Form 1065.  
8
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
             
loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1  
through 1.1503(d)-8.  
If box 11 is checked, a reporting partnership should include in  
attachments to the Schedule K-2 and the Schedules K-3 of a  
partner that is either a domestic corporation or a partnership the  
following.  
Information that a partner (whether direct or indirect) needs to  
complete Form 8858 with respect to a foreign branch or foreign  
disregarded entity owned by the partnership, if section 987 is  
applied to the activities of the foreign branch or foreign  
disregarded entity using a method that requires the partner,  
rather than the partnership, to recognize section 987 gain or  
loss.  
The foreign country in which each foreign branch is located.  
The foreign country in which each hybrid entity is subject to an  
Schedule K-2, Parts II and III, and Schedule K-3,  
Parts II and III  
income tax either on their worldwide income or on a residence  
basis.  
For each foreign branch and hybrid entity, including if the  
Certain partners will use the following information to claim and  
figure a foreign tax credit on Form 1116 or 1118. If the  
partnership doesn't qualify for the domestic filing exception,  
Schedules K-2 and K-3, Parts II and III, must be completed  
unless (a) the partnership doesn't have a direct or indirect  
partner that is eligible to claim a foreign tax credit, or (b) no direct  
or indirect partner would have to file Form 1116 or 1118 to claim  
the foreign tax credit.  
reporting partnership owns an interest in a partnership that owns  
a foreign branch or hybrid entity:  
1. On Schedules K-2, separately state the net income or  
loss attributable to each direct and indirect foreign branch or  
hybrid entity of the partnership, as determined under  
Regulations section 1.1503(d)-5(c); and  
2. On Schedule K-3, for each partner that is a domestic  
corporation or a partnership, separately state the partner's  
distributive share of the net income or loss of each direct and  
indirect foreign branch or hybrid entity of the partnership.  
Partners eligible to claim credit. A partner that’s 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).  
Whether a foreign use (as described in Regulations section  
1.1503(d)-3 and determined as if a net loss attributable to a  
partnership separate unit were a dual consolidated loss)  
occurred during the tax year with respect to a net loss of a  
partnership separate unit.  
Whether a transfer of assets (as described in Regulations  
section 1.1503(d)-6(e)(1)(iv)) or a transfer of an interest in a  
separate unit (as described in Regulations section  
1.1503(d)-6(e)(1)(v)) occurred during the tax year with respect to  
a foreign branch or hybrid entity.  
Form 1116 exemption exception. Under section 904(j),  
certain partners aren't required to file Form 1116 (Form 1116  
domestic partnership isn't required to complete Schedules K-2  
and K-3 if all partners are eligible for the Form 1116 exemption  
and the partnership receives notification of the partners’  
eligibility for such exemption by the 1-month date (as defined  
earlier). If a partnership receives notification from only some of  
the partners that they're eligible for the Form 1116 exemption,  
the partnership doesn’t need to complete Schedule K-3 for those  
exempt partners but must complete Schedules K-2 and K-3 with  
respect to the other partners to the extent that the partnership  
doesn't qualify for the domestic filing exception.  
A partnership that doesn't have or receive sufficient  
information or notice regarding a direct or indirect partner must  
presume such partner is eligible to claim a foreign tax credit and  
such partner would have to file Form 1116 to claim a credit. As  
such, the partnership must complete Schedules K-2 and K-3,  
including Parts II and III, accordingly.  
The organizational chart described in item 5 of Form 8858.  
If a foreign disregarded entity made its election to be treated  
as disregarded from its owner during the tax year, whether the  
tax owner claimed a loss with respect to stock or debt of the  
foreign disregarded entity as a result of the election.  
Box 12. Schedule K-2 (Reserved for future use). Sched-  
ule K-3, Form 8865 information. If the partnership transferred  
property to a foreign partnership that would subject one or more  
of its domestic partners to reporting under section 6038B and  
Regulations section 1.6038B-2(a)(2) but didn't file Schedule O  
(Form 8865), Transfer of Property to a Foreign Partnership,  
containing all the information required under Regulations section  
1.6038B-2, with respect to the transfer, then the partnership  
must provide the necessary information for each partner to fulfill  
its reporting requirements under Regulations section 1.6038B-2.  
The partnership should check box 12 on Schedule(s) K-3 and  
attach the relevant information, as applicable to each partner.  
Box 12 shouldn’t be checked on Schedule K-2.  
Example 6—Form 1116 exemption. A married couple,  
both U.S. citizens, each own a 50% interest in USP, a domestic  
partnership. The couple and USP each have a calendar tax year.  
USP invests in a RIC. USP receives Form 1099 from the RIC  
reporting $400 of creditable foreign taxes paid or accrued on  
passive category foreign source income. USP’s only foreign  
activity is from the RIC. The married couple don't pay or accrue  
any foreign taxes other than their distributive share of USP’s  
foreign taxes. They also don't have any other foreign source  
income. They qualify for the Form 1116 exemption and notify  
USP by the 1-month date that they don't need Schedule K-3.  
Even though USP doesn't qualify for the domestic filing  
exception because the creditable foreign taxes paid or accrued  
by USP are greater than $300, because the married couple  
notify USP by the 1-month date that they don't need  
Box 13. 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 that is attached to Schedules K-2 and K-3 and check  
box 13.  
Don't report with respect to box 13 any withholding tax returns  
required to be filed under chapters 3 and 4 (sections 1441  
through 1474). These forms are separately filed with the IRS.  
Do report with respect to box 13 the following.  
Form 926, Return by a U.S. Transferor of Property to a Foreign  
Corporation.  
Information a partner (whether direct or indirect) that is a U.S.  
Schedule K-3 under the Form 1116 exemption, USP doesn’t  
need to complete Schedules K-2 and K-3.  
shareholder of a CFC needs to complete Form 5471.  
Information a filer needs to complete Form 8865 to the extent  
that one of the partners (whether direct or indirect) is an entity for  
which there is a Form 8865 filing requirement.  
Partnerships with no foreign partners and limited or no for-  
eign activity. In many instances, a partnership with no foreign  
9
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
partners, no foreign source income, no assets generating foreign  
source income, and no foreign taxes paid or accrued may still  
need to report information on Schedules K-2 and K-3. For  
example, if the partner claims the foreign tax credit, the partner  
generally needs certain information from the partnership on  
Schedule K-3, Parts II and III, to complete Form 1116 or 1118.  
This information should have been reported in prior years,  
including before the Tax Cuts and Jobs Act, with Schedules K  
and K-1, and is information the partner needs to compute the  
foreign tax credit limitation, which determines the amount of  
foreign tax credit available to the partner.  
partners, and these instructions take this into account by  
excepting the partnership from completing certain portions of  
Schedules K-2 and K-3 with respect to these partners.  
Schedules K and K-1 contain net amounts but don't include  
separately stated reporting for the partnership’s interest expense  
for international tax reporting purposes, or the tax book value of  
the assets; see Regulations section 1.861-9(e). See the  
instructions for Part II, lines 39 through 43, and Part III, Section 2,  
for further guidance.  
Example 7—Parts II and III required for partnership with  
no foreign activity. U.S. citizens A and B own equal interests in  
USP, a domestic partnership. USP has no foreign activity. In Year  
1, A pays $2,000 of foreign income taxes on passive category  
income other than capital gains reported to A on a payee  
statement. A has interest expense of $5,000 and USP doesn't  
have interest expense. None of A’s interest expense is directly  
allocable. A doesn't have an overall domestic loss in tax year  
2023.  
Because A must complete Form 1116 to claim a foreign tax  
credit, A requests a Schedule K-3 by the 1-month date, and  
therefore the domestic filing exception doesn't apply to USP with  
respect to A. USP must complete the relevant portions of Parts II  
and III of Schedules K-2 and K-3 (for A). The tax book value of  
USP’s assets is $100,000 (reported on Schedule K-2, Part III,  
Section 2, column (a)) and A’s share of those assets is $50,000  
(reported on Schedule K-3, Part III, Section 2, column (a)). Not  
including its distributive share of the assets of USP, the tax book  
value of A’s assets is $50,000. Of A’s assets, $10,000 generate  
passive category foreign source income and $40,000 generate  
U.S. source income. A has passive category foreign source  
taxable income before interest expense of $8,000. A’s U.S. tax  
rate is 25%. A’s interest expense and USP’s assets are  
Exception. See Domestic Filing Exception, earlier.  
Section 904 generally limits the foreign tax credit to the  
portion of U.S. tax liability attributable to foreign source taxable  
income. Foreign source taxable income is foreign source gross  
income less allocable expenses. In general, the partnership  
must complete Schedules K-2 and K-3, Parts II and III, because  
the partnership’s gross income, gross receipts, expenses,  
assets, and foreign taxes paid may affect the foreign tax credit  
available to the partner. The source of certain gross income and  
gross receipts is determined by the partner. In addition, some  
expenses of the partnership are allocated and apportioned by  
the partner. Because of this partner determination, it isn't  
possible for the partner to assume that all income of the  
partnership is U.S. source and all expenses of the partnership  
reduce U.S. source income. Also, the allocation and  
apportionment of certain partner expenses take into account  
distributive shares of assets and income of the partnership that  
aren't otherwise reported in the specified format on the  
Schedule K-1.  
For example, for sourcing purposes, personal property sold  
by the partnership is treated as sold by the partners; see section  
865(i)(5). Generally, income from the sale of certain personal  
property (excluding inventory) is sourced according to the  
residence of the seller. In cases in which the partner is a  
pass-through entity, the partnership might not know the ultimate  
residence of the first non-pass-through partner. The partnership  
isn't required to separately state gain from the sale of personal  
property on Schedules K and K-1 because it is generally  
included in ordinary income. However, the gain is separately  
reported on Schedules K-2 and K-3, Part II.  
As another example, the partner’s R&E expense (which  
includes the distributive share of the partnership’s R&E expense)  
is allocated and apportioned by the partner; see Regulations  
section 1.861-17(f). R&E expense is allocated and apportioned  
based on the gross receipts by Standard Industrial Classification  
(SIC) code. R&E expense by SIC code isn't required reporting on  
Schedules K and K-1 but is reported on Schedules K-2 and K-3,  
Part II. The partner needs Schedule K-3, Part III, Section 1, for  
the partner’s share of the partnership’s gross receipts by SIC  
code for purposes of allocating and apportioning R&E expense.  
characterized in the same category under sections 163 and 469  
for purposes of Regulations section 1.861-9T(d). A uses the tax  
book value (as opposed to the alternative tax book value) to  
allocate and apportion interest expense.  
A’s interest expense is apportioned between U.S. source and  
foreign source income ratably based on the tax book value of A’s  
U.S. source and foreign source assets. Without taking into  
account the distributive share of USP’s assets, the amount of A’s  
interest expense that would reduce passive category foreign  
source income is $1,000 ($5,000 x ($10,000/$50,000)).  
Therefore, A’s passive category foreign source taxable income  
would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A  
may only use $1,750 (25% (0.25) x $7,000) of the $2,000 of  
foreign taxes. See section 904.  
Taking into account the distributive share of USP’s assets, the  
amount of A’s interest expense that reduces passive category  
foreign source income is $500 ($5,000 x ($10,000/$100,000)).  
Therefore, A’s passive category foreign source taxable income  
would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, A may  
use $1,875 (25% (0.25) x $7,500) of the $2,000 of foreign  
taxes—an additional foreign tax credit amount of $125 after  
taking into account A’s share of the tax book value of the  
partnership assets. B doesn't request a Schedule K-3 from USP  
for tax year 2023. Under the domestic filing exception, USP  
doesn't need to complete Schedule K-3 for B.  
In some cases, the partner will be able to use the information  
reported on Parts II and III to increase the foreign tax credit  
limitation, and the amount of available foreign tax credit to the  
partner. For example, Part III, Section 2, provides the partner  
with the tax book value of the assets of the partnership. In  
general, a partner apportions interest expense to reduce U.S.  
source income or foreign source income based on the tax book  
value of its assets, including its distributive share of the  
Example 8—Part II, not Part III, required for partnership  
with no foreign activity. The facts are the same as in  
Example 7, except that A has $5,000 of deductions that aren't  
definitely related to any gross income as described in  
partnership’s interest expense and assets; see section 864(e)(2)  
and Regulations section 1.861-9(e). Taking into account the  
assets of a domestic partnership generating solely U.S. source  
income would result in more expense allocated to reducing U.S.  
source income and less expense allocated to reduce foreign  
source income. Additional foreign source income increases the  
partner’s foreign tax credit limitation and the ability of the partner  
to claim foreign tax credits. The regulations provide exceptions to  
asset method apportionment for certain less-than-10% limited  
Regulations section 1.861-8(e)(9), and A and USP have no other  
expenses. Further, A’s share of USP’s gross income is $50,000.  
Not including its distributive share of the income of USP, A’s  
gross income is $50,000. Of A’s gross income, $5,000 is passive  
category foreign source gross income and $45,000 is U.S.  
source gross income. USP doesn't have any gross income the  
source of which is determined by the partner.  
10  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
A’s expenses must be ratably apportioned based on A’s gross  
income (including its distributive share of the income of USP);  
see Regulations section 1.861-8(c)(3). Therefore, USP must  
complete Schedule K-2, Part II, and Schedule K-3, Part II (for A).  
Before taking into account the distributive share of USP’s gross  
income, the amount of A’s expenses described in Regulations  
section 1.861-8(e)(9) that reduce foreign source income is $500  
($5,000 x ($5,000/$50,000)). Therefore, A’s foreign source  
taxable income would be $4,500 ($5,000 − $500). At a 25% U.S.  
tax rate, A may only use $1,125 (25% (0.25) x $4,500) of the  
$2,000 of foreign taxes. See section 904.  
Taking into account the distributive share of USP’s gross  
income, the amount of A’s expenses described in Regulations  
section 1.861-8(e)(9) that reduce foreign source income is $250  
($5,000 x ($5,000/$100,000). Therefore, A’s foreign source  
taxable income would be $4,750 ($5,000 − $250). At a 25% U.S.  
tax rate, A may use $1,187.50 (25% (0.25) x $4,750) of the  
$2,000 of foreign taxes in Year 1, which is an additional foreign  
tax credit amount of $62.50 after taking into account A’s  
distributive share of the gross income of USP.  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns in  
Schedule K-3, Parts II and III.  
Certain gross income, gross receipts, assets, COGS,  
deductions, and taxes aren't assigned to a source or separate  
category by the partnership. See Partner determination, later.  
Schedule K-3. If the partnership knows that some of its  
partners are limited partners that own less than 10% of the value  
of the partnership and that don't hold their interest in the ordinary  
course of the partner's active trade or business, when  
completing the Schedule K-3 for the less-than-10% limited  
partners, the partner's distributive share of the partnership’s  
foreign source gross income and gross receipts should be  
reported as passive category income and its deductions  
allocated and apportioned to foreign source income should be  
reported as reducing passive category income; see Regulations  
section 1.904-4(n)(1)(ii)(A). See Schedule K-3:  
Part II, column (c);  
Part III, Section 1, column (c);  
Part III, Section 3, column (b); and  
Part III, Section 5, column (d).  
Because A and USP don't have R&E expense or interest  
expense, and because USP didn't pay or accrue any foreign  
taxes, USP doesn't need to complete Schedules K-2 and K-3,  
Part III.  
Report the foreign taxes paid or accrued on foreign source  
income as passive category income in Part III, Section 4, column  
(d).  
If the partnership knows that some of its partners are limited  
partners that own less than 10% of a capital and profits interest  
in the partnership, don't complete Schedule K-3, Part III, Section  
2, for these partners. See Regulations section 1.861-9(e)(4)(i).  
Note. A partner may need the distributive share of the  
partnership’s gross income for purposes of allocating and  
apportioning expenses other than those described in  
Regulations section 1.861-8(e)(9).  
Foreign branch category income. A domestic partnership  
itself doesn't have foreign branch category income. However,  
report all amounts that would be foreign branch category income  
of its partners as if all partners were U.S. persons that were not  
pass-through entities. See Schedule K-2:  
General filing instructions. On Schedule K-2, Parts II and III,  
the partnership reports its gross income, gross receipts, cost of  
goods sold (COGS), certain deductions, and taxes by source  
and separate category. The partnership also reports information  
that the partner needs to allocate and apportion expenses and  
determine the source of certain items of gross income and gross  
receipts. Unless specifically noted below, the partnership reports  
on Schedule K-3, Parts II and III, the partner’s share of the  
partnership’s gross receipts, gross income, COGS, certain  
deductions, and taxes by source and separate category. The  
partner adds its share of the partnership’s foreign source gross  
income, gross receipts, COGS, certain deductions, and taxes by  
separate category to its other foreign source gross income,  
gross receipts, COGS, certain deductions, and taxes in that  
separate category to figure its foreign tax credit. The partnership  
also reports on the Schedule K-3 the distributive share of  
expenses and the allocation and apportionment factors so that  
the partner may determine expenses allocated and apportioned  
to foreign source income.  
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 determined by  
the partnership 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.  
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).  
Partnership determination. The source and separate  
category of certain gross receipts, gross income, and COGS as  
well as the allocation and apportionment of certain deductions  
can be determined by 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:  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns in  
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.  
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).  
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); Part III, Section 3, column  
(d); and Part III, Section 5, column (f).  
In Part III, Section 2, columns (a) through (e), some  
partnership assets may be characterized by source and  
separate category by the partnership. This includes certain  
assets that attract directly allocated interest expense under  
Temporary Regulations section 1.861-10T(b) and (c); see  
Temporary Regulations section 1.861-10T(d)(2).  
In Part III, Section 4, in the U.S. and Foreign columns, the  
partnership assigns foreign taxes paid or accrued to a separate  
category and source.  
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). 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  
11  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
           
group, the partnership must assign those taxes to section 951A  
category income.  
The partnership will enter such taxes on Part III, Section 4,  
column (b). This code isn't utilized in other portions of Parts II  
and III.  
Schedule K-2, Part II, and Schedule K-3, Part II  
(Foreign Tax Credit Limitation)  
Section 1—Gross Income (Lines 1 Through 24)  
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  
Form 1118, 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.  
Therefore, those required to file Form 1116 will report  
Schedule K-3, Section 1, 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 1065,  
Schedule K.  
Income re-sourced by treaty. If a sourcing rule in an  
applicable income tax treaty treats 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) or 951A  
and re-sourced as foreign source income under a treaty.  
The designations below are only relevant for Part III, Section  
4, column (f).  
Code RBT PAS. If an applicable income tax treaty treats 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.  
Code RBT GEN. If an applicable income tax treaty treats 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.  
For each line in Section 1, 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 with respect to 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 Schedule K-2,  
Part II, and Schedule K-3, Part II, for that type of income.  
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 there is an election to apply  
the treaty, enter code RBT 951A.  
Partner determination. Enter the gross income, income  
adjustments, and gross receipts of the partnership that are  
required to be sourced by the partner on Schedule K-2:  
If income is U.S. source, enter “US.Don't enter “various” or  
Part II, Section 1, column (f);  
“OC” for the country code.  
Part III, Section 1, column (f);  
Part III, Section 3, lines 1 and 2, column (e); and  
Part III, Section 5, column (g).  
Note. For Part II, column (f), enter the code XX if the partnership  
can't determine the country or U.S. territory with respect to which  
the gross income and gross receipts are sourced because the  
source is determined by the partner. However, don't enter the  
code XX for 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 with respect to that gain. See sections 865(e) and  
865(g). Instead, enter for Part II, column (f), the foreign country  
to which the partnership paid the tax of at least 10% of the gain.  
Each gross income and gross receipts item (for example,  
sales vs. interest income) may have different countries listed on  
lines 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 with  
respect to RICs and section 863(b). See the instructions for  
Forms 1116 and 1118 for the exceptions that apply in completing  
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.  
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. Attach a statement to  
the Form 1065 to identify the separate category of income under  
section 904(d) of the amounts listed in Part II, Section 1, column  
(f).  
Include deductions that are allocated and apportioned by the  
partner on Schedule K-2:  
Part II, Section 2, column (f); and  
Part III, Section 3, lines 3 and 4, column (e).  
This includes most interest expense and R&E expense. See  
Regulations sections 1.861-9(e) and 1.861-17(f).  
Enter the assets that are assigned to a source and separate  
category by the partner on Schedule K-2, Part III, Section 2,  
column (f).  
Enter the foreign taxes that are assigned to a source of  
income by the partner on Schedule K-2, Part III, Section 4, in the  
Partner column. This includes taxes imposed on certain sales  
income.  
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 Forms 1116 and 1118 so that,  
for example, the IRS may initially evaluate whether taxpayers are  
claiming credits for compulsory payments to foreign  
governments.  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns on  
Schedule K-3, Parts II and III.  
12  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
Example 9—Part II: multiple country sources: gross  
income. In Year 1, USP, a domestic partnership, has employees  
who perform services in Country X and Country Y. USP earns  
$25,000 of general category services income, $10,000 with  
respect to Country X and $15,000 with respect to Country Y. The  
two-letter code for Country X is AA and the two-letter country  
code for Country Y is YY. USP makes the following entries on the  
first two lines of Schedule K-2, Part II, line 2.  
Example 10. Schedule K-2, Part II, Section 1, Line  
11  
Foreign Source  
(a) U.S. source  
Description  
(c) Passive category  
income  
11 Net short-term capital  
gains  
Example 9 Table  
A
B
C
D
US  
FR  
CA  
HA  
$1,000  
$400  
($300)  
($200)  
Foreign Source  
Description  
(d) General category  
income  
2
Gross income from performance of services  
Line 12. Net long-term capital gain. On line 12, report net  
long-term capital gain, excluding amounts reported on lines 13,  
14, and 15.  
A
B
AA  
YY  
$10,000  
$15,000  
Line 13. Collectibles (28%) gain. Report collectibles gain on  
Lines 3 and 4. Rental income. These lines are reported  
separately because they're reported separately on Form 1065,  
Schedule K. The sourcing rule may be the same for both types of  
rental income.  
line 13 and not on 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. Include  
an attachment indicating the amount of unrecaptured section  
1250 gain that is also net section 1231 gain.  
Lines 7 and 8. Ordinary dividends and qualified dividends.  
Enter only ordinary dividends on line 7 and only qualified  
dividends on line 8. Don't include as ordinary dividends or  
qualified dividends the amount of any distributions received to  
the extent that they're attributable to PTEP in annual PTEP  
accounts of the partnership. See the instructions for line 19 for  
when a partnership might have an income inclusion with respect  
to a foreign corporation.  
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.  
Line 28. Net long-term capital loss. Report net long-term  
capital loss on line 28, excluding collectibles loss which is  
reported on line 29.  
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 therefore 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.  
Line 29. Collectibles loss. Report collectibles loss on line 29  
and not on line 28.  
Lines 16 and 46. Section 986(c) gain and loss. Include the  
partnership’s share of a lower-tier pass-through entity’s section  
986(c) gain or loss, and the amount of section 986(c) gain or  
loss on distributions of PTEP sourced from an annual PTEP  
account of the partnership. This isn't reported as a net amount  
but rather separate items. 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.  
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 1065, 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.  
Example 10—Parts II and III: capital gains and losses.  
Note. A partnership is only responsible for computing and  
reporting foreign currency gain or loss under section 986(c) with  
respect to distributed PTEP sourced from an annual PTEP  
account of the partnership. It isn't responsible for computing or  
reporting foreign currency gain or loss under section 986(c) with  
respect to distributed PTEP sourced from an annual PTEP  
account of a direct or indirect partner.  
Partnership has the following amounts for tax year 2023.  
Sources of Income for Example 10  
Short-term capital gains/losses  
Total  
$900  
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.  
A partnership may also obtain section 987 gain or loss  
information from Form 8858. This isn't reported as a net amount  
but rather separate items. Total section 987 gains for the year are  
reported on line 17. Total section 987 losses for the year are  
reported on line 47.  
U.S. source  
$1,000  
$400  
Passive category (France)  
Passive category (Canada)  
Passive category (Haiti)  
($300)  
($200)  
Partnership reports these amounts on Schedule K-2, Part II,  
Section 1, line 11, as follows.  
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  
13  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
               
partner, the section 988 gain and loss would be reported in  
column (f).  
generated by such partnership property. See Temporary  
Regulations section 1.861-9T(e)(1).  
Line 19. Section 951(a) inclusions. Report section 951(a)  
inclusions if the domestic partnership takes into account such  
income. A domestic partnership doesn't have a section 951(a)  
inclusion with respect to a foreign corporation for tax years of the  
foreign corporation that begin on or after January 25, 2022. A  
domestic partnership may not have a section 951(a) inclusion  
with respect to a foreign corporation for tax years of the foreign  
corporation that begin before January 25, 2022, if, pursuant to  
Regulations section 1.958-1(d)(4), it applies Regulations  
sections 1.958-1(d)(1) through (3) to be treated as not owning  
stock of a foreign corporation within the meaning of section  
958(a) for purposes of section 951, and for purposes of any  
other provision that applies by reference to section 951.  
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  
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 Example 11, later. If the  
partnership’s only partners are corporate partners, the  
partnership doesn’t need to report its 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 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.  
Exception. With respect to limited partners that each own  
less than 10% of the capital and profits interests of the  
partnership, and such interests aren't owned in the ordinary  
course of the partner’s active trade or business, the partnership  
reports the partners’ distributive shares of interest expense as  
reducing passive category foreign source income in column (c).  
However, if the partnership interest is held in the ordinary course  
of the partner's active trade or business, a partner's share of the  
partnership’s interest expense (other than partnership interest  
expense that is directly allocated to identified property under  
Regulations section 1.861-10T) is apportioned in accordance  
with the partner's relative distributive share of gross foreign  
source income in each separate category and of gross domestic  
source income from the partnership in columns (a) through (e)  
as applicable. See Regulations sections 1.861-9(e)(4)(i) and  
1.904-4(n)(1)(ii) for more information.  
Section 2—Deductions (Lines 25 Through 54)  
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 -10T. 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. Section 2 also  
generally corresponds to the deductions separately reported on  
Form 1065, Schedule K.  
Exception. See Regulations sections 1.861-9(e)(8) and (9)  
for a special rule for partnership loans. See also Box 10. Partner  
loan transactions, earlier.  
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. Foreign taxes that  
are creditable (even if a partner chooses to deduct such taxes)  
aren't reported as expenses on Part II. Creditable taxes are  
reported on Part III, Section 4.  
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  
Manual (SIC code); see osha.gov/data/sic-manual.  
Lines 49 and 50. Other deductions. Attach to 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)  
Section 1—R&E Expenses Apportionment Factors  
Line 38. Charitable contributions. Charitable contribution  
deductions are apportioned solely to U.S. source gross income;  
see Regulations section 1.861-8(e)(12). Therefore, this  
deduction should be reported in column (a).  
This section requires the partnership to report information that a  
partner will use to allocate and apportion its R&E expense for  
foreign tax credit limitation purposes.  
Lines 39 and 40. Interest expense specifically allocable un-  
der Regulations section 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  
A partnership 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)).  
14  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
                     
Deductible R&E expenses, as described in section 174, are  
ordinarily definitely related to gross intangible income  
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  
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. R&E expenses are allocated and apportioned  
by the partner; see Regulations section 1.861-17(f)(1). This  
requires that the partnership report to its partners the gross  
receipts by SIC code according to source and separate category  
of income. This also requires that the partnership reports the  
amount of R&E expense performed in the United States and  
outside the United States to apply exclusive apportionment; see  
Regulations section 1.861-17(f)(2).  
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 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).  
Note. Attach to Form 1065 a second Part III, Section 2, if the  
partnership reports both the tax book value and the alternative  
tax book value of its assets to the partners.  
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). The partnership characterizes its 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.  
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. Include on line 1 assets  
without directly identifiable yield referred to in Regulations  
section 1.861-9T(g)(3)(iii).  
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 reductions in asset values  
reported on Schedule K-2.  
Note. Line 2 isn't reported according to source or separate  
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. Include on line 5 assets without directly  
identifiable yield referred to in Regulations section 1.861-9T(g)  
(3)(iii).  
category.  
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 1.861-9T(d). This includes reporting the assets  
according to such classifications. If the partnership has no such  
partners, the partnership doesn’t need to complete  
This section requires the partnership to report information that a  
partner will use to allocate and apportion its interest expense for  
foreign tax credit limitation purposes.  
Complete this Section 2 only if the partnership or the partners  
have interest or stewardship expenses.  
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). Therefore, the  
instructions with respect to Part III, Section 2, for interest  
expense apportionment factors apply generally to the partner’s  
stewardship expense apportionment.  
Schedule K-2, Part III, Section 2, lines 6b through 6d; or  
Schedule K-3, Part III, Section 2, lines 6b through 6d. The  
partnership includes 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 individual, estate, and certain trust  
partners (whether direct or indirect through a pass-through  
entity).  
With respect to corporate partners with an interest in the  
partnership of 10% or more, interest expense, including the  
15  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Example 11—Parts II and III: asset method  
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 the partnership may  
not have the 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.  
With respect to a partnership-owned specified 10% foreign  
corporation that isn't a CFC, the partnership will 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). The partnership must attach a statement to  
Schedules K-2 and K-3 with the following information for each  
foreign corporation for which adjusted basis is reported on line 7.  
apportionment of interest expense. A, a U.S. citizen, has a  
10% interest in USP, a domestic partnership. USP is engaged in  
the active conduct of a U.S. trade or business. USP’s business  
generates only domestic source income. USP also has an  
investment portfolio consisting of several less-than-10% stock  
investments. USP has a bank loan. The proceeds of the bank  
loan were divided equally between the business and the  
investment portfolio. A’s only business assets and investment  
assets are its distributive share of those owned by USP. A’s only  
interest expense is that from its distributive share of the USP  
loan.  
A’s share of the interest expense with respect to the loan for  
USP’s business is $2,000. It is apportioned on the basis of  
business assets. Because all business income is domestic  
source, the business assets are domestic assets and reported  
on Schedules K-2 and K-3, Part III, Section 2, line 6b, column  
(a). A’s $2,000 share of the interest expense is reported on  
Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S.  
source income by the partner.  
The interest expense for A’s share of the loan for USP’s  
investments is $2,000 and is reported on Schedule K-3, Part II,  
line 42, column (f). The investment interest must be apportioned  
on the basis of investment assets. Applying the asset method,  
$80,000 of USP’s adjusted basis in its investment portfolio stock  
generates domestic source income and $120,000 of USP’s  
adjusted basis in the stock generates foreign source passive  
income. USP reports these amounts on Schedule K-2, Part III,  
Section 2, line 6c, columns (a) and (c), respectively. A’s  
distributive share of the adjusted basis in USP’s stock is $8,000  
with respect to the stock generating domestic source income  
and $12,000 with respect to the stock generating foreign source  
passive income. Such amounts are reported on Schedule K-3,  
Part III, Section 2, line 6c, columns (a) and (c), respectively. With  
respect to the interest expense on the loan for USP’s  
Name of foreign corporation.  
EIN or reference ID number. Don't enter “FOREIGNUS” or  
“APPLIED FOR.”  
Percentage of voting and value of stock owned by partnership  
in such foreign corporation.  
Value of the stock in such corporation included in each of the  
groupings on lines 6b through 6d (identify separately each of  
those groupings).  
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 a non-section 245A subgroup under the  
rules described in Regulations section 1.861-13(a)(5).  
However, because the partnership will generally not have the  
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.  
With respect to partnership-owned CFCs, the partnership will  
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). The partnership must attach a statement to  
Schedules K-2 and K-3 with the following information for each  
foreign corporation for which basis is reported on line 8.  
investments, $800 (($8,000/$20,000) x $2,000) is apportioned to  
domestic source income and $1,200 (($12,000/$20,000) x  
$2,000) is apportioned to foreign source passive income.  
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 6d.  
Include the total distributive share on line 6a.  
Name of foreign corporation.  
EIN or reference ID number. Don't enter “FOREIGNUS” or  
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  
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).  
“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  
Don't complete this Section 3 if the partnership knows that it has  
no domestic corporate partners (whether direct or indirect).  
This section requires the partnership to report information that  
a partner will use to allocate and apportion its 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 the partnership  
to report information that its partners will use to determine the  
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 can't  
16  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
source and separate category of its income so that the partners  
may allocate and apportion the FDII deduction under section  
250(a)(1)(A) for purposes of the foreign tax credit limitation.  
Example of Multiple Types of Income for the Same  
Country  
Lines 1 and 2. Report the partnership’s foreign-derived gross  
receipts and COGS, respectively, by source and separate  
category.  
Description  
(a) Type of tax  
1
Direct (section 901 or 903) foreign taxes: Paid  
Accrued  
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).  
A
B
AA  
AA  
WHTD  
OTH  
Column (b). Section 951A category income. 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. A partnership might not  
be able to complete this column due to lack of information  
regarding the treatment of the current year distributions.  
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.  
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.  
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).  
Section 4—Foreign Taxes  
Don't complete this Section 4 if the partnership doesn't pay or  
accrue foreign taxes.  
In Part III, Section 4, the partnership assigns 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.  
On the line after category code, enter one of the following  
codes.  
Code RBT PAS. If an applicable income tax treaty treats any  
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.  
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.  
Code RBT GEN. If an applicable income tax treaty treats 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.  
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  
Code RBT 951A. If an applicable income tax treaty treats any  
section 986(a).  
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.  
Column (a). Enter the code for the type of tax.  
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  
Withholding tax on dividends  
Withholding tax on distributions of  
PTEP  
WHTP  
WHTB  
Note. Don't include on line 1 any foreign taxes not creditable but  
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 4, 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  
WHTR  
WHTI  
Withholding tax on interest  
Taxes paid or accrued to foreign  
countries or territories on certain  
effectively connected income  
ECI  
Other foreign taxes paid or accrued  
on sales income  
OTHS  
Note. Check only one box “Paid” or “Accrued” depending on the  
method of accounting the partnership takes into account foreign  
taxes.  
Other foreign taxes paid or accrued  
on services income  
OTHR  
OTH  
Other foreign taxes paid or accrued  
Enter on a separate line, indicated by the letters A through F,  
taxes paid or accrued to each country. Enter the two-letter code  
from the list at IRS.gov/CountryCodes. Don't enter “various” or  
“OC” for country code.  
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.  
17  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
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 with  
respect to RICs and section 863(b). These exceptions apply as  
well to reporting of taxes in this section.  
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 with  
respect to different countries, report such redeterminations on  
separate lines. Enter the two-letter code from the list at IRS.gov/  
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 with  
respect to RICs and section 863(b). Don't enter “various” or “OC”  
for the country code.  
Similarly, if there is more than one redetermination in a year  
with respect to the same country, but the redeterminations are  
related to different years, report such redeterminations on  
separate lines.  
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, with respect to 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, with respect to 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.  
Example 12—Part III, Section 4: multiple country  
sources: foreign taxes. The facts are the same as in  
Example 9, earlier. USP uses the cash method of accounting  
and pays taxes of $1,000 and $3,000 to Countries AA and YY,  
respectively. USP completes Part III, Section 4, line 1, as follows.  
Example 12 Table  
(e) General  
category income  
Description  
(a) Type of tax  
Foreign  
1
Direct (section 901 or 903) foreign  
ߛ
taxes:  
A AA  
B YY  
Paid  
Accrued  
OTHR  
OTHR  
$1,000  
$3,000  
Line 2. Enter on line 2, as negative number, the sum of the  
taxes in the following categories.  
Taxes on foreign mineral income (section 901(e)).  
Taxes attributable to boycott operations (section 908).  
Reduction in taxes for failure to timely file (or furnish all of the  
information required on) Forms 5471 and 8865 (section  
6038(c)).  
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,  
therefore, isn't considered an amount of tax paid for purposes of  
section 901 until the contest is resolved. Thus, 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 their distributive share of such contested foreign  
income tax liability; see Regulations section 1.905-1(f)(2).  
Foreign income taxes paid or accrued during the current tax  
year with respect to splitter arrangements under section 909.  
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), section 965(b) PTEP, a  
portion of which isn’t creditable. The partnership may be unable  
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 is important to  
track this amount as a tax on a distribution.  
Other. Attach a statement to Schedules K-2 and K-3  
indicating the reason for the reduction.  
Partnerships that are contesting a foreign income tax liability  
with a foreign country but that have remitted all or a portion of  
such contested liability should report information about the  
contested tax on line 3, and check the “Contested tax” box. In  
addition, partnerships should 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 contested foreign income tax. If  
it is 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).  
There isn’t a need to report the amounts on line 2 by country.  
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.  
Exception. Partnerships subject to subchapter C of  
chapter 63 of the Code (BBA partnerships) are generally  
required to file an administrative adjustment request (AAR)  
under Regulations section 1.905-4(b)(2)(ii) to account for a  
foreign tax redetermination. If an AAR is filed with respect to a  
foreign tax redetermination (or if an AAR will be timely filed),  
don't report the foreign tax redetermination on line 3.  
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.  
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  
is the U.S. tax year that includes the close of the foreign tax year  
18  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Section 5—Other Tax Information  
Schedule K-2, Part IV (Information on Partners’  
Section 250 Deduction With Respect to  
This section provides other tax information that a partner needs  
to figure its foreign tax credit limitation.  
Foreign-Derived Intangible Income (FDII)), and  
Schedule K-3, Part IV (Information on Partner’s  
Section 250 Deduction With Respect to  
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 with respect to a tax described in  
section 901(j).  
Foreign-Derived Intangible Income (FDII))  
Note. Certain partners will use the following information to claim  
and figure a section 250 deduction with respect to FDII on Form  
8993.  
This part is used by the partnership to report information to a  
direct domestic corporate partner (other than REITs, RICs, and S  
corporations) or to a partner which is a partnership that has a  
direct or indirect domestic corporate partner (other than REITs,  
RICs, and S corporations) needed to determine the domestic  
corporate partner's FDII. A partnership that doesn't have or  
receive sufficient information or notice regarding a partner must  
presume the partner is a domestic corporate partner or a  
partnership that has a direct or indirect domestic corporate  
partner, and the partnership must complete Schedules K-2 and  
K-3, Part IV, accordingly. Any partnership with direct or indirect  
domestic corporate partners must complete this part, even if the  
partnership doesn't have foreign-derived gross receipts. Even if  
a partnership has no foreign activities, and therefore has no  
FDDEI as reported in Section 2 of this part, the partnership must  
still report the information required by Sections 1 and 3 of this  
part so that any direct or indirect 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 (QBAI)  
(see the instructions for line 8 of this part) in such a case to  
determine its deemed tangible income return and deemed  
intangible income (DII); see section 250(b)(2).  
Line 1. For partnerships other than 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 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. The  
partnership 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 on other parts of  
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.  
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 a partnership should  
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.  
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 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. The  
partnership 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) negative income  
adjustments should be included as relevant in other parts of  
Schedule K-2. For example, the section 743(b) income  
Enter each amount and total amounts in U.S. dollars. The  
partnership should 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. The  
partnership should report these amounts based on the best  
information available to it about how its partners might use this  
information to determine their FDII deduction. The partnership  
may report certain information differently to each partner  
depending on federal income tax determinations that the partner  
makes. Each partner must then figure its FDII deduction using  
Form 8993 including the information reported to it on  
Schedule K-3, Part IV, taking into account partner  
adjustments should be reflected as part of the total depreciation  
reported on Part II, Section 2.  
determinations. A partner must obtain (and if requested by a  
partner, the partnership must provide) any further necessary  
information from the partnership to correctly determine its FDII  
deduction.  
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 Regulations sections 1.250(b)-3(f),  
1.250(b)-4(d)(3), and 1.250(b)-5(e)(4). In all other cases, a  
19  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
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). Therefore, the partner must be able to  
satisfy the general or special substantiation requirements to be  
eligible for the deduction. To the extent the partner doesn't have  
the necessary information in its possession to substantiate the  
deduction, the partnership must maintain the information.  
Line 2a. DEI gross receipts. Enter DEI gross receipts.  
Line 2b. DEI COGS. Enter the amount of COGS 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 gross DEI, without interest and R&E expense. See  
Regulations section 1.250(b)-1(d)(2) for more details. Enter the  
amounts of interest and R&E expenses on Section 3, lines 13  
and 16, respectively. Deductions properly allocable to gross DEI  
are determined without regard to sections 163(j), 170(b)(2), 172,  
246(b), and 250.  
As described above, the partnership should determine the  
partner's share of each item below in accordance with the  
partner's distributive share of the underlying item of income,  
gain, deduction, and loss of the partnership.  
Example 13—partners’ reporting of DEI and QBAI. DC is  
a domestic corporation that owns a 50% interest in a domestic  
partnership, USP. USP manufactures and sells Product A and  
provides services, both solely to U.S. persons. The services give  
rise to domestic oil and gas extraction income (DOGEI) for  
purposes of section 250(b)(3)(A)(i)(V). USP has $200 in gross  
receipts from sales of Product A, $100 in COGS, and $50 in  
properly allocated and apportioned deductions (none of which  
are interest or R&E expenses). USP reports these amounts on  
Schedule K-2, Part IV, Section 1, lines 2a through 2c,  
Lines 3 through 7 are exclusions from DEI used to determine  
the partner’s DEI.  
Line 3. Section 951(a) inclusions. Enter any amounts  
included in the partnership’s gross income under section 951(a)  
(1). Include the section 78 gross-up with respect to the inclusion  
under section 951(a)(1). A domestic partnership doesn't have a  
section 951(a) inclusion with respect to a foreign corporation for  
tax years of the foreign corporation that begin on or after January  
25, 2022. A domestic partnership may not have a section 951(a)  
inclusion with respect to a foreign corporation for tax years of the  
foreign corporation that begin before January 25, 2022, if,  
pursuant to Regulations section 1.958-1(d)(4)(i), it applies  
Regulations sections 1.958-1(d)(1) through (3) to such tax years,  
which treats a domestic partnership as not owning stock of a  
foreign corporation within the meaning of section 958(a) for  
purposes of section 951, and for purposes of any other provision  
that applies by reference to section 951.  
respectively, and 50% of these amounts on the same section  
and lines of the Schedule K-3 that USP issues to DC, because  
this information is necessary for DC to compute its deduction  
eligible income (DEI). The net amount increases DC’s DEI,  
which increases its DII and in turn increases its section 250  
deduction for FDII. DC uses these amounts to calculate its gross  
DEI on Form 8993, Part I, line 4.  
Note. Partners will determine whether any amount included in  
the gross income of such corporate partner is GILTI under  
section 951A (or the section 78 gross-up with respect to this  
inclusion under section 951A), which can only be determined by  
the partner and therefore isn't reported on Schedules K-2 and  
K-3, Part IV, Section 1.  
USP has $100 in gross receipts from services, $50 in cost of  
services, and $25 in properly allocated and apportioned  
deductions (none of which are interest or R&E expenses).  
Because the performance of these services results in DOGEI, it  
doesn't give rise to DEI, but rather the net amount ($25) is  
reported on Schedule K-2 Part IV, Section 1, line 6, and 50% of  
the net amount is reported to DC on the same line and section of  
Schedule K-3, so that DC can treat this amount as an exclusion  
from its DEI. DC’s DEI is determined without this amount by  
subtracting the amount from DEI on Form 8993, Part I, line 2e.  
USP owns two properties, Asset C which has an adjusted  
basis of $1,000, and Asset D which has an adjusted basis of  
$1,200. Asset C is used in the production of Product A and Asset  
D is used in providing the DOGEI services. Because sales of  
Product A give rise to DEI, USP should report the partnership’s  
adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV,  
Section 1, line 8 (and $500 is reported to DC on the same  
section/line of Schedule K-3). This increases DC’s QBAI, and  
thereby increases DC’s deemed tangible income return (DTIR).  
The increase to DTIR decreases DC’s DII which in turn  
Line 4. Controlled foreign corporation (CFC) dividends.  
Enter the amount of any dividend received from a CFC with  
respect to which the partner is a U.S. shareholder as defined  
under section 951(b). Don't include as a dividend any amount  
received from a CFC to the extent that such amount is  
attributable to PTEP in the annual PTEP accounts of the  
partnership. See sections 959(a) and 959(d).  
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.  
decreases its section 250 deduction for FDII. DC uses the  
amount to determine its DTIR from partnerships on Form 8993,  
Part I, line 7b. The services, however, don't give rise to DEI, so  
USP shouldn’t include the partnership’s adjusted basis in Asset  
D ($1,200) on Schedule K-2, Part IV, Section 1, line 8.  
USP has no sales or services provided to foreign persons and  
therefore no FDDEI to report on Part IV, Section 2. Even though  
the partnership has no interest or R&E deductions, in many  
cases, the partnership would still have to complete Part IV,  
Section 3.  
Line 6. Domestic oil and gas extraction income. Enter the  
amount of net DOGEI 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)). A partnership should report all  
income that would be foreign branch income of its partners as if  
all partners were U.S. persons.  
Section 1—Information To Determine Deduction  
Eligible Income (DEI) and Qualified Business  
Asset Investment (QBAI) on Form 8993  
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).  
Line 1. Net income (loss). This amount may equal line 1 of  
Analysis of Net Income (Loss) on Form 1065, page 5.  
20  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
The adjusted basis is determined by using the alternative  
depreciation system under section 168(g) and allocating  
depreciation deductions with respect to 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 with respect to which a deduction is allowable under  
section 167. See Regulations section 1.250(b)-2(b).  
of income from B assets is non-DEI. Thus, the B assets are  
partnership specified tangible property with respect to X only,  
and USP 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 with respect to X and  
Y. Thus, the C assets are partnership specified tangible property  
with respect to both X and Y, but USP 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 with respect to the  
C assets bears to the total amount of gross income produced  
with respect to the C assets.  
If a domestic corporation holds an interest in one or more  
partnerships during a tax year (including indirectly through one  
or more partnerships that are partners in a lower-tier  
partnership), the QBAI of the domestic corporation for the tax  
year is increased by the sum of the domestic corporation’s  
partnership QBAI with respect to each partnership for the tax  
year. See Regulations section 1.250(b)-2(g)(1).  
Section 2—Information To Determine  
Foreign-Derived Deduction Eligible Income  
(FDDEI) on Form 8993  
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).  
Foreign-derived gross receipts means, with respect to a  
partnership, gross receipts of the partnership for the  
partnership's tax year that are used to figure the amount of gross  
FDDEI as defined in Regulations section 1.250(b)-1.  
Partnership specified tangible property means, with respect  
to a domestic corporation, tangible property that is used in the  
trade or business of the partnership, of a type with respect to  
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 a partnership can't determine the portion of partnership  
specified tangible property (for example, if the partnership  
doesn't know 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, the partnership must 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 wouldn't include  
in its adjusted bases in the partnership specified tangible  
property.  
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 section 475(e)(2)(B) through (D).  
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 with respect to  
property, located outside the United States as defined in  
Regulations section 1.250(b)-5.  
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).  
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 with respect to the property bears to  
the total amount of gross income produced with respect to the  
property. See Regulations section 1.250(b)-2(g)(8), Example 2,  
for guidance on how to figure the partner adjusted basis. If  
specified tangible property is only partially depreciable, then only  
the depreciable portion is QBAI.  
Example 14—domestic corporate partner; specified  
tangible property. X and Y are both domestic corporations that  
are partners in USP, 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 USP and with respect to which a  
deduction is allowable under section 167. The production of  
income from A assets is DEI with respect to X and Y. Thus, the A  
assets are partnership specified tangible property with respect to  
X and Y, and USP 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 with respect to X. However, with respect to Y, the production  
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).  
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 means 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 COGS attributable to the  
amount(s) on line 9.  
For purposes of this form, when figuring FDDEI, COGS  
includes the COGS to customers, and adjusted basis of  
21  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
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).  
COGS must be attributed to gross receipts with respect to  
gross DEI or gross FDDEI regardless of whether certain costs  
included in COGS can be associated with activities undertaken  
in an earlier tax year (including a year before the effective date of  
section 250).  
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 whose interest in the partnership is 10% or more  
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 basis in an asset which is stock in nonaffiliated 10%-owned  
corporations, adjust such amount for E&P; see Regulations  
section 1.861-12(c)(2)(i)(A).  
The total interest expense 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.  
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 Section 3, lines 13 and 16, respectively.  
Deductions are determined without regard to sections  
163(j),170(b)(2), 172, 246(b), and 250.  
A corporate partner with a less than 10% interest in a  
partnership shall directly allocate its distributive share of the  
partnership’s interest expense to its distributive share of  
partnership gross income. See Regulations section 1.861-9(e)  
(4).  
Column (a). General property. Enter the amount of the  
deductions that are allocated and apportioned to gross FDDEI  
from all sales of general property.  
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).  
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 14A. Total average value of assets. 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 (c). Services. Enter the amount of the deductions that  
are allocated and apportioned to gross FDDEI from all services.  
Line 12. Other apportioned deductions. Enter all other  
apportioned deductions that relate to gross FDDEI that aren't  
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 14B. Sections 734(b) and 743(b) adjustments to as-  
sets. 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).  
Lines 14C and 14D. Assets attracting directly allocable in-  
terest expense under Regulations sections 1.861-10(e)  
and -10T. 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).  
Section 3—Other Information for Preparation of  
Form 8993  
Line 13. Interest deductions. The term “interest” refers to the  
gross amount of interest expense incurred by a taxpayer in a  
given year. Generally, interest expense includes any expense  
that is currently deductible under section 163 (including original  
issue discount (OID)), and interest equivalents. See Regulations  
section 1.861-9(b)(1) for the definition of interest equivalents and  
Temporary Regulations section 1.861-9T(c) for sections that  
disallow, suspend, or require the capitalization of interest  
deductions. Include excess business interest expense (EBIE)  
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).  
Line 14E. Assets excluded from apportionment factors.  
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 the partnership to report information that a  
partner will use to allocate and apportion its R&E expense for  
FDII purposes. A partnership isn't required to complete lines 15  
and 16 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)). 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.  
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. Other interest expense. Enter all interest  
deductions not otherwise included on lines 13A and 13B.  
Line 14. Interest expense apportionment factors. This line  
requires the partnership to report information that a partner will  
use to allocate and apportion its interest expense for FDII  
purposes.  
R&E expenses are allocated and apportioned by the partner.  
This requires that the partnership report to its partners the gross  
receipts related to certain income within the statutory and  
residual groupings within a SIC code and the partner’s  
Interest deductions are apportioned to gross DEI and FDDEI  
ordinarily based on the tax book value of the taxpayer’s assets;  
22  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
     
distributive share of the partnership’s R&E deductions, if any,  
connected with the SIC codes.  
respect to 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). 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 both  
the upper-tier partnership and the lower-tier partnership are to  
be reported on separate rows on the upper-tier partnership's  
Schedules K-2 and K-3 (Form 1065), Part V. If the partnership  
owns stock of a foreign corporation through another partnership  
(lower-tier partnership) from which it receives Schedule K-3  
(Form 1065 or 8865), Part V, the partnership must replicate each  
line of Schedule K-3 (Form 1065 or 8865), Part V, on its  
Schedules K-2 and K-3 (Form 1065), Part V. Rows for  
Line 15. 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 16. R&E expenses by SIC code. Enter the amount of  
R&E expense by SIC code.  
Schedule K-2, Part V, and Schedule K-3, Part V  
(Distributions From Foreign Corporations to  
Partnership)  
Note. Certain partners will use the following information, in  
combination with other information known to the partners,  
including Schedule P (Form 5471), to exclude from gross income  
distributions to the extent that they're attributable to PTEP in their  
annual PTEP accounts and report foreign currency gain or loss  
with respect to the PTEP on Forms 1040 and 1120. If eligible,  
partners will also use this information to figure and claim a  
dividends received deduction under section 245A on Form 1120.  
distributions with respect to a partnership's direct ownership of  
foreign corporation stock should be listed before rows for  
distributions with respect to a partnership’s ownership of foreign  
corporation stock through a pass-through entity.  
If the partnership is a domestic partnership, the partnership  
may have annual PTEP accounts with respect to the foreign  
corporation, or the foreign corporation may have E&P that, when  
distributed, are excludable from the partnership’s gross income  
under section 1293(c). Don't report distributions to the extent  
that they're attributable to PTEP in annual PTEP accounts of the  
partnership or to E&P that are excludable from the partnership’s  
gross income under section 1293(c). Distributions by the foreign  
corporation to the partnership that are attributable to PTEP in  
annual PTEP accounts of the partnership should be properly  
reflected on the Schedules J (Form 5471) for the foreign  
corporation. The partnership should provide this information to  
its partners as appropriate.  
However, to the extent a distribution is attributable to PTEP in  
an annual PTEP account of the partnership with respect to a  
foreign corporation, or attributable to E&P that are excludable  
from the partnership’s gross income under section 1293(c), that  
corresponds to a tax year of the foreign corporation that ended  
with or within a tax year of the partnership (a) that began after  
December 31, 2012; and (b) for which an election under  
Regulations section 1.1411-10(g) wasn't made by the  
partnership (such PTEP, NII PTEP), append Worksheet 3 to  
Schedule K-2 and Worksheet 4 to each K-3 in the format shown,  
adding additional rows as necessary for each distribution by a  
foreign corporation. For more information about net investment  
income (NII) and net investment income tax (NIIT) relating to  
CFCs and qualified electing funds (QEFs), see Regulations  
section 1.1411-10.  
Use Schedule K-2, Part V, to report the distributions made by  
foreign corporations to the partnership.  
Use Schedule K-3, Part V, to report the partner's share of the  
amounts reported on Schedule K-2, Part V.  
Exception. Schedule K-2, Part V, isn't required to be  
completed with respect to distributions by a foreign corporation if  
the partnership 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 with respect to any distribution by  
the foreign corporation. Nevertheless, the partnership may be  
required to append Worksheet 3 to Schedule K-2 (discussed  
below).  
Exception. Schedule K-3, Part V, for a partner doesn't need  
to be completed with respect to distributions by a foreign  
corporation if the partnership 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 with respect to any distributions  
by the foreign corporation. Nevertheless, the partnership may be  
required to append Worksheet 4 to Schedule K-3 for the partner  
(discussed below). If this exception is applicable with respect to  
a foreign corporation, the sum of the amounts reported on  
Schedules K-3, Part V, with respect to the foreign corporation  
may not equal the amounts reported on Schedule K-2, Part V,  
with respect to the foreign corporation.  
Note. If additional rows are required, attach statements to  
Schedules K-2 and K-3 that look like the current versions of  
Schedule K-2, Part V, and Schedule K-3, Part V, respectively.  
Rows A through O. Use rows A through O to report information  
with respect to each distribution by a foreign corporation with  
23  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Worksheet 3  
Worksheet 3 (Schedule K-2)  
(a) Name of distributing foreign  
corporation  
(b) EIN or reference ID (c) Date of  
number distribution  
(d) Functional  
currency of  
(e) Amount of NII (f) Spot rate  
PTEP in functional (functional  
(g) Amount of NII  
PTEP in U.S.  
dollars  
distributing foreign currency  
corporation  
currency to U.S.  
dollars)  
Worksheet 4  
Worksheet 4 (Schedule K-3)  
(a) Name of distributing foreign  
corporation  
(b) EIN or reference ID (c) Date of  
number distribution  
(d) Functional  
currency of  
(e) Partner’s share (f) Spot rate  
(g) Partner’s share  
of NII PTEP in U.S.  
dollars  
of NII PTEP in  
(functional  
distributing foreign functional currency currency to U.S.  
corporation  
dollars)  
Column (b). Enter the EIN or reference ID number of the  
distributing foreign corporation. Don't 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 (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).  
Schedule K-2, Part VI (Information on Partners’  
Section 951(a)(1) and Section 951A Inclusions),  
and Schedule K-3, Part VI (Information on  
Partner’s Section 951(a)(1) and Section 951A  
Inclusions)  
Column (c). Enter the year, month, and day in which the  
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  
ISO 4217 standard. These codes are available at ISO.org/  
Note. Certain partners will use the following information to  
complete Form 8992 and Forms 1040 and 1120 with respect to  
income inclusions under section 951(a) (subpart F income  
inclusions), section 951(a)(1)(B) inclusions, and section 951A  
inclusions.  
Note. Columns (e) and (f) are reported in functional currency.  
Column (e). This represents the partnership’s share of the  
amount distributed in functional currency. See Schedule R (Form  
5471), column (c).  
Schedules K-2 and K-3, Part VI, must be completed with  
respect to 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).  
Column (f). This represents the partnership's share of the  
amount of E&P distributed in functional currency. See  
Schedule R (Form 5471), column (d). The total of the amounts  
reported in column (f) with respect to a distributing foreign  
corporation should equal the partnership's share of the total  
reported on line 9 of all Schedules J on a separate category of  
income basis as reported in Schedule J (Form 5471) TOTAL filed  
with respect to the distributing foreign corporation.  
If a Schedule J (Form 5471) with code TOTAL entered on line  
a isn’t filed with respect to the distributing foreign corporation,  
then the total of the amounts reported in column (f) with respect  
to a distributing foreign corporation should equal the  
partnership's share of the amount reported in Schedule J (Form  
5471), line 9, column (f), filed with respect to the distributing  
foreign corporation.  
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.  
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.  
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.  
If the partnership is a domestic partnership, then the domestic  
partnership doesn't have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for  
tax years of the foreign corporation that begin on or after January  
25, 2022, under Regulations section 1.958-1(d)(1). A domestic  
partnership may not have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for a  
tax year of the foreign corporation that begins before January 25,  
2022, if, pursuant to Regulations section 1.958-1(d)(4)(i), the  
partnership applies Regulations sections 1.958-1(d)(1) through  
(3) to such tax year and, thus, is treated as not owning stock of a  
foreign corporation within the meaning of section 958(a) for  
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).  
24  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
purposes of section 951, or the partnership isn't a U.S.  
shareholder of the foreign corporation during such tax year. If the  
partnership doesn't have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for a  
tax year of the foreign corporation, the subpart F income  
inclusions and section 951(a)(1)(B) inclusions with respect to the  
foreign corporation for such tax year that are reported in  
Schedule K-2, Part VI, columns (e) and (f), aren't inclusions of  
the partnership. Schedule K-3, Part VI, columns (e) and (f),  
report the information partners will need to figure and report their  
subpart F income inclusions and section 951(a)(1)(B) inclusions  
with respect to the CFC.  
A partner's GILTI is figured based on its share of the following  
amounts for each CFC with respect to 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).  
A partner's share of a CFC's subpart F income, amounts used  
to determine its section 956 amount with respect to 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 Schedules K-2  
and K-3, Part VI, use only the partner's share of a CFC's subpart  
F income, amounts used to determine its section 956 amount  
with respect to a CFC, and a CFC's GILTI items through the  
partner's ownership in the partnership.  
Note. If the partnership is a domestic partnership that is treated  
as owning stock of a foreign corporation within the meaning of  
section 958(a) for purposes of section 951 for a tax year that  
begins before January 25, 2022, because it doesn't apply  
Regulations sections 1.958-1(d)(1) through (3) to such tax year,  
and is a U.S. shareholder of the foreign corporation during such  
tax year, then any subpart F income inclusions and section  
951(a)(1)(B) inclusions with respect to the foreign corporation for  
such tax year are inclusions of the partnership, which are  
therefore not reported in Schedules K-2 and K-3, Part VI,  
columns (e) and (f), and are instead reported on Schedules K  
and K-1, line 11, Other income (loss).  
Exception. Schedule K-2, Part VI, doesn't need to be  
completed with respect to a CFC if the partnership knows that it  
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 with respect to the CFC, or figure  
section 951A inclusions by taking into account GILTI items  
(defined below) of the CFC.  
Exception. Schedule K-3, Part VI, for a partner doesn't need  
to be completed with respect to a CFC if the partnership 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 with respect to 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  
section 951(a)(1)(B) inclusion with respect to the CFC, or figure  
section 951A inclusions by taking into account GILTI items  
(defined below) of the CFC. If the partnership doesn't complete  
Schedule K-3, Part VI, for a partner with respect to a CFC, the  
sum of each partner’s share of the CFC’s subpart F income,  
section 951(a)(1)(B) inclusion with respect to 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  
with respect to the CFC (defined below), and the aggregate  
share of the CFC’s GILTI items (defined below), respectively,  
reported on Schedule K-2.  
A partner's share through its ownership in the partnership of  
subpart F income and GILTI items is generally anticipated to be  
figured by multiplying the percentage in column (d) by the  
amount of subpart F income or GILTI items, 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 figured 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 figured 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 Schedules K-2 and K-3 explaining the  
partner's share through its ownership in the partnership of the  
CFC's subpart F income and GILTI items.  
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 of a partnership with  
respect to reporting income by separate category don't change  
by reason of the partnership reporting GILTI items that include  
general category income on a Part VI completed for passive  
category income.  
Codes for Categories of Income  
Code  
PAS  
Category of Income  
Passive Category Income  
Section 901(j) Income  
901j  
GEN  
General Category Income  
Use Schedule K-3, Part VI, to report the partner's share of the  
amounts needed to figure its subpart F income inclusions, its  
section 951(a)(1)(B) inclusions, and its share of items of CFCs  
needed to determine the partner's GILTI inclusion, with respect  
to CFCs owned (within the meaning of section 958) by the  
partnership.  
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.  
Line 1. Use lines A through K to report information with respect  
to CFCs owned (within the meaning of section 958) by the  
partnership, and for which Schedules K-2 and K-3, Part VI, 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, the partnership must  
replicate each line of Schedule K-3 (Form 1065 or 8865), Part VI,  
that is related to the CFC on its Schedule K-2 (Form 1065), 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  
If the partnership must complete Schedules K-2 and K-3, Part  
VI, with respect to a CFC, then the partnership must complete  
Schedules K-2 and K-3, Part VI, 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, an amount determined under section 956 with  
respect to the CFC (section 951(a)(1)(B) inclusion), and its  
GILTI.  
25  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
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 a statement to Schedules K-2 and K-3 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 on  
Schedule I-1 (Form 5471), line 10c.  
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.  
Don't 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 (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.  
Schedule K-2, Part VII, and Schedule K-3, Part  
VII (Information Regarding Passive Foreign  
Investment Companies (PFICs))  
Column (c). Enter the end of the CFC’s tax year using the  
format YYYYMMDD.  
Column (d). Enter the partners' shares of CFC items through  
the partners' ownership in the partnership (aggregate share).  
See Regulations sections 1.951-1(b), 1.951-1(e), and  
Note. Partners will use the following information to complete  
Form 8621 and/or determine income inclusions with respect to  
the PFICs reported on Schedules K-2 and K-3, Part VII.  
1.951A-1(d)(1) for rules on determining the partners' shares.  
Except as otherwise provided, Schedules K-2 and K-3, Part  
VII, must be filed by every partnership that owns PFIC stock,  
directly or indirectly. However, the following exceptions apply.  
Note. A domestic partnership that is treated as owning stock of  
a CFC within the meaning of section 958(a) for a tax year of the  
CFC that begins before January 25, 2022, because it doesn't,  
pursuant to Regulations section 1.958-1(d)(4)(i), apply  
Regulations sections 1.958-1(d)(1) through (3) to such tax year,  
and is a U.S. shareholder of the CFC listed in column (a), doesn't  
report amounts with respect to that CFC for that tax year in  
column (e) or (f).  
A partnership that knows it has no direct or indirect partners  
that are U.S. persons, including U.S persons that own an indirect  
interest in the partnership through one or more foreign entities,  
isn't required to complete Schedules K-2 and K-3, Part VII.  
A domestic partnership that has elected to treat a PFIC as a  
pedigreed QEF or made a market-to-market (MTM) election  
under section 1296 with respect to a PFIC applicable to the  
partnership’s tax year (other than a domestic partnership making  
an MTM election under section 1296 with respect to PFIC stock  
in the current tax year if the current tax year isn't the first year of  
the partnership’s holding period in the stock (non-initial section  
1296 MTM election)) isn't required to complete Schedules K-2  
and K-3, Part VII, with information regarding that PFIC if the  
partnership files Form 8621 for that PFIC. The term “pedigreed  
QEF” is defined in Regulations section 1.1291-1(b)(2)(ii).  
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' shares of a CFC's subpart F income, see Worksheet A  
in the Instructions for Form 5471.  
Column (f). Enter the amount determined under section 956  
with respect to the partners that relate 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’ shares through their  
ownership in the partnership of:  
A partnership that owns stock of a foreign corporation that is  
treated as a qualifying insurance corporation (QIC) (as defined in  
section 1297(f)(1)) and which isn't treated as a PFIC by reason  
of section 1298(b)(1), or a domestic partnership that satisfies the  
deemed election requirements of Regulations section  
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  
1.1297-4(d)(5)(iv) with respect to a foreign corporation eligible to  
be treated as a QIC (and that isn't treated as a PFIC by reason of  
section 1298(b)(1)), isn't required to complete Schedules K-2  
and K-3, Part VII, with respect to that foreign corporation.  
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’ shares  
of a CFC’s earnings invested in U.S. property, see Worksheet B  
in the Instructions for Form 5471.  
A partnership that knows that all of its direct and indirect  
partners that are U.S. persons are either (a) not subject to the  
PFIC rules with respect to the corporation under section 1297(d)  
because they're subject to the subpart F rules with respect to the  
corporation, (b) tax-exempt entities that aren't subject to the  
PFIC rules with respect to the corporation under Regulations  
section 1.1291-1(e), or (c) pass-through entities with no direct or  
indirect U.S. taxable owners isn't required to complete  
Column (g). Enter the CFC’s tested income, if any, from  
Schedule I-1 (Form 5471), line 6, for each CFC.  
Column (h). Enter the CFC’s tested loss, if any, from  
Schedule I-1 (Form 5471), line 6, for each CFC. The loss  
amounts should be shown as negative numbers.  
Schedules K-2 and K-3, Part VII, with respect to the corporation.  
A partnership that marks to market stock of a PFIC as  
described in Regulations section 1.1291-1(c)(4) doesn't need to  
report information about the PFIC on Schedules K-2 and K-3,  
Part VII. The partnership should report its MTM gain or loss on  
Form 1065, Schedule K, and report the partners’ shares of those  
amounts on Schedule K-1 (Form 1065), Part III. Note, however,  
there may be instances in which the partnership will need to  
provide its partners with additional information to meet their tax  
obligations with respect to a PFIC the stock of which the  
partnership has marked to market as described in Regulations  
section 1.1291-1(c)(4), such as when section 1291 rules apply  
because the stock wasn't marked in the first year of the  
Column (i). Enter the aggregate share of the tested income  
listed in column (g) for each CFC with tested 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.  
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.  
26  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
partnership’s holding period. In such instances, the partnership  
may use Part VII to provide the needed information.  
Part VII, and its corresponding Schedules K-3, Part VII, with the  
information contained in Table 4 and/or Table 5.  
Use Schedule K-2, Part VII, to report certain information with  
respect to any PFIC owned, directly or indirectly, by the  
partnership for which reporting is required, including PFICs with  
respect to which no QEF or section 1296 MTM election has  
been made, and unpedigreed QEFs (section 1291 funds), and  
PFICs with respect to which pedigreed QEF, section 1296 MTM,  
or other elections have been, or may be, made, and for which the  
partnership isn't filing a Form 8621.  
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, it can attach additional Parts VII of Schedules K-2 and K-3,  
as needed.  
Section 1—General Information  
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. Don't 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.  
Domestic partnerships must also use Schedule K-2, Part VII,  
to report information for any PFIC with respect to which the  
partnership is making a non-initial section 1296 MTM election,  
and for any foreign corporation eligible to be treated as a QIC  
that is treated as a PFIC by reason of section 1298(b)(1),  
regardless of whether it files Form 8621 for that PFIC. See  
section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for  
more information related to non-initial section 1296 MTM  
elections.  
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  
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.  
the partnership using the following codes.  
Codes for Classes of PFIC Shares  
Complete only one line on both Sections 1 and 2 for each  
PFIC for which reporting on Schedule K-2, Part VII, and  
Schedule 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 information to report with respect to 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).  
Code  
COM  
PRE  
OTH  
VAR  
Class of PFIC Shares  
Common or Ordinary Shares  
Preferred Shares  
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 with respect to that PFIC.  
The partnership may have additional required information with  
respect to a PFIC for certain columns (for example, scenarios  
where the partnership may have multiple different events with  
respect to the PFIC in the same tax year, such as multiple dates  
of acquisitions of, or distributions with respect to, 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 that PFIC to Schedule K-2,  
Note. If the partnership acquired shares in a PFIC on multiple  
dates during the tax year, attach a statement with the information  
contained in Table 4 to Schedule K-2, Part VII, and its  
corresponding Schedules K-3, Part VII, providing those dates.  
Table 4  
Additional Information for Part VII, Section 1  
General Information  
Annual Information  
(a) Name of PFIC  
(b) EIN or reference ID number  
(g) Dates PFIC shares acquired during tax  
year (if applicable)  
value and the information provides a more reasonable estimate  
of the PFIC’s value.  
Column (h). Enter the total number of all classes of shares of  
the PFIC the partnership owned at the end of its tax year.  
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 with respect to 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.  
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  
aren't publicly traded, the partnership may rely upon periodic  
account statements provided at least annually to determine the  
value of a PFIC unless the partnership has actual knowledge or  
reason to know based on readily accessible information that the  
statements don't reflect a reasonable estimate of the PFIC’s  
27  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Column (j). If the partnership is a domestic partnership and has  
made either of the following elections with respect to the PFIC,  
indicate which election was made using the following codes. If  
the partnership hasn't made an election with respect to the PFIC,  
leave this column blank with respect to that PFIC.  
Completing Part VII, Section 1, Column (n)  
THEN...  
IF...  
• this is the first year of the  
partnership's holding period in stock  
check the box.  
of the foreign corporation, and  
• the partnership has determined  
(directly or otherwise) that the foreign  
corporation is a PFIC under the  
income test or asset test of section  
1297(a)  
Partnership Election Codes  
Code  
QEF  
Partnership Election Type  
Qualified Electing Fund Election  
Section 1296 Mark-to-Market Election  
• the foreign corporation was a PFIC  
in a prior tax year of the partnership's  
holding period, and  
check the box.  
MTM  
• the partnership hasn't determined  
(directly or otherwise) the foreign  
corporation is a former PFIC within  
the meaning of Regulations section  
1.1291-9(j)(2)(iv)  
Reminder. If the partnership is a domestic partnership and has  
made a pedigreed QEF election or section 1296 MTM election  
(other than a non-initial section 1296 MTM election) with respect  
to a PFIC, and the partnership files Form 8621 for that PFIC, it  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. If the partnership has marked  
stock in a PFIC to market as described in Regulations section  
1.1291-1(c)(4), it isn't required to report information regarding  
that PFIC on Schedule K-2 or K-3, Part VII.  
• the foreign corporation was a PFIC  
in a prior tax year of the partnership's  
holding period, and  
• the partnership has determined  
(directly or otherwise) the foreign  
corporation is a former PFIC within  
the meaning of Regulations section  
1.1291-9(j)(2)(iv)  
don't check the box.  
Column (k). 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.  
Column (l). 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.  
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 with respect to the PFIC to aid the partner in  
making certain elections under Regulations section 1.1298-3.  
Column (m). Check the box if the PFIC also constitutes a CFC  
within the meaning of section 957 (PFIC/CFC).  
Reminder. A partnership that knows that all of its direct and  
indirect partners that are U.S. persons aren't subject to the PFIC  
rules with respect to a PFIC/CFC under section 1297(d) because  
they're subject to the subpart F rules with respect to the  
PFIC/CFC isn't required to complete Schedules K-2 and K-3,  
Part VII, with respect to the PFIC/CFC.  
Section 2—Additional Information on PFIC or  
Qualified Electing Fund (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."  
Note. If the PFIC is a PFIC/CFC, a partner may need certain  
additional information with respect to 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.  
QEF Information  
Column (n). Complete column (n) in the following manner.  
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 the  
partnership with a statement that provides information to assist  
the partnership in determining these amounts. See Regulations  
section 1.1295-1(g) for additional information on annual PFIC  
statements.  
A domestic partnership must provide this information for any  
PFIC with respect to which it has made a pedigreed QEF  
election but for which it doesn't file Form 8621, and for any PFIC  
it has elected to treat as an unpedigreed QEF. A foreign  
partnership must provide this information if it has received an  
annual information statement with respect to the PFIC, unless  
the partnership knows that no direct or indirect partner has  
made, or intends to make, a QEF election with respect to the  
PFIC; the partnership may obtain this knowledge in any  
reasonable manner, provided it retains a written record in its  
books and records.  
28  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
Reminder. If the partnership is a domestic partnership and has  
made a pedigreed QEF election with respect to a PFIC, and if  
the partnership files Form 8621 for that PFIC, the partnership  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. The partnership should report its  
inclusion of its share of the QEF’s ordinary earnings and net  
capital gain on Form 1065, Schedule K, and report the partners’  
shares of those amounts on Schedules K-1, Part III. However,  
certain partners which receive a distributive share of the  
partnership’s QEF inclusions may be entitled to claim foreign tax  
credits under section 960 with respect to those inclusions. See  
the instructions for Schedules K-2 and K-3, Part VIII, regarding  
deemed paid foreign tax credits under section 960, including for  
inclusions with respect to a QEF under section 1293(f).  
section 1296(a) MTM gain or loss on Form 1065, Schedule K,  
and report the partners’ shares of those amounts on  
Schedule K-1, Part III.  
If the partnership has marked stock in a PFIC to market as  
described in Regulations section 1.1291-1(c)(4), it isn't required  
to report information regarding that PFIC on Schedule K-2 or  
K-3, Part VII, though it may use Part VII to provide its partners  
with additional information to meet their tax obligations with  
respect to the PFIC in certain instances, such as when the  
section 1291 rules apply because the partnership didn't mark the  
stock to market in the first year of its holding period.  
Note. If the partnership is a domestic partnership that has made  
an MTM election under section 1296 with respect to a PFIC but  
doesn't file Form 8621 for that PFIC, 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)  
regarding its share of the partnership’s adjusted tax basis in the  
partnership’s MTM PFIC stock in order to complete Form 8621.  
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 with respect to its  
computation of its net capital gain (as defined in Regulations  
section 1.1293-1(a)(2)) to perform certain computations under  
section 1061 or the regulations thereunder. The partnership may  
aid the partner in obtaining this information from the QEF, though  
the QEF isn't required to provide it. See section 1061 and  
Regulations sections 1.1061-4 and 1.1061-6 for more  
information.  
Section 1291 and Other Information  
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 with  
respect to section 1291 funds. However, this information may be  
relevant to PFICs with respect to which a QEF election  
Section 1296 Mark-to-Market Information  
(pedigreed or unpedigreed), section 1296 MTM election  
(including a non-initial section 1296 MTM election), or other  
election has been made by the partnership, partner, or other  
indirect PFIC shareholder. Accordingly, the partnership must  
complete columns (g) through (o) with respect to each PFIC for  
which reporting on Schedules K-2 and K-3, Part VII, is required.  
However, note the instructions for column (k) regarding reporting  
distributions from PFICs with respect to which the partnership  
has made a pedigreed QEF election or section 1296 MTM  
election (other than a non-initial section 1296 MTM election) and  
for which the partnership doesn't file Form 8621.  
Columns (e) and (f). Enter the fair market value (FMV) 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 1065 is  
being filed, the FMV in column (e) should reflect the FMV of  
those shares as of the date of acquisition. A domestic  
partnership must provide this information for any PFIC with  
respect to which it has made an MTM election under section  
1296 but for which it doesn't file Form 8621 and for any PFIC  
with respect to which it is making a non-initial section 1296 MTM  
election. A foreign partnership must provide this information  
unless it knows that no direct or indirect partner has made, or  
intends to make, an MTM election under section 1296 with  
respect to the PFIC; the partnership may obtain this knowledge  
in any reasonable manner, provided it retains a written record in  
its books and records.  
Reminder. If the partnership has additional required information  
with respect to a PFIC for any of columns (g) through (j) or (l)  
through (m) (for example, if the partnership received multiple  
distributions with respect to stock in a PFIC), it must complete  
that column with the first of those entries and attach a statement  
including the remaining entries to Schedule K-2, Part VII, and its  
corresponding Schedules K-3, Part VII, with the information  
contained in Table 5.  
Reminder. If the partnership is a domestic partnership and has  
made an MTM election under section 1296 with respect to a  
PFIC (other than a non-initial section 1296 MTM election), and if  
the partnership files Form 8621 for that PFIC, the partnership  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. The partnership should report its  
Column (g). Enter the date(s) on which the partnership initially  
acquired each block of stock in the PFIC using the format  
YYYYMMDD.  
29  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
Table 5  
Additional Information for Part VII, Section 2  
Section 1291 and Other Information  
General Information  
(a) Name of PFIC  
(b) EIN or  
(g) Dates  
PFIC shares  
were acquired  
(h) Amount of (i) Dates of  
(j) Total  
(l) Dates  
(m) Amount (n) Tax basis  
(o) Gain or  
(loss) on  
disposition of  
PFIC shares  
reference ID  
number  
cash and  
FMV of  
distribution  
creditable  
PFIC shares  
realized on  
of PFIC  
shares on  
date of  
foreign taxes disposed of disposition of  
property  
attributable to  
distribution  
by PFIC  
during tax  
year (if  
PFIC shares  
distributed by  
PFIC during  
the current  
tax year (if  
applicable)  
disposition  
applicable)  
Column (h). Enter the amount of each distribution of cash  
and/or the FMV of any other property distributed to the  
partnership by the PFIC during the tax year, if any.  
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.  
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.  
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 1.1291-9, 1.1291-10,  
1.1297-3, and 1.1298-3 for adjustments made under the PFIC  
regime.  
Column (i). Enter the date(s) of distribution of the amounts  
entered in column (h) using the format YYYYMMDD.  
Column (o). Enter the partnership's gain or loss on the  
disposition of PFIC shares. This equals column (m) minus  
column (n).  
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.  
Schedule K-2, Part VIII (Partnership’s Interest in  
Foreign Corporation Income (Section 960)), and  
Schedule K-3, Part VIII (Partner’s Interest in  
Foreign Corporation Income (Section 960))  
Note. Certain partners will use the following information to figure  
Note. Creditable foreign taxes entered in column (j) don't  
include taxes attributable to QEF inclusions under section  
1293(f). Enter only creditable foreign taxes within the meaning of  
section 1291(g) in column (j). See the instructions for Schedules  
K-2 and K-3, Part VIII, regarding deemed paid foreign tax credits  
under section 960, including for inclusions with respect to a QEF  
under section 1293(f).  
a deemed paid foreign tax credit on Form 1118.  
Reporting currency. Report all amounts on Part VIII in  
functional currency.  
The partnership must complete a separate Schedule K-2,  
Part VIII, for each CFC with respect to which it has a direct or  
indirect interest, unless the partnership doesn't have a direct or  
indirect partner that is a domestic corporation that is a U.S.  
shareholder or that is eligible to make a section 962 election to  
claim a deemed paid foreign tax credit with respect to such CFC.  
An indirect interest is one that the partnership owns through  
other pass-through entities. Indirect partners are partners who  
own the partnership through a foreign corporation or through a  
pass-through entity.  
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 with respect to a PFIC for  
which the partnership has made a pedigreed QEF election or  
section 1296 MTM election (other than a non-initial section 1296  
MTM election) and for which the partnership doesn't file Form  
8621.  
Schedule K-3, Part VIII, must be completed and provided to  
(a) direct partners that are domestic corporation U.S.  
shareholders or that may be eligible to make a section 962  
election to claim a deemed paid foreign tax credit, and (b) direct  
partners who may have direct or indirect partners who may be  
eligible to claim the indirect credit.  
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.  
A partnership that doesn't have or receive sufficient  
information or notice regarding a direct or indirect partner must  
30  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
presume the partner is eligible to claim the indirect credit and  
must complete Schedules K-2 and K-3 accordingly.  
Exception. Part VIII isn't required to be completed with  
respect to dormant foreign corporations (as defined in section 3  
of Rev. Proc. 92-70).  
In general, a domestic corporate U.S. shareholder of a CFC is  
deemed to pay all or a portion of the foreign income taxes paid or  
accrued by the CFC that are properly attributable to subpart F  
income or tested income of the CFC that the U.S. shareholder  
includes in its gross income; see sections 960(a) and (d). See  
also section 1293(f) with respect to QEF inclusions from a PFIC.  
The domestic corporate U.S. shareholder may claim a credit for  
such foreign taxes, subject to certain limitations. Individuals,  
estates, and trusts may also claim a foreign tax credit for foreign  
income taxes deemed paid with respect to a CFC if they make  
an election under section 962.  
To figure the foreign taxes deemed paid by a corporate U.S.  
shareholder, the income, deductions, and taxes of the CFC must  
be assigned to separate categories of income and then included  
in income groups within those separate categories; see  
Regulations section 1.960-1(c)(1). The applicable separate  
categories of income are general category income, passive  
category income, and section 901(j) income. The income groups  
include the subpart F income groups, the tested income group,  
and the residual income group. Each single item of foreign base  
company income (as defined in Regulations section 1.954-1(c)  
(1)(iii)) is a separate subpart F income group; see Regulations  
section 1.960-1(d)(2)(ii)(B).  
On Schedule K-2, Part VIII, the partnership reports in column  
(ii) its share of the CFC's net income by income groups and by  
units. In column (iii), the partnership reports the CFC’s total net  
income by income groups and units as reported in Schedule Q  
(Form 5471), column (xvi). In column (iv), the partnership reports  
the CFC’s current year foreign taxes for which credit is allowed  
by income groups and units as reported in Schedule Q (Form  
5471), column (xii). In column (i), consistent with the reporting  
requirement on Form 1118, enter the two-letter code (from the  
list at IRS.gov/CountryCodes) of each foreign country and U.S.  
territory within which income is sourced and/or to which taxes  
were paid or accrued. Enter "US" for income sourced in the  
United States. Don't enter “various” or “OC” for the country code.  
Don't enter a country in column (i) of line 5, later. See the  
instructions for line D for further information.  
On Schedule K-3, Part VIII, the partnership reports each  
partner's share of the net income in the income group by unit and  
country.  
Enter "US" for income sourced in the United States.  
Line A. On line A, enter the EIN or reference ID number of the  
CFC as listed on Form 5471. Don't enter "FOREIGNUS" or  
"APPLIED FOR."  
Line B. The partnership must file separate Schedules K-2 and  
K-3, Part VIII, to report the net income or loss of the CFC in each  
separate category. Use the applicable code from the table below.  
Category of Income Codes  
Line 1f allows the partnership to report foreign personal  
holding company income under section 954(c)(1)(F) (income  
from notional principal contracts), section 954(c)(1)(G)  
(payments in lieu of dividends), and section 954(c)(1)(H)  
(personal service contracts). A partnership must report a  
separate line 1f for income in each of sections 954(c)(1)(F), (G),  
and (H). Income within one of these income groups may need to  
be further subdivided on separate lines to the extent it is  
attributable to more than one country, source of income, passive  
grouping, etc. See the instructions for Schedule Q (Form 5471).  
The tested income group consists of tested income within a  
section 904 category; see Regulations section 1.960-1(d)(2)(ii)  
(C). The residual income group consists of any income not in the  
other income groups or in a PTEP group; see Regulations  
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)  
(2) with respect to the PTEP groups. The PTEP groups aren't  
reported on this Part VIII.  
Code  
PAS  
Category of Income  
Passive Category Income  
Section 901(j) Income  
General Category Income  
901j  
GEN  
Line C. With respect to passive category income, separate  
Schedules K-2 and K-3, Part VIII, must be completed for each  
applicable grouping under Regulations section 1.904-4(c). This  
includes the groups in Regulations section 1.904-4(c)(3)  
reported on Schedule Q (Form 5471).  
The partnership should use the following codes to report  
each of these groupings for each unit.  
Passive Group Codes  
Lines 1 through 4. The partnership's share of the CFC's net  
income in each of the subpart F income groups, tested income  
group, and residual income group by unit is reported on lines 1  
through 4. The CFC’s net income and taxes in each of these  
groups are figured on Schedule Q (Form 5471), and then  
included in columns (iii) and (iv), respectively. See the  
Code  
Passive Group  
i
All passive income received during the tax year that is subject to a  
withholding tax of 15% or greater must be treated as one item of  
income. See Regulations section 1.904-4(c)(3)(i).  
ii  
All passive income received during the tax year that is subject to a  
withholding tax of less than 15% (but greater than zero) must be  
treated as one item of income. See Regulations section 1.904-4(c)(3)  
(ii).  
instructions for Schedule Q (Form 5471) for the meaning of unit.  
However, don't include on line 1 (including lines 1a through 1j  
and any subset lines (1), (2), etc., under line 1) any amounts  
excluded from subpart F income under the high-tax exception in  
section 954(b)(4) (subpart F high-tax exception); these amounts  
are reported on line 4 (and on lines (1), (2), etc., under line 4).  
Also, don't include on line 3 (or lines (1), (2), etc., under  
line 3) any amounts excluded under the GILTI high-tax exclusion  
in Regulations section 1.951A-2(c)(7); these amounts are  
reported on line 4 (including any subset lines (1), (2), etc., under  
line 4).  
The PTEP groups aren't reported on this Part VIII. Don't report  
by unit with respect to the following subpart F income groups: (a)  
international boycott income; (b) bribes, kickbacks, and other  
payments; and (c) section 901(j) income. Also don't report by  
unit with respect to the recaptured subpart F income group.  
iii  
iv  
All passive income received during the tax year that is subject to no  
withholding tax or other foreign tax must be treated as one item of  
income. See Regulations section 1.904-4(c)(3)(iii).  
All passive income received during the tax year that is subject to no  
withholding tax but is subject to foreign tax other than a withholding  
tax must be treated as one item of income. See Regulations section  
1.904-4(c)(3)(iv).  
Example 15—Part VIII: subpart F income group  
reporting by unit. In Year 1, USP, a domestic partnership,  
wholly owns foreign corporation CFC, with reference ID number  
1234, and the CFC owns a foreign disregarded entity organized  
in Country X. CFC has two separate units, the foreign  
31  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
disregarded entity and the CFC itself. See the tables for  
Example 15.  
Example 15. Foreign Source Income  
For the Year 1 tax year, the separate units have the following foreign source income.  
Tax  
Country Code  
Net Income  
100u  
Country X Foreign Disregarded Entity  
(FDE) Passive Interest Income  
20% withholding tax  
AA  
CFC Passive Rental Income  
10% withholding tax  
No tax  
YY  
ZZ  
50u  
CFC General Category Tested Income  
300u  
Example 15. Partnership USP’s First Schedule K-2, Part VIII  
USP completes Schedule K-2, Part VIII, as shown below.  
A
B
C
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions  
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1234  
PAS  
i
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(ii) Partnership’s share of  
(iv) Foreign corporation’s  
current year foreign taxes  
for which credit allowed  
(U.S. dollars)  
(iii) Foreign corporation’s  
total net income  
(functional currency)  
Enter amounts in functional currency of the  
foreign corporation (unless otherwise noted).  
foreign corporation’s net  
income (functional  
currency)  
(i) Country code  
1
Subpart F income groups  
a
Dividends, interest, rents, royalties, and  
annuities (total)  
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(1) Unit: Country X FDE  
AA  
100u  
100u  
$20  
Example 15. Partnership USP’s Second Schedule K-2, Part VIII  
USP completes another Schedule K-2, Part VIII, as shown below.  
A
B
C
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions  
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1234  
PAS  
ii  
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(ii) Partnership’s share of  
(iv) Foreign corporation’s  
current year foreign taxes  
for which credit allowed  
(U.S. dollars)  
(iii) Foreign corporation’s  
total net income  
(functional currency)  
Enter amounts in functional currency of the  
foreign corporation (unless otherwise noted).  
foreign corporation’s net  
income (functional  
currency)  
(i) Country code  
1
Subpart F income groups  
a
Dividends, interest, rents, royalties, and  
annuities (total)  
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(1) Unit: CFC  
YY  
50u  
50u  
$5  
Example 15. Partnership USP’s Third Schedule K-2, Part VIII  
USP completes another Schedule K-2, Part VIII, as shown below.  
A
B
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
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1234  
GEN  
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(ii) Partnership’s share of  
foreign corporation’s net  
income (functional  
currency)  
(iv) Foreign corporation’s  
current year foreign taxes  
for which credit allowed  
(U.S. dollars)  
(iii) Foreign corporation’s  
total net income  
(functional currency)  
Enter amounts in functional currency of the  
foreign corporation (unless otherwise noted).  
(i) Country code  
3
Tested income group (total)  
(1) Unit: CFC  
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ZZ  
300u  
300u  
$0  
USP also completes Schedule K-3, Part VIII, with each  
Line D. If net income in an income group is sourced from more  
than one country, check the box on line D, and attach a  
statement to indicate that you have expanded Part VIII to report  
these additional countries on both Schedules K-2 and K-3.  
partner's share of the partnership's net income in each income  
group. On Schedule K-3, Part VIII, USP also includes the CFC's  
total net income and the CFC's current year foreign taxes for  
which credit is allowed in each income group.  
32  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
Example 16—Part VIII: more than two source countries.  
In Year 1, USP, a domestic partnership, wholly owns foreign  
corporation CFC, with reference ID number 1234. USP has two  
domestic corporate partners. CFC has only one unit, the CFC  
itself, and no other separate units. CFC has general category  
foreign source foreign base company sales income (FBCSI)  
sourced in Country A of 100u and general category foreign  
source FBCSI sourced in Country B of 50u and general category  
foreign source FBCSI sourced in Country C of 30u. The country  
code for Country A is AA, the country code for Country B is BB,  
and the country code for Country C is CC. See the tables for  
Example 16.  
Example 16 Attachment (Expansion). USP also completes  
Schedule K-3, Part VIII, with each partner's share of the  
partnership's net income in each subpart F income group. USP  
attaches to Schedule K-3 the same schedule it attaches to  
Schedule K-2, however, with each partner’s share of the income  
in each subpart F income group, by country.  
Example 16. Schedule K-2, Part VIII  
USP completes Schedule K-2, Part VIII, as shown below.  
A
B
D
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
Check the box and attach a statement if there is more than one source country for a line  
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1234  
GEN  
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ߛ
Enter amounts in functional currency of the foreign  
corporation (unless otherwise noted).  
(ii) Partnership’s share of foreign corporation’s net  
(i) Country code  
income (functional currency)  
1
Subpart F income groups  
g
Foreign base company sales income (total)  
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.
180u  
100u  
50u  
(1)  
(2)  
Unit:  
Unit:  
CFC  
CFC  
AA  
BB  
Example 16. Attachment (Expansion)  
USP attaches to Schedule K-2 the following schedule to expand line 1g to include another line.  
A
B
D
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
Check the box and attach a statement if there is more than one source country for a line  
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