Formulário 1065 Instruções para horários K-2 e K-3
Instruções para horários K-2 e K-3 (Form 1065)
Rev. 2023
Formulários Relacionados
- Formulário 1065 Programação K-2 - Itens de Partilha Distributiva de Parceiros Internacional
- Formulário 1065 Programação K-3 - Partilha de Renda, Dedução, Créditos, etc. Internacional
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
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
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
Part III. Other Information for Preparation of
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
Part V. Distributions From Foreign
Part VI. Information on Partners' Section
Domestic filing exception. A domestic filing exception that
allows an exception for filing and furnishing Schedules K-2 and
Part VIII. Partnership's Interest in Foreign
General Instructions
Part IX. Partners' Information for Base Erosion
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
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.
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
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
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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
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
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.
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
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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.
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
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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
"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
•
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
•
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
FAQs for section 267A at IRS.gov/businesses/partnerships/faqs-
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
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
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
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
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
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
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
“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
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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.
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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
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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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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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)
(3) Unit: CFC
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180u
30u
CC
The BEAT is generally levied on certain large corporations
that have deductions and certain other items paid or accrued to
foreign related parties (a base erosion payment) that are 3% of
their total deductions or higher (2% in the case of certain banks
or registered securities dealers), a determination referred to as
the “base erosion percentage test.” Partnerships aren't subject to
the BEAT; however, corporate partners of a partnership that are
applicable taxpayers under Regulations section 1.59A-2 may be
subject to the BEAT. Except for purposes of determining a
partner's base erosion tax benefits under Regulations section
1.59A-7(d)(1), and whether a taxpayer is a registered securities
dealer, BEAT determinations are made by the partner. See
Regulations section 1.59A-7 for further information regarding the
application of section 59A to partnerships, and the Instructions
for Form 8991 for additional information on whether a corporate
partner is an applicable taxpayer subject to the BEAT.
Line E. The partnership should check the box and complete a
separate Part VIII for U.S. source income in each separate
category.
Line F. If the foreign corporation has FOGEI or foreign oil related
income (FORI), the partnership should check the box and
complete a separate Part VIII indicating the amount of FOGEI
and FORI in each grouping. The partnership should check box 2
on Part I and complete Schedule I (Form 1118). See the
instructions for Part I, box 2.
Line G. Enter the functional currency of the foreign corporation
as reported on Form 5471, line 1h.
Schedule K-2, Part IX (Partners' Information for
Base Erosion and Anti-Abuse Tax (Section
59A)), and Schedule K-3, Part IX (Partner’s
Information for Base Erosion and Anti-Abuse
Tax (Section 59A))
For the partnership to complete Schedules K-2 and K-3, Part
IX, the foreign related parties of each partner must be identified,
subject to the exception for small partners. It is expected that the
partnership will collaborate with its partners to identify the foreign
related parties of each partner. A foreign related party with
respect to the partner is a foreign person that is:
Certain partners will use the following information to complete
Form 8991. This Part IX of Schedules K-2 and K-3 must be
completed by a partnership to assist its corporate partners in
determining if they're subject to the BEAT, and to figure their
BEAT, if any. This information includes the partner's share of the
partnership's gross receipts, the partner's amount of base
erosion payments made through the partnership, and the
partner's base erosion tax benefits.
Any 25% owner of the applicable taxpayer (as defined in
•
Regulations section 1.59A-1(b)(17)(ii)(A)),
Any person who is related (within the meaning of section
•
267(b) or 707(b)(1)) to the applicable taxpayer or any 25%
owner of the applicable taxpayer, or
33
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Any other person who is related to the applicable taxpayer
base erosion payment, any amount paid or accrued by the
partnership is treated as paid or accrued by each partner based
on the partner's distributive share of the item of deduction with
respect to that amount. A partner that is an applicable taxpayer
has a base erosion payment for any amount paid or accrued by
the partnership to a foreign person (as defined in Regulations
section 1.59A-1(b)(10)) that is a related party to the partner (as
defined in Regulations section 1.59A-1(b)(12)) with respect to
which a deduction is allowable under chapter 1 and for certain
other items on lines 13 and 15. See Regulations section 1.59A-3
and the Instructions for Form 8991 for more information on the
definition of a base erosion payment.
•
within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).
Exception for small partners. Part IX of Schedule K-3 isn't
required to be prepared by the partnership for small partners
meeting the following three requirements.
The partner's interest in the partnership represents less than
•
10% of the capital and profits of the partnership at all times
during the tax year.
The partner is allocated less than 10% of each partnership
•
item of income, gain, loss, deduction, and credit for the tax year.
The partner's interest in the partnership has an FMV of less
•
than $25 million on the last day of the partner's tax year,
determined using a reasonable method.
Column (c). Total base erosion tax benefits. A partner's
distributive share of any deduction or reduction in gross receipts
attributable to a base erosion payment is the partner's base
erosion tax benefit. A partner's base erosion tax benefits are
determined separately for each asset, payment, or accrual, as
applicable, and aren't netted with other items. A partner's base
erosion tax benefit may be more than the partner's base erosion
payment (for example, in the case of special allocations made by
the partnership). See the Instructions for Form 8991 and
Regulations section 1.59A-7(d) for further information
See Regulations section 1.59A-7(d)(2) for further information
regarding the application of the exception for small partners
Exception for certain other partners. The partnership
doesn't need to complete Schedule K-3, Part IX, for a partner
that is an individual.
The partnership doesn't need to complete Schedule K-3, Part
IX, for a corporate partner that is an S corporation.
The partnership should complete Schedule K-3, Part IX,
Section 1, lines 1 through 4, for partners that are RICs and REITs
but doesn't need to complete Section 2 for these partners.
concerning a partner's base erosion tax benefits.
General. Don’t include amounts that a partner doesn't take into
account pursuant to the exception for certain small partners for:
Section 1—Applicable Taxpayer
Line 8, columns (b) and (c);
Line 9, columns (b) and (c);
Line 10a, columns (b) and (c);
Line 11, columns (b) and (c);
Line 12, columns (b) and (c);
Line 13, columns (b) and (c);
Line 14a, columns (b) and (c);
Line 15, columns (b) and (c); and
Line 16, columns (b) and (c).
•
•
•
•
•
•
•
•
•
Lines 1 through 4, column (a). Enter the partnership's total
gross receipts for the current year and each of the 3 preceding
tax years. The determination of the partnership's gross receipts
is made in accordance with Regulations section 1.448-1T(f)(2)
(iv).
Lines 1 through 4, column (b). Complete lines 1 through 4,
column (b), if the partnership has a foreign partner or has reason
to know it has a foreign partner through a partner that is a
pass-through entity. Enter the partnership’s total gross ECI
receipts for the current year and each of the 3 preceding tax
years which the foreign partner(s) would take into account as
ECI. If the foreign partner(s) is subject to tax on a net basis
pursuant to an applicable income tax treaty of the United States,
enter the gross receipts that would be attributable to transactions
taken into account in determining its net taxable income.
See Regulations section 1.59A-7(d)(2) and Exception for small
partners, earlier. For Schedule K-2, Part IX, report the total
allocated to all partners, and for Schedule K-3, Part IX, report the
amount allocated to each individual partner.
Don't complete section 2 if the partnership has determined
that no amounts were paid or accrued by the partnership to a
foreign person (as defined in Regulations section 1.59A-1(b)
(10)) that is a related party to any partner with respect to which a
deduction is allowable under chapter 1 and for certain other
items on lines 13 and 15. The partnership’s determination that it
hasn't made any base erosion payment should be based on its
collaboration with its partners to identify any foreign related
parties.
Lines 1 through 4, column (c). Complete lines 1 through 4,
column (c), if the partnership has a foreign partner or has reason
to know it has a foreign partner through a partner that is a
pass-through entity. Enter the total non-ECI gross receipts as the
difference between column (a) and column (b).
Schedule K-3. For purposes of section 59A, each partner in
a partnership includes on its Schedule K-3, Part IX, the share of
partnership gross receipts in proportion to the partner's
distributive share (as determined under sections 704(b) and (c))
of items of gross income that were taken into account by the
partnership under section 703 or 704(c) (such as remedial or
curative items under Regulations section 1.704-3(c) or (d)).
Line 8. Purchase or creation of property rights for intangi-
bles (patents, trademarks, etc.).
Column (a). Enter the amount paid or accrued by the
partnership in connection with the acquisition or creation of
intangible property rights (patents, copyrights, trademarks, trade
secrets, etc.) that is subject to the allowance for depreciation (or
amortization in lieu of depreciation) for the tax year.
Column (b). Enter the amount paid or accrued to all foreign
persons that are a related party of any of the partners in
connection with the acquisition or creation of intangible property
rights (patents, copyrights, trademarks, trade secrets, etc.) that
is subject to the allowance for depreciation (or amortization in
lieu of depreciation).
Line 5, column (a). Amounts included in the denominator
of the base erosion percentage as described in Regula-
tions section 1.59A-2(e)(3). Enter the amount of deductions
and other items allocated to the partners from the partnership
that will be included in the denominator of the partners' base
erosion percentage. For a description of deductions that aren't
included in the denominator, see Regulations section 1.59-2(e)
(3)(ii).
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to deductions allowed under chapter 1
for the tax year for depreciation (or amortization in lieu of
depreciation) with respect to intangible property rights acquired
in the current year or prior years from all foreign persons that are
related parties of any of the partners.
Section 2—Base Erosion Payments and Base
Erosion Tax Benefits
Column (b). Total base erosion payments. For purposes of
Line 9. Rents, royalties, and license fees.
determining whether a payment or accrual by a partnership is a
34
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the use or right to use tangible or
intangible property resulting in rents, royalties, and/or license
fees.
Column (a). Enter the amounts paid or accrued by the
partnership to any foreign person that is a related party of any of
the partners for services qualifying for the services cost method
exception in section 59A(d)(5).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property resulting in rents,
royalties, and/or license fees.
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners for the use
or right to use tangible or intangible property that results in rents,
royalties, and/or license fees.
Line 11. Interest expense.
Column (a). Enter the amount of interest paid or accrued by
the partnership for the tax year (excluding interest paid or
accrued in a prior year treated as paid or accrued in the current
year under section 163(j) or similar provisions).
Column (b). Enter the amount of interest expense paid or
accrued to all foreign persons that are related parties of any of
the partners (excluding interest paid or accrued in a prior year
treated as paid or accrued in the current year under section
163(j) or similar provisions).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to interest expense paid or accrued by
the partnership that is allowed as a deduction in the current tax
year. If the partner is a foreign person, include the individual lines
from column (c) of Worksheet A on the applicable Schedule K-3.
Schedule K-3. When completing Schedule K-3, line 11, if the
partner is a foreign person, enter the total from Worksheet A,
column (a), on the partner’s Schedule K-3, line 11, column (a);
enter the total from Worksheet A, column (b), on Schedule K-3,
line 11, column (b); and enter the total from Worksheet A,
column (c), on Schedule K-3, line 11, column (c).
Line 10a. Compensation/consideration paid for services
not excepted by section 59A(d)(5).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year as compensation or consideration for
services, excluding any amount that qualifies for the services
cost method exception in section 59A(d)(5).
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners as
compensation or consideration for services, excluding any
amount that qualifies for the services cost method exception in
section 59A(d)(5).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to amounts paid or accrued to all foreign
persons that are related parties of any of the partners
representing compensation or consideration paid for services,
excluding amounts qualifying for the services cost method
exception in section 59A(d)(5).
The partnership is required to complete Worksheet A for all
partnership-related items and complete Worksheet A for each
foreign partner’s share of the amounts reported on the
partnership Worksheet A and attach a statement containing the
partner’s share of the information in Worksheet A to the partner’s
Schedule K-3.
Line 10b. Compensation/consideration paid for services
excepted by section 59A(d)(5).
Worksheet A
Interest Paid or Accrued by the Partnership
(a)
(b)
(c)
Total Interest Paid or Accrued in Interest Paid or Accrued to
Interest Expense Paid or Accrued
to Foreign Related Parties of the
Foreign Partner That Is Allowed
as a Deduction in the Current
Year
the Current Year
Foreign Related Parties of the
Foreign Partner in the Current
Year
(1) Interest expense on liabilities described in
Regulations section 1.882-5(a)(1)(ii)(A) or (B)
(2) Interest paid on U.S. booked liabilities under
Regulations section 1.882-5(d)(2)(vii)
(3) Interest paid on all other liabilities of the
partnership
Totals. Combine line (1) through line (3)
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for reinsurance.
Line 12. Payments for the purchase of tangible personal
property.
Column (b). Enter the amount of any premiums or other
consideration paid or accrued to all foreign persons that are
related parties of any of the partners for reinsurance taken into
account under section 803(a)(1)(B) (relating to return premiums
and premiums or other consideration arising out of indemnity
reinsurance that reduces life insurance gross income) or section
832(b)(4)(A) (relating to amounts deducted from gross premiums
written on insurance contracts for return premiums and
premiums paid for reinsurance).
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for the purchase of tangible personal
property.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for the
purchase of tangible personal property.
Column (c). Enter the amount of base erosion tax benefits
attributable to amounts paid or accrued to any foreign persons
that are related parties of any of the partners for the purchase of
tangible property.
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to premiums or other consideration as
described in section 59A(c)(2)(A)(iii) paid or accrued to any
foreign person that is a related party of any of the partners for
reinsurance.
Line 13. Premiums and/or other considerations paid or ac-
crued for reinsurance as covered by section 59A(d)(3) and
section 59A(c)(2)(A)(iii).
35
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Line 14a. Nonqualified derivative payments.
Line 16. Other payments—specify.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year attributable to derivative contracts as
defined in section 59A(h)(4).
Column (a). Enter the amount paid or accrued for the tax
year by the partnership that hasn't been included on lines 8
through 15.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners with
respect to derivative contracts that aren't eligible for the qualified
derivative payment exception under section 59A(h) and
Regulations section 1.59A-6. Don't include any amount paid that
is a qualified derivative payment on line 14a, column (b).
Column (c). Enter the amount of base erosion tax benefits
attributable to nonqualified derivative payments paid or accrued
to any foreign person that is a related party of any of the
partners.
Column (b). Enter the amount paid or accrued to any foreign
person that is a related party of any of the partners that is a base
erosion payment that hasn't otherwise been included on lines 8
through 15.
Column (c). Enter the amount of the partners’ base erosion
tax benefits related to other specified base erosion payments not
listed in any of the categories on lines 8 through 15.
Attachment. For amounts reported on line 16, attach a
statement to both Schedules K-2 and K-3 (for distributive share)
describing the type and amount of other payments, using the
same column headings as specified in this schedule: Total base
erosion payment and Total base erosion tax benefits. For each
type of payment, the attachment must identify the relationship of
a partner to the foreign related party consistent with the
categories and instructions for columns (b) and (c) of this
schedule.
Line 14b. Qualified derivative payments excepted by sec-
tion 59A(h). Enter the total amount of qualified derivative
payments paid or accrued by the partnership. Generally, a
qualified derivative payment is any payment made by the
taxpayer pursuant to a derivative contract, provided that the
taxpayer recognizes gain or loss on the derivative contract as if it
were sold for its FMV on the last business day of the tax year;
treats the gain or loss as ordinary; and treats the character of all
other items of income, deduction, gain, or loss with respect to a
payment pursuant to the derivative as ordinary. A payment isn't a
qualified derivative payment if the payment would be treated as a
base erosion payment if it were not made pursuant to a
Line 17, column (c)—Base erosion tax benefits related to
payments reported on lines 6 through 16, on which tax is
imposed by section 871 or 881, with respect to which tax
has been withheld under section 1441 or 1442 at 30%
(0.30) statutory withholding tax rate. Enter the aggregate
amount of the partners’ base erosion tax benefits, reported on
lines 8 through 16, on which tax is imposed under section 871 or
881 and with respect to which tax has been deducted and
withheld under section 1441 or 1442 at a 30% statutory
withholding tax rate.
derivative (such as interest, royalty, or services income). With
respect to a contract with both derivative and nonderivative
components, a payment isn't a qualified derivative payment if it is
properly allocable to the nonderivative component.
Line 15. Payments reducing gross receipts made to surro-
gate foreign corporation.
Line 18, column (c)—Portion of base erosion tax benefits
reported on lines 8 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been
withheld under section 1441 or 1442 at a reduced with-
holding rate pursuant to an income tax treaty. Multiply ratio
of percentage withheld divided by 30% (0.30) times base
erosion tax benefit. The partnership is required to provide the
information in Worksheet B for all partnership-related items and
attach a statement containing the information in Worksheet B to
Schedule K-3 for each partner’s share of the amounts reported
on the partnership Worksheet B.
Complete Worksheet B to determine the portion of the base
erosion tax benefits, reported on lines 8 through 16, on which tax
is imposed under section 871 or 881 and with respect to which
tax has been deducted and withheld at a reduced withholding
tax rate (but not exempt from tax) pursuant to a U.S. income tax
treaty. Keep a copy of the completed Worksheet B for the
partnership’s records.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year to certain expatriated entities
described in section 59A(d)(4)(C)(i).
Column (b). Enter the amount paid or accrued to certain
expatriated entities that results in a reduction of the gross
receipts of the partnership. This amount includes payments to a
surrogate foreign corporation that is a related party to the
partner, but only if the entity first became a surrogate foreign
corporation after November 9, 2017. The amount also includes
payments to a foreign person that is a member of the same
expanded affiliated group, as defined in section 7874(c)(1), as
the surrogate foreign corporation. A surrogate foreign
corporation is defined in section 7874(a)(2)(B) but doesn't
include a foreign corporation that is treated as a domestic
corporation under section 7874(b).
Column (c). Enter the base erosion tax benefits attributable
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross receipts
of the partnership.
Worksheet B
Part IX, Section 2, Line 18, Column (c)
A
B
C
D
E
Type of base erosion
payment
Amount of base erosion tax
benefit
Treaty—reduced
withholding rate
Divide column C by 30% (0.30)
(round to 4 decimal places)
Multiply column B by
column D
%
%
%
%
%
Add the amounts in column E and enter the total on line 18, column (c)
36
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
report to its partners, as needed, on Schedule K-3, Part X, their
distributive shares of any U.S. or foreign source partnership
effectively connected items, any U.S. source FDAP income, and
any income that isn't effectively connected or FDAP of the
partnership but that may be effectively connected to the foreign
person's conduct of a U.S. trade or business.
In addition, unless otherwise noted, the partnership must
complete Schedule K-3, Part X, to report each partner's
distributive share of the amounts reported on Schedule K-2, Part
X.
Schedule K-2, Part X (Foreign Partners'
Character and Source of Income and
Deductions), and Schedule K-3, Part X (Foreign
Partner’s Character and Source of Income and
Deductions)
Certain partners will use the following information to figure and
report their U.S. tax liability on Forms 1040-NR and 1120-F, or
other applicable forms.
In general, Schedules K-2 and K-3, Part X, must be filed by
every partnership that has a foreign partner, or if a foreign person
has a U.S. income tax reporting obligation with respect to any
item of partnership income, deduction, gain, or loss.
Exception. A domestic partnership that is required to file a
partnership return isn't required to complete Schedules K-2 and
K-3, Part X, if it doesn't have any ECI and the partnership (or
another withholding agent) has met its withholding and reporting
obligations under chapters 3 and 4 with respect to its income.
A foreign partnership that doesn't have ECI and files a
partnership return under the modified filing obligations under
Regulations section 1.6031(a)-1(b)(3)(iii) is only required to
complete Schedules K-2 and K-3, Part X, if (a) it has a domestic
pass-through partner that has a direct or indirect foreign owner,
beneficiary, or partner; or (b) it knows or has reason to know that
another withholding agent failed to meet its withholding and
reporting obligations under chapters 3 and 4 with respect to the
income. An indirect owner, beneficiary, or partner is one that
owns an interest in the domestic pass-through partner through a
pass-through entity. The foreign partnership should presume that
a domestic pass-through partner has a foreign owner, partner, or
beneficiary if it doesn't have sufficient information or notice to
make this determination.
Note. Schedule K-3, Part X, doesn’t need to be completed and
provided to partners who are U.S. persons (as defined in section
7701(a)(30)) and not pass-through partners. A pass-through
partner is a partnership required to file a return under section
6031(a), an S corporation, a trust (other than a wholly owned
trust disregarded as separate from its owner for federal income
tax purposes), and a decedent’s estate. See Regulations section
301.6241-1(a)(5). Therefore, a partnership with one partner that
is a nonresident alien (as defined in section 7701(b)(1)(B)) and
another partner that is a U.S. citizen need only provide
Schedule K-3 to the nonresident alien partner. However, a
partnership must complete Schedule K-2 with all of the
partnership’s information and not just the total of the information
reported to the foreign partners on Schedule K-3.
Section 1—Gross Income
The partnership uses Schedule K-2, Part X, Section 1, to report
each item of the partnership's gross income as one of the
following.
ECI derived from U.S. sources.
•
•
•
Foreign source ECI.
Income from U.S. sources that is FDAP and isn't income
Note. A foreign partner doesn't include an individual who is
effectively connected with the partnership’s conduct of a U.S.
trade or business (non-ECI).
treated as a U.S. resident under section 7701(b)(3).
Other U.S. source non-ECI.
Foreign source non-ECI.
•
A partnership may rely on Form W-8, Certificate of Foreign
Status, and Form W-9, Request for Taxpayer Identification
Number and Certificate, from its partners to determine whether it
has a foreign partner. If a partner is a flow-through entity, the
partner, or its authorized representative, may notify the
partnership as to whether or not there is a foreign person with a
U.S. income tax reporting obligation with respect to a partnership
item.
A partnership that doesn't have or receive sufficient
information or notice regarding a partner should presume the
partner is foreign or that a foreign person has a U.S. income tax
reporting obligation with respect to a partnership item and
complete Schedules K-2 and K-3, Part X, accordingly.
•
The partnership must generally report items of gross income as
either:
U.S. source ECI in column (c),
•
•
•
•
•
Foreign source ECI in column (d),
U.S. source non-ECI (FDAP) in column (e),
U.S. source (Other) in column (f), or
Foreign source non-ECI in column (g).
Each line in this section of the schedule corresponds to a line on
Form 1065, Schedule K, lines 1 through 11. For a more detailed
description of the types of income listed on each line, see the
instructions for Form 1065, Schedule K.
Column (a). Total. For each line in Section 1, enter in column
(a) the total amount of the applicable gross income. For
instance, if the partnership had $100 of Other income (loss) on
Form 1065, Schedule K, line 11, enter $100 in line 20, column
(a).
Example 17—pass-through partner; need to complete
Part X. A partnership doesn't receive notice from a
pass-through partner regarding whether or not the pass-through
partner has any partners or owners that are foreign persons and
doesn't otherwise have the information necessary to make this
determination. Because the partnership can't determine whether
a foreign person has a U.S. income tax reporting obligation with
respect to a partnership item, it must complete Schedules K-2
and K-3, Part X, for the flow-through partner.
Column (b). Partner determination. For each line, enter in
column (b) the amount of the applicable gross income the
source of which must be determined by each partner individually.
This includes income from the sale of most personal property
other than inventory, depreciable property, and certain intangible
property.
The source of income is important in determining how to
report income on Part X of Schedules K-2 and K-3. Each type of
income has its own sourcing rules. For more information on
sourcing rules for particular items of income, see Pub. 514 and
section 865.
Schedule K-3. For each line in Section 1, enter in column (b)
the partner's distributive share of the applicable gross income
the source of which needs to be determined by the partner. For
Any foreign person that earns ECI from U.S. or foreign
sources or U.S. source FDAP income may have a U.S. tax
obligation for its applicable tax year. Furthermore, the applicable
tax rates and reporting requirements are different for ECI and
U.S. source FDAP income. The partnership's reporting on
Schedules K-2 and K-3, Part X, is necessary for a foreign person
with a direct or indirect interest in the partnership to properly
report and figure its U.S. income tax liability on any required U.S.
income tax returns (for example, Form 1120-F, Form 1040-NR,
and other applicable forms). Therefore, a partnership must
37
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
each item of income in column (b), attach a statement identifying
the column [(c), (e), or (f)] in which the income would be reported
by the partnership if it were U.S. source and the column [(d) or
(g)] in which the income would be reported by the partnership if it
were foreign source. For example, if you have income from the
sale of personal property the source of which is based on the tax
home of the partner under section 865, the statement should
indicate both how the income should be characterized (as ECI,
FDAP, or other) if it were U.S. source, and how it should be
characterized (as ECI or non-ECI) if it were foreign source.
Don't include gross rental real estate income in
Schedule K-2, Part X, column (c), that isn't ECI to the
partnership. Even if a foreign partner elects to treat the
!
CAUTION
income as ECI, report these amounts in Schedule K-2, Part X,
column (e). However, the partnership should report the income
as ECI in Schedule K-3, Part X, column (c).
Schedule K-3. In addition to the partner’s distributive share of
the amounts reported in Schedule K-2, Part X, column (c), report
in Schedule K-3, Part X, column (c), any U.S. source income that
is subject to withholding under section 1446 based on a
partner’s Form W-8ECI, Certificate of Foreign Person's Claim
That Income Is Effectively Connected With the Conduct of a
Trade or Business in the United States, including U.S. source
gross rental real estate income that the foreign partner elected to
treat as ECI.
Column (c). U.S. source ECI. For each line in Section 1, enter
the amounts of the applicable U.S. source gross income, as
determined by the partnership, that are, or are treated as,
effectively connected with the partnership's conduct of a U.S.
trade or business.
If the partnership conducts a U.S. trade or business, report in
column (c) any U.S. source income other than FDAP or capital
gains.
Column (d). Foreign source ECI. Enter in this column the
amounts of the applicable gross income that are foreign source
ECI. Foreign source income is ECI only in limited circumstances.
If the partnership has an office or other fixed place of business in
the United States, the following types of foreign source income it
receives from that U.S. office are ECI.
Report U.S. source items of FDAP income or capital gains as
ECI in column (c) only if the asset-use test, the
business-activities test, or both tests (explained below) are met.
If neither test is met, such items are generally not ECI. For more
information, see section 864(c)(2) and Regulations section
1.864-4(c).
Rents or royalties received for the use outside the United
•
States of intangible personal property described in section
862(a)(4) if derived from the active conduct of a U.S. trade or
business.
Note. See Regulations section 1.864-4(c)(5) for special rules
relating to banking, financing, or similar business activities. Such
rules apply to certain stocks and securities of a banking,
financing, or similar business in lieu of the asset-use and
business-activities tests.
Gains or losses on the sale or exchange of intangible personal
•
property located outside the United States or from any interest in
such property if such gains or losses are derived in the active
conduct of the trade or business in the United States.
Dividends, interest, or amounts received for the provision of a
•
guarantee of indebtedness, issued after September 27, 2010, if
derived from the active conduct of a U.S. banking, financing, or
similar business or if the principal business of the partnership is
trading in stocks or securities for its own account.
Asset-use test. FDAP income and capital gains are ECI if such
items are derived from assets used in, or held for use in, the
conduct of a U.S. trade or business. For example, the following
items are ECI.
Income from the sale or exchange of inventory outside the
•
Income earned on a trade or note receivable acquired in the
•
United States through the U.S. office, unless the property is sold
or exchanged for use, consumption, or disposition outside the
United States and an office of the partnership in a foreign
country materially participated in the sale. See section 865 for
additional information regarding the source of this income.
conduct of the U.S. trade or business.
Interest income earned from the temporary investment of
•
funds needed in the U.S. trade or business.
Business-activities test. FDAP income and capital gains are
ECI if the activities of the U.S. trade or business were a material
factor in the realization of the passive income items.
Any income or gain that is equivalent to any item of income or
•
gain listed above must be treated in the same manner as such
item for purposes of determining whether that income is foreign
source ECI. See section 864(c)(5)(A) and Regulations section
1.864-7 for the definition of office or other fixed place of business
in the United States. See sections 864(c)(5)(B) and (C) and
Regulations section 1.864-6 for special rules for determining
when foreign source income is from an office or other fixed place
of business in the United States.
Other income treated as U.S. source ECI. If a partnership
isn't engaged in a U.S. trade or business during the tax year, it
will report amounts in column (c) if the partnership:
Had current year income or gain from a sale or exchange of
•
property or from performing services (or any other transaction) in
any other tax year that would have been ECI if received by a
foreign person in that other tax year (see section 864(c)(6)),
If income is reported in column (d), see the Instructions for Form
8804 for any Form 8804 filing obligation.
Had current year income or gain from a disposition of property
•
Column (e). U.S. source non-ECI (FDAP). For each line, enter
in column (e) amounts of the applicable gross income if all of the
following apply.
that is no longer used or held for use in conducting a U.S. trade
or business within the 10-year period before the disposition that
would have been ECI immediately before such cessation (see
section 864(c)(7)), or
The amount is FDAP (described below).
•
The amount is includible in gross income. Therefore, receipts
•
Had gain or loss from disposing of a U.S. real property interest
•
that are excluded from income (for example, interest income
received on state and local bonds that is excluded under section
103) wouldn't be reported.
as defined in section 897(c).
Note. Such amounts are always U.S. source ECI and should
never be reported in any other column.
The amount is received from U.S. sources.
•
The amount received is non-ECI. Amounts that are ECI
•
If income is reported in column (c), see the Instructions for
Form 8804, Annual Return for Partnership Withholding Tax, for
any Form 8804, filing obligations.
should be reported in column (c) or column (d).
The amount received isn't exempt (by the Code) from taxation.
•
For example, interest on deposits that are exempted by section
881(d) wouldn't be included as income by a foreign partner. In
addition, certain portfolio interest isn't taxable for obligations
issued after July 18, 1984. See section 881(c) for more details.
Amounts that are FDAP include the following.
38
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Interest (other than OID as defined in section 1273),
OID instrument or gain on the sale or exchange of the OID
instrument that are taxable on a gross basis to foreign partners
under section 881(a)(3)(8) or section 871(a)(1)(C)(ii) (as
applicable), these amounts should be reported in Schedule K-2,
Part X, column (e), as interest income or gain, as appropriate.
These amounts should also be entered as a negative adjustment
in column (f) to ensure that the total OID reported on Part X
reconciles with OID reported on Form 1065, Schedule K. Attach
a statement explaining that the negative adjustment in column (f)
is for reconciliation purposes only and isn't relevant to the foreign
partner’s tax liability and therefore doesn’t need to be reported
on the foreign partner’s tax return. The partnership should take a
similar approach for reporting distributive share amounts to a
foreign partner on Schedule K-3.
Example 18—Part X; OID. In addition to other income and
expense items, a partnership accrues $100 OID in Year 1
reported on Form 1065, Schedule K. On Schedule K-2, Part X,
for Year 1, the partnership should report this amount as interest
in column (f) (such amount is also included in column (a) for the
total). In Year 2, the partnership receives a payment of $50 on
the same instrument taxable to its foreign partners under section
881(a)(3)(B) or section 871(a)(1)(C)(ii) (as applicable). On its
Schedule K-2, Part X, for Year 2, the partnership should report
$50 as interest in column (e) and ($50) as a reconciliation
adjustment in column (f). The partnership should take the same
approach for reporting a foreign partner’s distributive share of
OID amounts on Schedule K-3 in both Years 1 and 2.
•
dividends, rents, royalties, salaries, wages, premiums, annuities,
compensation, and other passive gains, profits, and income.
Gains described in section 631(b) or (c), relating to disposal
•
of timber, coal, or domestic iron ore with a retained economic
interest.
Gains on a sale or exchange of an OID obligation, the amount
•
of the OID accruing while the obligation was held unless this
amount was taken into account on a payment.
On a payment received on an OID obligation, the amount of
•
the OID accruing while the obligation was held, if such OID
wasn't previously taken into account and if the tax imposed on
the OID doesn't exceed the payment received less the tax
imposed on any interest included in the payment received. This
rule applies to payments received for OID obligations issued
after March 31, 1972. Certain OID isn't taxable for OID
obligations issued after July 18, 1984. See section 881(c) for
more details. For rules that apply to other OID obligations, see
Pub. 515.
Gains from the sale or exchange of patents, copyrights, and
•
other intangible property if the gains are from payments that are
contingent on the productivity, use, or disposition of the property
or interest sold or exchanged.
For more information, see section 881(a) and Regulations
section 1.881-2.
If the partnership had U.S. source rental real estate
income that wasn't ECI to the partnership, include such
!
CAUTION
amounts in Schedule K-2, Part X, column (e). Foreign
Column (g). Foreign source non-ECI. For each line, enter
partners that have elected to treat any such amounts as ECI are
required to report and figure their U.S. income tax liabilities in
accordance with their ECI elections. This income is reported in
Schedule K-3, Part X, column (c), for such partners.
amounts of gross income which are neither U.S. source nor ECI.
Line 8. Dividend equivalents. Except as provided in the next
sentence, the partnership must report its dividend equivalents in
columns (a) and (e). The partnership shouldn’t report dividend
equivalents with respect to any partnership interest that the
partnership knows is held directly and indirectly (including
through one or more pass-through entities) by a partner that isn’t
subject to section 871(m). In such a case, the partnership should
report dividend equivalents in columns (a) and (e) only with
respect to its other partnership interests.
Schedule K-3. Except as provided in the next sentence, the
partnership must report its dividend equivalents in Schedule K-3,
Part X, Section 1, line 8, columns (a) and (e), with respect to its
partnership interests. To the extent the partnership knows a
partnership interest is held directly and indirectly (including
through one or more pass-through entities) by a partner that isn’t
subject to section 871(m), it doesn’t have to report allocations
with respect to that partnership interest in columns (a) and (e).
If income is reported in column (e), see the instructions for
Forms 1042 and 1042-S for any filing obligation.
Schedule K-3. For each line in Section 1, enter in column (e)
the partner's distributive share of the applicable income that is
U.S source FDAP and not ECI. Don't include income subject to
withholding under section 1446 based on a partner’s Form
W-8ECI or rental real estate income which a foreign partner has
elected to treat as ECI. That income should instead be reported
in column (c).
Column (f). U.S. source non-ECI (other). Include in this
column U.S. source gross income amounts that aren't ECI and
wouldn't be subject to tax in the hands of a foreign corporation
under section 881 or in the hands of a nonresident alien under
section 871(a). Such amounts include, for example, tax-exempt
portfolio interest or municipal bond interest, U.S. source capital
gains, and transportation income subject to tax under section
887.
Schedule K-3. Report the partner’s distributive share of the
amounts in Schedule K-2, Part X, column (f). For any amount
that is transportation income subject to tax under section 887,
also provide the partner the statement described in the
instructions for Form 1040-NR, line 23c. If you owe this tax, you
must attach a statement to your return that includes the
information described in chapter 4 of Pub. 519.
Line 11. Net long-term capital gain. Don't include gains
reported on lines 12, 13, and 14 on line 11.
Line 12. Collectibles (28%) gain. Report collectibles gain on
line 12 and not line 11.
Line 13. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 13 and not on line 11. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 13 and not on line 14, but
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.
Accrued OID reported on Form 1065. The amount of accrued
OID reported on Form 1065, Schedule K, that isn't taxable to
foreign partners should be reported as interest income in
Schedule K-2, Part X, column (f). Attach a statement to Form
1065 with respect to Part X clarifying that these amounts aren't
taxable to foreign partners and doesn’t need to be reported on
the foreign partner’s tax return. The partnership should take a
similar approach for reporting a foreign partner’s distributive
share of OID amounts on Schedule K-3.
Line 14. Net section 1231 gain. Report net section 1231 gain
on line 14 and not on line 11 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 13.
Line 20. Other income (loss) not included on lines 1
through 19. Determine other income (loss) without regard to
any amount reported on line 8.
OID payments or gains taxable on a gross basis to a for-
eign partner. When the partnership receives payments on the
39
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Charitable contribution deductions are apportioned solely to U.S.
source gross income; see Regulations section 1.861-8(e)(12).
Include amounts reported on line 16 in column (c).
Section 2—Deductions, Losses, and Net Income
In computing a foreign corporation's or nonresident alien's ECI,
deductions are allowed only if they're allocated and apportioned
to income that is effectively connected with a U.S. trade or
business; see sections 861(b), 873, and 882(c). To determine
ECI, a foreign corporation and nonresident alien individual must
allocate and apportion deductions and losses to gross income in
the ECI statutory grouping and to gross income in the non-ECI
residual grouping; see Regulations section 1.861-8(f)(1)(iv). For
additional guidance for foreign corporations, see Schedule H
(Form 1120-F) and Schedule I (Form 1120-F). For additional
guidance for nonresident aliens, see the Instructions for Form
1040-NR.
Lines 17 and 18. Other deductions. Enter other types of
deductions not described in the prior line items. If the partnership
has more than one other type of deduction, separately identify
each type of deduction on lines 17 and 18. If there are more than
two types of other deductions, attach a statement to both
Schedules K-2 and K-3 to expand the schedules to include
information on Section 2 identifying the amount and type of
deduction.
Section 3—Allocation and Apportionment
Methods for Deductions
Use Section 2 to report the partnership's deductions and
losses that will be utilized to determine the foreign partner's ECI.
The line items on Section 2 generally correspond to the
deductions separately reported on Form 1065, Schedule K. On
Schedule K-3, Part X, report the partner's share of the amounts
reported by the partnership on Schedule K-2, Part X.
Section 3 provides information a partner may use to apportion
deductions to ECI or non-ECI. See Regulations sections 1.861-8
through 1.861-20 and Temporary Regulations sections 1.861-8T
through -9T for more detailed information. The ratios listed below
generally correspond to the ratios on Schedule H (Form 1120-F),
Part III.
Column (b). Partner determination. Certain deductions and
losses must be allocated and apportioned by the partner, for
example, R&E expenses and interest expense.
On Schedule K-3, Part X, report the partner’s share of the
amounts reported by the partnership on Schedule K-2, Part X.
Columns (c) and (d). Partnership determination—ECI.
Enter deductions definitely related and allocated to ECI under,
for example, Regulations sections 1.861-8 through 1.861-20 and
Temporary Regulations sections 1.861-8T and -9T.
Line 1a. Gross ECI. Enter the partnership’s gross ECI from
Section 1, line 21, sum of columns (c) and (d).
Line 1b. Worldwide gross income. Enter the partnership’s
worldwide gross income from Section 1, line 21, column (a).
Don't include deductions attributable to gross rental real
Line 2a. Average U.S. assets (inside basis). Report the
partnership’s basis in its average U.S. assets for purposes of
applying the asset method as defined in Regulations section
1.884-1(d)(3)(ii) to calculate interest expense under Regulations
section 1.882-5(b).
estate income in Schedule K-2, Part X, column (c), that
!
CAUTION
isn't ECI to the partnership. Even if a foreign partner
elects to treat the income as ECI, report these deductions in
Schedule K-2, Part X, column (e). However, the partnership
should report the deductions in Schedule K-3, Part X, column
(c).
Line 2b. Worldwide assets. Report the partnership’s basis in
its average worldwide assets for purposes of Regulations section
1.882-5(b) and the asset method as defined in Regulations
section 1.884-1(d)(3)(ii). If the partnership doesn't report an
amount on line 2a because there aren’t any U.S. assets, then the
partnership doesn’t need to report an amount on line 2b.
Columns (e) through (g). Partnership determina-
tion—non-ECI. Enter deductions definitely related and
allocated to non-ECI under, for example, Regulations sections
1.861-8 through 1.861-20 and Temporary Regulations sections
1.861-8T and -9T.
Line 3a. U.S.-booked liabilities of the partnership. Enter the
partnership's average U.S.-booked liabilities as defined in
Regulations section 1.882-5(d)(2) using the average defined in
Regulations section 1.882-5(d)(3).
Line 2. R&E expenses. In general, R&E expenses are
allocated and apportioned by the partner and reported in column
(b).
Line 7. Interest expense on U.S.-booked liabilities. The
partnership reports its interest expense on U.S.-booked liabilities
as described in Regulations section 1.882-5(d)(2)(vii). This is
relevant for determining the foreign corporation’s interest
expense allocable to ECI.
Line 3b. Directly allocated partnership indebtedness. Enter
the portion of the principal amount of the partnership’s
indebtedness outstanding at year end that meets the
requirements of Regulations section 1.861-10T(b) or (c), as
limited by Regulations section 1.861-10T(d)(1), as described in
Regulations section 1.882-5(a)(1)(ii)(B). See Regulations
section 1.861-10T(d)(2).
Line 10. Section 59(e)(2) expenditures. Don't include R&E
expenses on this line. Instead, include R&E expenses that are
also section 59(e)(2) expenditures on line 2.
Line 4a. Personnel of U.S. trade or business. Enter on
line 4a the number of personnel who worked in the partnership's
U.S. trade or business during the tax year. The partnership may
use any reasonable method to determine the number of
personnel, including data that is already prepared and used by
the partnership for a non-tax business purpose. For example, if
the partnership maintains headcount data (such as weighted
average headcount data) in its personnel records or for other
purposes such as budgeting, planning, and control, such
numbers may be used in the numerator.
Line 12. Net long-term capital loss. Don't include losses
reported on line 13.
Line 13. Collectibles loss. Report collectibles loss on line 13
and not on line 12.
Line 15. Other losses. Each loss must be separately reported
and shouldn’t be combined on line 15. Instead, if there are more
than two other losses during the year, attach a statement to both
Schedules K-2 and K-3 to expand the lines to report the amount
of each additional loss.
Line 5. Gross receipts from sales or services by SIC code.
A partnership isn't required to complete this line 5 unless either
(a) the partnership incurs R&E expense; or (b) the partner is
expected to license, sell, or transfer its intangible property to the
partnership (as provided in Regulations section 1.861-17(f)(3)).
Line 16. Charitable contributions. Charitable contributions
may be deducted whether or not they're effectively connected
with a U.S. trade or business; see sections 873(b)(2) and 882(c)
(1)(B), and Regulations section 1.882-4(b) for more information.
40
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
For purposes of determining ECI, R&E expenses are definitely
related to gross intangible income reasonably connected with
relevant broad product categories of the taxpayer and are
allocable to gross intangible income as a class related to such
product categories. The product categories are determined by
reference to the three-digit classification of the SIC code. In
general, the R&E expenses are apportioned based on gross
receipts. See Regulations section 1.861-17. Because R&E
expenses are allocated and apportioned by the partner, the
partnership reports to its partners the gross receipts generating
ECI by SIC code.
For each SIC code, in line 5, column (ii), enter the gross
receipts that resulted in ECI, and in line 5, column (iii), enter the
worldwide gross receipts. Such gross receipts include both the
partnership's gross receipts and certain other controlled or
uncontrolled parties' gross receipts. See Regulations sections
1.861-17(d)(3) and (d)(4).
partnership is a partnership that carries on a trade or business of
dealing or trading in securities or holds significant investments in
securities. A partnership holds a significant investment in
securities for this purpose if either (a) 25% or more of the value
of the partnership's assets consist of underlying securities or
potential section 871(m) transactions, or (b) the value of the
underlying securities or potential section 871(m) transactions
equals or exceeds $25 million.
Generally, an underlying security is any interest in an entity
that could give rise to a U.S. source dividend (such as shares of
stock of a domestic corporation), and a potential section 871(m)
transaction is a securities lending or sale-repurchase
transaction, a notional principal contract, or any other financial
transaction that references one or more underlying securities.
See Regulations section 1.871-15 for additional information,
including the definitions of underlying securities and potential
section 871(m) transactions.
If there are more than two SIC codes, attach a statement to
Schedules K-2 and K-3 to expand the schedule to include
information on line 5 for the additional SIC codes.
Line 2. On Schedule K-2, specify the total number of units the
partnership has issued and outstanding. On Schedule K-3,
specify the number of units of the partnership held by the
partner.
Lines 7 and 8. Other allocation and apportionment key.
Report other apportionment keys than those identified on lines 1
through 5, as applicable. See Regulations section 1.861-8
through -20 and Temporary Regulations section 1.861-8T
and -9T for more detailed information.
Line 3. On both Schedules K-2 and K-3, for each allocation
period, specify when the allocation period begins and ends, as
well as the dividends, the dividend equivalents, and the total of
the dividends and dividend equivalents for the applicable period.
On Schedule K-2, the information is for all the issued and
outstanding units of the partnership. On Schedule K-3, the
information is for the units of the partner to which the
Schedule K-3 relates.
For example, a partnership might enter ECI COGS on line a,
column (i), and total COGS on line b, column (i). If ECI COGS is
$100, the partnership would enter $100 in line a, column (ii), and
if COGS is $200, the partnership would enter $200 in line b,
column (ii). As another example, a partnership might enter
average ECI assets in line a, column (i), and the average total
assets in line b, column (i). The average ECI assets are the
partnership’s basis in its assets that generate ECI for purposes
of Regulations section 1.861-9T(e)(7) using the average tax
book value as defined in Regulations section 1.861-9(g). The
average total assets are the partnership’s basis in all of its assets
for purposes of Regulations section 1.861-9T(e) using the
average tax book value as defined in Regulations section
1.861-9(g). If the partnership doesn't have assets that generate
ECI, then a partnership doesn’t need to report an amount on
line 7b, unless the partner has requested this amount. If there
are more than two other types of apportionment keys, attach a
statement to Schedules K-2 and K-3 to expand the schedules to
include all of the information for those apportionment keys.
The allocation period should be determined in accordance
with section 706 and the regulations thereunder. The value of a
partnership's assets is equal to their FMV, except that the value
of any notional principal contract, futures contract, forward
contract, option, and any similar financial instrument held by the
partnership is deemed to be the value of the notional securities
referenced by the transaction. See Regulations section 1.871-15
for additional information regarding dividend equivalents. You
can add additional lines if needed. The amounts for the
dividends, dividend equivalents, and total in columns (iii), (iv),
and (v) should be reported to the fourth decimal point, rounding
up for any excess amount. For example, if the amount of a
dividend was 0.12344, the reported amount should be 0.1235.
Schedule K-3, Part XIII (Foreign Partner's
Distributive Share of Deemed Sale Items on
Transfer of Partnership Interest)
Section 4—Reserved for Future Use
Note. There isn't a corresponding part on Schedule K-2 with
respect to Schedule K-3, Part XIII. This part provides the
information for a foreign partner to use to determine the gain or
loss it reports on its return from the transfer of an interest in the
partnership.
Schedule K-2, Part XI (Section 871(m) Covered
Partnerships), and Schedule K-3, Part XI
(Section 871(m) Covered Partnerships)
Partners will use this information as follows. A partner that:
Note. Certain partners that enter into section 871(m)
transactions referencing units in the partnership will use the
information in this part to determine their U.S. withholding tax
and reporting obligations with respect to those transactions
under section 871(m) and related rules.
Is a nonresident alien individual, foreign trust, or foreign estate
•
completes Schedule P (Form 1040-NR);
Is a foreign corporation completes Schedule P (Form 1120-F),
•
Parts IV and V; or
Had an installment sale, see Form 6252.
•
Schedules K-2 and K-3, Part XI, must be completed if you're
a PTP that (a) is a covered partnership as defined in Regulations
section 1.871-15(m)(1); or (b) directly or indirectly holds an
interest in a lower-tier partnership that is a covered partnership,
in each case regardless of whether your partners are domestic
or foreign.
This part generally applies to a partnership that is directly or
indirectly engaged in the conduct of a trade or business in the
United States (U.S. trade or business) and had a foreign partner
if either:
The foreign partner transferred an interest in the partnership
•
(including a distribution that results in the recognition of gain or
loss to a partner (see Regulations section 1.731-1(a)), or
Line 1. If the partnership is a PTP and (a) a covered
The partnership directly or indirectly transferred an interest in
partnership, or (b) directly or indirectly holds an interest in a
lower-tier partnership that is a covered partnership, check the
box on Part XI, line 1, of both Schedules K-2 and K-3. A covered
•
a partnership that engaged in a U.S. trade or business.
41
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
The partnership must complete lines 1 through line 3 of this part
if it is notified or otherwise knows that a transfer subject to
section 864(c)(8) has occurred. A partnership that makes a
distribution is treated as having actual knowledge of the transfer.
See Regulations section 1.864(c)(8)-2(a)(1) and Pub. 541 for the
rules regarding foreign transferor notifications.
If the transfer was a section 751(a) exchange, the partnership
must also file a Form 8308, Report of a Sale or Exchange of
Certain Partnership Interests. See Regulations section
1.6050K-1.
property in a fully taxable transaction for cash in an amount
equal to the FMV of the property immediately before the
partner's transfer of the interest in the partnership. See
Regulations section 1.751-1(a).
Lines 2 and 3. Aggregate effectively connected ordinary
gain or (loss) that would be recognized on the deemed
sale of section 751 property, and Aggregate effectively
connected capital gain or (loss) that would be recognized
on the deemed sale of non-section 751 property.
Determining the amount to report on line 2 and line 3 requires a
three-step process. These instructions provide an overview of
that process outlined below. For more information, see
Regulations section 1.864(c)(8)-1.
Step 1. With respect to each asset the partnership holds,
determine the amount of gain or loss that the partnership would
recognize in connection with a deemed sale to an unrelated
party in a fully taxable transaction for cash equal to the asset’s
FMV immediately before the partner’s transfer of its partnership
interest.
Tiered partnerships. If a foreign transferor transferred an
interest in an upper-tier partnership that holds, directly or
indirectly through one or more partnerships, an interest in a
lower-tier partnership engaged in a U.S. trade or business, then
the upper-tier partnership must include in the foreign transferor’s
aggregate deemed sale ECI items the items derived from the
lower-tier partnership; see Regulations section 1.864(c)(8)-2(b)
(2)(i). Therefore, to complete this part, the upper-tier partnership
will need to obtain the amount of the upper-tier partnership’s
distributive share of deemed sale effectively connected gain or
loss from the lower-tier partnership. Under these circumstances,
the lower-tier partnership may provide that information to the
upper-tier partnership using Part XIII even though the upper-tier
partnership didn't actually transfer its interest in the lower-tier
partnership. A lower-tier partnership that uses Part XIII should
complete it as though the upper-tier partnership transferred its
entire interest in the lower-tier partnership. Part XIII may be used
by each tier of partnerships until it reaches the uppermost tier
whose interest was transferred. To indicate that there was no
actual transfer by an upper-tier partnership of its interest in a
lower-tier partnership, the lower-tier partnership should leave
item A blank. When the upper-tier partnership receives the
information from the lower-tier partnership, whether reported on
Part XIII or in some other manner, it should use this information
to complete the Part XIII it issues to its foreign transferor.
Step 2. Determine the amount of that gain or loss that would
be treated as effectively connected gain or loss (deemed sale
effectively connected gain and deemed sale effectively
connected loss).
Step 3. Determine the partner’s distributive share of these
deemed sale gain or loss amounts.
Enter on line 2 the foreign transferor’s distributive share of
deemed sale effectively connected ordinary gain or loss
recognized on the transfer of section 751(a) property.
Enter on line 3 the foreign transferor’s distributive share of
deemed sale effectively connected capital gain or loss
recognized on the transfer of non-section 751(a) property.
Lines 4 and 5. Aggregate effectively connected gain (loss)
that would be recognized on the deemed sale of section
1(h)(5) collectible assets, and Aggregate effectively con-
nected gain that would be recognized on the deemed sale
of section 1(h)(6) unrecaptured section 1250 gain assets.
Lines 4 and 5 don’t apply to a foreign transferor that is a
corporation. These amounts are subsets of the amount of the
aggregate effectively connected capital gain (loss) that would be
recognized on the deemed sale of non-section 751 property
reported on line 3.
Enter on line 4 the foreign transferor's distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(5) collectible assets.
Enter on line 5 the foreign transferor's distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(6) unrecaptured section 1250 gain
assets.
Item A. Date of transfer of the partnership interest. Enter
the date that the foreign partner transferred an interest in the
partnership or the date that the partnership transferred an
interest in a partnership that engaged in a U.S. trade or
business. The partner's notification should provide this date to
you. If there are multiple transfers during the tax year with
respect to a foreign partner, complete a separate schedule for
each transfer.
Item B. Identify the number of units or the percentage in-
terest in the partnership transferred. Enter either the
percentage interest in the partnership or the number of units in
the partnership that the partner transferred in item B1 or B2,
respectively.
Enter zero for item B if a partnership is completing this part for
a partner that is treated as transferring an interest in the
partnership because it received a distribution but whose
ownership interest in the partnership remains unchanged.
Line 6. Check this box if any amount on lines 2 through 5 is
determined (in whole or in part) under Regulations section
1.864(c)(8)-1(c)(2)(ii)(E) (material change in circumstances
rule for a deemed sale of the partnership's inventory prop-
erty or intangibles). As part of the three-step process for
determining the amount to report on lines 2 and 3, Regulations
section 1.864(c)(8)-1 provides certain look-back rules that apply
for purposes of sourcing the deemed sale gain or loss with
respect to inventory property and intangibles held by a
Item C. Check the box in item C that identifies the type of
interest the partner transferred in the partnership. Complete a
separate schedule for each type of partnership interest (such as
capital or preferred) transferred, and complete each schedule
based on the portion of the type of interest transferred. If there
are multiple classes of the same type of partnership interest,
complete a separate schedule for each class of interest
transferred. If the categories in item C aren't narrow enough to
distinguish between different classes, then check “Other” and
explain.
partnership. However, if a material change in circumstances
during the look-back period causes these rules to reach an
inappropriate sourcing result, Regulations section 1.864(c)
(8)-1(c)(2)(ii)(E) allows, in certain cases, the relevant look-back
rule for inventory property or intangibles to be applied by
reference to the date on which the material change in
Line 1. Total ordinary gain or (loss) that would be recog-
nized on the deemed sale of section 751 property. Enter the
amount of income or loss from section 751(a) property that
would have been allocated to the foreign partner with respect to
the interest transferred if the partnership had sold all of its
circumstances occurs. The partnership must check the box
provided on line 6 if the material change in circumstances rule is
used to determine the amount provided on line 2 or line 3.
42
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
partnership isn't subject to section 864(c)(8). Under these
circumstances, the partnership must enter on line 7 for purposes
of section 897(g) the foreign transferor’s distributive share of the
partnership’s gain or loss on the deemed sale of the U.S. real
property interests and should not complete lines 1 through 6. A
partnership that has this type of income and is also engaged in a
U.S. trade or business should instead include this income on
line 3 and should not complete line 7.
Line 7. Capital gain or (loss) that would be recognized un-
der section 897(g) on the deemed sale of U.S. real property
interests. Section 897(a) treats gain or loss from the
disposition of a U.S. real property interest (as defined in section
897(c)) by a nonresident alien or foreign corporation as gain or
loss that is effectively connected to a trade or business within the
United States. Section 897(g) generally provides that, under
regulations prescribed by the Secretary, the amount of any
money, and the FMV of any property, received by a nonresident
alien individual or foreign corporation in exchange for all or part
of its interest in a partnership, trust, or estate shall, to the extent
attributable to U.S. real property interests, be considered as an
amount received from the sale or exchange in the United States
of such property. A partnership must complete line 7 if it holds
U.S. real property interests and the transfer of an interest in the
Line 8. Gain that would be recognized under section 897(g)
on the deemed sale of section 1(h)(6) unrecaptured sec-
tion 1250 gain assets. A partnership that has this type of gain
will be engaged in a U.S. trade or business and should report
this amount on line 5. Therefore, there isn’t a need to complete
this line.
43
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)
Index
A
Example 07—Parts II and III required
for partnership with no foreign
activity 10
I
Allocation and apportionment
Example 08—Part II, not Part III,
required for partnership with no
B
Interest expense apportionment
Example 09—Part II: multiple country
factors 15
Base erosion and anti-abuse tax
Interest expense on U.S. booked
Example 10—Parts II and III: capital
liabilities 40
Base erosion payments and base
Interest expense specifically
allocable under Reg. 1.861–10
Example 11—Parts II and III: asset
method apportionment of interest
expense 16
C
Example 12—Part III, Section 4:
multiple country sources: foreign
taxes 18
N
Net income (loss):
Example 13—partners’ reporting of
Controlled foreign corporation
(CFC) 31
Example 14—domestic corporate
partner; specified tangible
property 21
Compensation/consideration paid for
services excepted by section
59A(d)(5) 35
Effectively connected income
(ECI) 40
Example 15—Part VIII: subpart F
Compensation/consideration paid for
services not excepted by section
59A(d)(5) 35
Example 16—Part VIII: more than two
O
Example 17—pass-through partner;
Computer-generated Schedules
K-2 3
Other information for preparation of
Cost of goods sold (COGS):
Effectively connected income
(ECI) 41
F
Foreign-derived deduction eligible
P
FDII deduction apportionment
factors 16
Currency 4
Foreign partner’s distributive share of
D
Foreign partners’ character and
source of income and
deductions 37
Deductions 14
Partnership’s interest in foreign
corporation 30
Distributions from foreign corps. to
Partnerships with no foreign partners
partnership 23
Foreign taxes deductible but not
creditable 18
Parts of Sch. K-2 and Sch. K-3, in
Foreign taxes paid or accrued to
general 4
Foreign taxes related to PTEP
E
Purchase or creation of property
EIN 5
Examples:
Q
Example 01—Part IX required to
determine base erosion
payments 2
Example 02—domestic filing
exception met; issuance of
R
G
R&E expenses:
Example 03—domestic filing
Effectively connected income
(ECI) 40
Example 04—domestic filing
exception met; Schedule K-3
Example 05—Part I, box 5; high-taxed
income 7
H
44