Dil Seçin

Form 1065 Schedules K-2 ve K-3 için Talimatlar

Schedules K-2 ve K-3 (Form 1065)

Rev. 2023

İlgili Formlar

Detaylar
Dosya formatı PDF
Boyut 545.6 KB
İndirmek
Department of the Treasury  
Internal Revenue Service  
2023  
Partnership Instructions for  
Schedules K-2 and K-3 (Form  
1065)  
Partners’ Distributive Share Items—International Partner’s Share of Income,  
Deductions, Credits, etc.—International  
Section references are to the Internal Revenue Code unless  
otherwise noted.  
Part 1, box 11. Certain partnerships are now required to report  
information concerning dual consolidated losses with Schedules  
K-2 and K-3.  
Contents  
Page  
General Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 1  
Purpose of Schedules K-2 and K-3 . . . . . . . . . . . 1  
Who Must File . . . . . . . . . . . . . . . . . . . . . . . . . . 1  
When and Where To File . . . . . . . . . . . . . . . . . . . 3  
How To Complete Schedules K-2 and K-3 . . . . . . 4  
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 4  
Schedule K-2, Identifying Information . . . . . . . . . . 5  
Schedule K-3, Identifying Information . . . . . . . . . . 5  
Part I, box 13. The new qualified intermediary agreement in  
Rev. Proc. 2022-43 (the QIA), 2022-52 I.R.B. 570, applies  
beginning January 1, 2023, including to qualified intermediaries  
that are qualified derivatives dealers (QDDs) as defined under  
the QIA. For more information, see the note, later.  
Part II. Amounts may now be entered in lines 41 through 43,  
columns (a) through (e), with respect to interest expense.  
Part VIII. Part VIII includes two new columns: (i) the foreign  
corporation's total net income, and (ii) the foreign corporation's  
current year foreign taxes for which credit is allowed. Part VIII  
also requests the functional currency of the foreign corporation.  
These additions will allow the preparer to include all information  
necessary for the section 960 computation on Part VIII without  
attaching Schedule Q (Form 5471).  
Part I. Partnership's Other Current Year  
International Information . . . . . . . . . . . . . . . . . 5  
Part II. Foreign Tax Credit Limitation . . . . . . . . . . 12  
Part III. Other Information for Preparation of  
Form 1116 or 1118 . . . . . . . . . . . . . . . . . . . . 14  
Part XIII. New lines have been added to Part XIII to provide  
additional information a nonresident alien, foreign trust, or  
foreign estate needs to complete Schedule P (Form 1040-NR) to  
report information and calculate gain or loss on the transfer of an  
interest in a partnership that directly or indirectly is engaged in  
the conduct of a trade or business within the United States.  
Part IV. Partners' Section 250 Deduction with  
Respect to FDII . . . . . . . . . . . . . . . . . . . . . . 19  
Part V. Distributions From Foreign  
Corporations to Partnership . . . . . . . . . . . . . . 23  
Part VI. Information on Partners' Section  
951(a)(1) and Section 951A Inclusions . . . . . . 24  
Domestic filing exception. A domestic filing exception that  
allows an exception for filing and furnishing Schedules K-2 and  
K-3 applies for 2023. See Domestic Filing Exception, later.  
Part VII. Information to Complete Form 8621 . . . . 26  
Part VIII. Partnership's Interest in Foreign  
Corporation Income (Section 960) . . . . . . . . . 30  
General Instructions  
Part IX. Partners' Information for Base Erosion  
and Anti-Abuse Tax (Section 59A) . . . . . . . . . 33  
The Instructions for Form 1065 and Instructions for Schedule K-1  
(Form 1065) generally apply to Schedules K-2 and K-3. These  
instructions provide additional information needed to complete  
Schedules K-2 and K-3 for tax years beginning in 2023.  
Part X. Foreign Partners' Character and  
Source of Income and Deductions . . . . . . . . . 37  
Part XI. Section 871(m) Covered Partnerships . . . 41  
Part XIII. Foreign Partner's Distributive Share  
Purpose of Schedules K-2 and K-3  
of Deemed Sale Items on Transfer of  
Schedule K-2 is an extension of Form 1065, Schedule K, and is  
used to report items of international tax relevance from the  
operation of a partnership.  
Partnership Interest . . . . . . . . . . . . . . . . . . . . 41  
Future Developments  
Schedule K-3 is an extension of Schedule K-1 (Form 1065)  
and is generally used to report to partners their shares of the  
items reported on Schedule K-2. Partners must include the  
information reported on Schedule K-3 on their tax or information  
returns, if applicable.  
For the latest information about developments related to  
Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and  
their instructions, such as legislation enacted after they were  
published, go to IRS.gov/Form1065.  
Who Must File  
What’s New  
Any partnership required to file Form 1065 that has items  
relevant to the determination of the U.S. tax or certain  
Part I, box 7, reserved. Box 7 requiring attachment of Form  
8858 has been reserved. Instead, box 13 now requires, in certain  
instances, information that a partner (whether direct or indirect)  
needs to complete Form 8858 with respect to a foreign branch or  
foreign disregarded entity owned by the partnership.  
withholding tax or reporting obligations of its partners under the  
international provisions of the Internal Revenue Code (the Code)  
must complete the relevant parts of Schedules K-2 and K-3. See  
each part and section for a more detailed description of who  
Jan 3, 2024  
Cat. No. 74375Q  
     
must file each part and section. Penalties may apply for filing  
Form 1065 without all required information or for furnishing  
Schedules K-3 to partners without all required information. The  
penalties that apply with respect to Form 1065 and Schedule K-1  
apply with respect to Schedules K-2 and K-3, respectively. See  
Penalties in the Instructions for Form 1065.  
exception. See Regulations section 1.59A-3(b)(3)(i). DC’s  
distributive share of the $100 payment to the foreign subsidiary  
is $50.  
For purposes of determining whether a payment or accrual by  
a partnership is a base erosion payment, any amount paid or  
accrued by USP is treated as paid or accrued by each partner  
based on the partner’s distributive share of the item of deduction  
with respect to that amount. See Regulations section 1.59A-7(d)  
(2). Therefore, DC is treated as having paid $50 to the foreign  
subsidiary.  
DC must complete Form 8991, Tax on Base Erosion  
Payments of Taxpayers With Substantial Gross Receipts, to  
compute its base erosion minimum tax amount (if any);  
therefore, USP must complete the relevant portions of Schedules  
K-2 and K-3, Part IX.  
Except as otherwise required by statute, regulations, or other  
IRS guidance, a partnership isn't required to obtain information  
from its direct or indirect partners to determine if it needs to file  
each of these parts.  
A partnership is only required to complete and file the  
relevant portions of Schedules K-2 and K-3, as applicable. For  
example, if the partnership doesn't own (within the meaning of  
section 958) stock of a foreign corporation other than solely by  
reason of applying section 318(a)(3) (providing for downward  
attribution) as provided in section 958(b), it isn't required to  
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.  
Domestic Filing Exception (Exception to Filing  
Schedules K-2 and K-3)  
Schedules K-2 and K-3 consist of the most common  
international tax provisions of the Code. However, not all  
provisions are specifically identified on these schedules. To the  
extent that an international provision is impacted and isn't  
otherwise specifically identified, the partnership should check  
box 13 on Schedule K-2, Part I, and Schedule K-3, Part I, and  
attach a statement to both Schedules K-2 and K-3 (for  
distributive share).  
A domestic partnership (as defined under sections 7701(a)(2)  
and (4)) doesn't need to (a) complete and file Schedules K-2 and  
K-3, or (b) furnish to a partner Schedule K-3 (except where  
requested by a partner after the 1-month date (defined in criteria  
number 4, below)) if each of the following four criteria are met  
with respect to the partnership’s tax year 2023.  
1. No or limited foreign activity. During the domestic  
partnership’s tax year 2023, the domestic partnership either has  
no foreign activity (as defined below), or, if it does have foreign  
activity, such foreign activity is limited to (a) passive category  
foreign income (determined without regard to the high-taxed  
income exception under section 904(d)(2)(B)(iii)); (b) upon which  
not more than $300 of foreign income taxes allowable as a credit  
under section 901 are treated as paid or accrued by the  
partnership; and (c) such income and taxes are shown on a  
payee statement (as defined in section 6724(d)(2)) that is  
furnished or treated as furnished to the partnership.  
Note. A partnership that is, or has a branch that is, a QDD (a  
QDD partnership) must file Form 1065 even if it wouldn’t be  
required to file if it wasn’t a QDD partnership and must attach a  
statement to its Form 1065 with certain required information as  
provided in section 7.01(C) of the QIA. If the QDD partnership is  
filing Form 1065 solely because it’s a QDD partnership and  
wouldn’t otherwise be required to file Form 1065, then the QDD  
partnership isn’t required to complete Schedules K-2 and K-3.  
A partnership with no foreign source income, no assets  
generating foreign source income, no foreign partners, and no  
foreign taxes paid or accrued may still need to report information  
on Schedules K-2 and K-3. For example, if the partner claims a  
credit for foreign taxes paid or accrued by the partner, the  
partner may need certain information from the partnership to  
complete Form 1116, Foreign Tax Credit; or Form 1118, Foreign  
Tax Credit—Corporations. Also, a partnership that has only  
domestic partners may still be required to complete Part IX when  
the partnership makes certain deductible payments to foreign  
related parties of its domestic partners. The information reported  
in Part IX will assist any domestic corporate partner in  
Foreign activity. For purposes of the domestic filing  
exception, foreign activity means any of the following: (a) foreign  
income taxes paid or accrued (as defined in section 901 and the  
regulations thereunder); (b) foreign source income or loss (as  
determined in sections 861 through 865, and section 904(h), and  
the regulations thereunder); (c) ownership interest in a foreign  
partnership (as defined in sections 7701(a)(2) and (5)); (d)  
ownership interest in a foreign corporation (as defined in  
sections 7701(a)(3) and (5)); (e) ownership of a foreign branch  
(as defined in Regulations section 1.904-4(f)(3)(vii)); or (f)  
ownership interest in a foreign entity that is treated as  
determining the amount of base erosion payments made through  
the partnership, and in determining if the partners are subject to  
the base erosion and anti-abuse tax (BEAT). Further, if the  
domestic partnership with no foreign activity or foreign partners  
has direct or indirect domestic corporate partners, Part IV  
(concerning foreign-derived intangible income (FDII)) must be  
completed. A domestic or foreign publicly traded partnership  
(PTP) as defined in section 7704(b) with no foreign activity or  
foreign partners may need to complete Part XI. See each part for  
applicability.  
Example 1—Part IX required to determine base erosion  
payments. Foreign corporation wholly owns DC, a domestic  
corporation, and foreign corporation (foreign subsidiary). DC  
satisfies the gross receipts test. See Regulations section  
1.59A-2(d). In Year 1, DC owns a 50% interest in a domestic  
partnership, USP. An unrelated domestic corporation owns the  
remaining 50% interest in USP. DC’s investment in USP doesn't  
qualify for the small partner exception. See Regulations section  
1.59A-7(d)(2).  
disregarded as an entity separate from its owner (as defined in  
Regulations section 301.7701-3).  
2. U.S. citizen/resident alien partners. During tax year 2023,  
all the direct partners in the domestic partnership are (a)  
individuals that are U.S. citizens; (b) individuals that are resident  
aliens (as defined in section 7701(b)(1)(A) and the regulations  
thereunder); (c) domestic decedents’ estates (that is, decedents’  
estates that aren't foreign estates as defined in section 7701(a)  
(31)(A)), with solely U.S. citizen and/or resident alien individual  
beneficiaries; (d) domestic grantor trusts (that is, trusts  
described under sections 671 through 678) that aren't foreign  
trusts as defined in section 7701(a)(31)(B)) and that have solely  
U.S. citizen and/or resident alien individual grantors and solely  
U.S. citizen and/or resident alien individual beneficiaries; (e)  
domestic non-grantor trusts (that is, trusts subject to tax under  
section 641 that aren't foreign trusts as defined in section  
7701(a)(31)(B)) with solely U.S. citizen and/or resident alien  
individual beneficiaries; (f) S corporations with a sole  
shareholder; or (g) single-member limited liability companies  
(LLCs), where the LLC’s sole member is one of the persons in  
In Year 1, USP pays the foreign subsidiary $100 for services.  
The services aren't eligible for the services cost method  
2
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
     
subparagraphs (a) through (f), and the LLC is disregarded as an  
entity separate from its owner (as defined in Regulations section  
301.7701-3).  
receives the request from the partner. See Examples 3 and 4,  
later.  
Example 2—domestic filing exception met; issuance of  
Schedule K-3 not required. A married couple, U.S. citizens,  
each own a 50% interest in USP, a domestic partnership. USP  
and the married couple have a tax year end of December 31.  
USP invests in a regulated investment company (RIC). With  
respect to tax year 2023, USP receives Form 1099 from the RIC  
reporting $100 of creditable foreign taxes paid or accrued on  
passive category foreign source income. USP doesn't have any  
foreign activity other than that from the RIC. The married couple  
receive notification from USP on an attachment to Schedule K-1  
that they won't receive Schedule K-3 unless they request it. The  
married couple don't request Schedule K-3 from USP for tax  
year 2023. USP qualifies for the domestic filing exception, and,  
as such, USP doesn’t need to complete Schedules K-2 and K-3.  
3. Partner notification. With respect to a partnership that  
satisfies criteria 1 and 2, partners receive a notification from the  
partnership at the latest when the partnership furnishes the  
Schedule K-1 to the partner. The notice can be provided as an  
attachment to Schedule K-1. The notification must state that  
partners won't receive Schedule K-3 from the partnership unless  
the partners request the schedule.  
4. No 2023 Schedule K-3 requests by the 1-month date.  
The partnership doesn't receive a request from any partner for  
Schedule K-3 information on or before the 1-month date. The  
1-month date is 1 month before the date the partnership files the  
Form 1065. For tax year 2023 calendar year partnerships, the  
latest 1-month date is August 15, 2024, if the partnership files an  
extension. Any request from a partner for Schedule K-3  
information for a year prior to tax year 2023 will be considered a  
request for a tax year 2023 Schedule K-3 as well.  
Example 3—domestic filing exception not met. The facts  
are the same as in Example 2, except that each spouse owns a  
40% interest in USP, and A, a U.S. citizen, owns a 20% interest  
in USP. A requests Schedule K-3 from USP for tax year 2023 and  
USP receives this request on February 1, 2024. After requesting  
an extension, USP files Form 1065 on August 31, 2024. USP  
doesn't qualify for the domestic filing exception because A  
requested the Schedule K-3 by the 1-month date (July 31,  
2024). As such, USP must complete and file the parts and  
sections of Schedules K-2 and K-3 that are relevant to A. With  
respect to Schedules K-2 and K-3, USP doesn't need to  
complete, attach, or file any parts or sections relevant to the  
married couple. USP must provide a copy of the filed  
Note. If a partnership receives a request from a partner for  
Schedule K-3 information after the 1-month date for tax year  
2023 and hasn't received a request from any other partner for  
Schedule K-3 information on or before the 1-month date, the  
domestic filing exception is met and the partnership isn't required  
to file the tax year 2023 Schedules K-2 and K-3 or furnish the tax  
year 2023 Schedule K-3 to the non-requesting partners.  
However, the partnership is required to provide the tax year 2023  
Schedule K-3, completed with the requested information, to the  
requesting partner on the later of the date on which the  
partnership files Form 1065 or 1 month from the date on which  
the partnership receives the request from the partner. See  
Example 4, later. The partnership must complete and file tax  
year 2024 Schedules K-2 and K-3 with respect to the requesting  
partner by the tax year 2024 Form 1065 filing deadline if that  
partner is still a partner in tax year 2023.  
Schedule K-3 to A on the date that USP files its Form 1065. USP  
doesn't need to furnish Schedule K-3 to the married couple.  
Example 4—domestic filing exception met; Schedule K-3  
issuance still required. The facts are the same as in  
Example 3, except that USP receives the request from A on  
August 20, 2024. USP qualifies for the domestic filing exception  
because A requested Schedule K-3 after the 1-month date. USP  
isn't required to file the tax year 2023 Schedules K-2 and K-3 or  
furnish Schedule K-3 to the married couple. However, USP is  
required to provide Schedule K-3, completed with the requested  
information, to A on September 20, 2024, the later of the date on  
which USP files Form 1065 or 1 month from August 20, 2024.  
Because A requested Schedule K-3 for tax year 2023, USP must  
file tax year 2024 Schedules K-2 and K-3 with respect to the  
information requested by A to the extent that A is still a partner in  
tax year 2024.  
Note for partnerships that satisfy criteria 1 through 3, but  
don't satisfy criterion 4. If the partnership received a request  
from a partner for Schedule K-3 information on or before the  
1-month date and therefore the partnership doesn't satisfy  
criterion 4, the partnership is required to file Schedules K-2 and  
K-3 and furnish Schedule K-3 to the requesting partner.  
Schedules K-2 and K-3 are required to be completed only with  
respect to the parts and sections relevant to the requesting  
partner. For example, if a partner requests the information  
reported on Part III, Section 2, the partnership is required to  
complete and file Schedule K-2, Part III, Section 2, with respect  
to the partnership’s total assets and Schedule K-3, Part III,  
Section 2, with respect to the requesting partner’s distributive  
share of the assets. On the date that the partnership files  
Schedules K-2 and K-3, the partnership must provide a copy of  
the filed Schedule K-3 to the requesting partner. The partnership  
doesn't need to complete, attach, file, or furnish any other parts  
or sections of Schedules K-2 and K-3 to the IRS, the requesting  
partner, or any other partner. The partnership should keep  
records of the information requested by the partner. See  
Example 3, later.  
Note. If a partnership doesn't meet the domestic filing  
exception, it may meet the Form 1116 exemption exception to  
filing Schedules K-2 and K-3.  
When and Where To File  
Attach Schedules K-2 and K-3 to the partnership’s Form 1065  
and file both by the due date (including extensions) for that  
return.  
Provide Schedule K-3 to the partners of the partnership  
according to the timeline for providing Schedule K-1. See the  
Instructions for Form 1065.  
If a partnership receives requests from partners for  
Schedule K-3 information both on or before the 1-month date  
and after the 1-month date, the partnership is required to file  
Schedules K-2 and K-3 as described in the prior paragraph only  
with respect to the partner requests received on or before the  
1-month date. With respect to requests received after the  
1-month date, the partnership is required to provide  
Also, see the Instructions for Form 1065 for recordkeeping  
requirements and amendments or adjustments to Schedules K-2  
and K-3.  
Computer-Generated Schedules K-2 and K-3  
If a computer-generated Schedule K-2 or Schedule K-3  
conforms to and doesn't deviate from the official form and  
schedules, it may be filed with the IRS.  
Schedule K-3, completed with that partner’s requested  
information, on the later of the date on which the partnership files  
Form 1065 or 1 month from the date on which the partnership  
Important. Be sure to attach the approval letter to a  
computer-generated Schedule K-2 or K-3. However, if the  
3
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
           
computer-generated form is identical to the IRS prescribed form,  
it doesn't need to go through the approval process, and an  
attachment isn't necessary.  
information to figure and claim a foreign tax credit on Form 1116  
or 1118.  
Part VI of Schedule K-2 (and Part VI of Schedule K-3).  
Used to provide information the partner needs to determine any  
inclusions under sections 951(a)(1) and 951A. Partners will use  
the information to complete Form 8992, U.S. Shareholder  
Calculation of Global Intangible Low-Taxed Income (GILTI), and  
Forms 1040 and 1120 with respect to subpart F income  
inclusions, section 951(a)(1)(B) inclusions, and section 951A  
inclusions.  
Every year, the IRS issues a revenue procedure to provide  
guidance for filers of computer-generated forms. In addition,  
every year, the IRS issues Pub. 1167, General Rules and  
Specifications for Substitute Forms and Schedules, which  
reprints the most recent applicable revenue procedure. Pub.  
1167 is available at IRS.gov/pub/irs–pdf/p1167. For purposes of  
Schedules K-2 and K-3, the procedures relevant to Form 1065  
and Schedule K-1 (Form 1065) should be conformed with, to the  
extent possible.  
Part VII of Schedule K-2 (and Part VII of Schedule K-3).  
Used to provide information needed by partners to complete  
Form 8621, Information Return by a Shareholder of a Passive  
Foreign Investment Company or Qualified Electing Fund, and to  
provide partners with information to determine income inclusions  
with respect to the passive foreign investment company (PFIC).  
Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).  
Used to provide the foreign corporation's net income in the  
income groups for purposes of the partner's deemed paid taxes  
computation with respect to inclusions under sections 951A,  
951(a)(1), and 1293(f). Partners will use the information to figure  
and claim a deemed paid foreign tax credit on Form 1118.  
Part IX of Schedule K-2 (and Part IX of Schedule K-3).  
Used to provide information for the partner to figure its BEAT.  
Partners will use the information to complete Form 8991.  
Part X of Schedule K-2 (and Part X of Schedule K-3).  
Used to provide information for the partner to figure its tax  
liability with respect to income effectively connected with a U.S.  
trade or business (ECI) or with respect to fixed, determinable,  
annual, or periodical (FDAP) income. Partners will use the  
information to figure and report any U.S. tax liability on Form  
1040-NR, U.S. Nonresident Alien Income Tax Return; and Form  
1120-F, U.S. Income Tax Return of a Foreign Corporation, or  
other applicable forms.  
How To Complete Schedules K-2 and K-3  
Reporting currency. Report all amounts in U.S. dollars except  
where specified otherwise.  
References to other forms. References in these instructions to  
Form 1040, U.S. Individual Income Tax Return, are intended, if  
applicable, to include Form 1040-SR, U.S. Tax Return for  
Seniors, as well as other tax returns for noncorporate partners  
such as Form 1041, U.S. Income Tax Return for Estates and  
Trusts. Similarly, references to Form 1120, U.S. Corporation  
Income Tax Return, are intended, if applicable, to apply to other  
forms in the 1120 series. References to forms which have been  
replaced are intended, if applicable, to include the replacement  
forms.  
Uses of the parts of Schedules K-2 and K-3, in general.  
Part I of Schedule K-2 (and Part I of Schedule K-3). Used  
to report international tax items not reported elsewhere on  
Schedule K-2 or K-3.  
Part II of Schedule K-2 (and Part II of Schedule K-3).  
Used to figure the partnership’s income or loss by source and  
separate category of income; and to report the partner’s  
distributive share of such income or loss. Partners will use the  
information to figure and claim a foreign tax credit on Form 1116  
or 1118.  
Part XI of Schedule K-2 (and Part XI of Schedule K-3).  
Used to provide certain information to U.S. and foreign partners  
with respect to section 871(m) by a PTP that satisfies certain  
other requirements. Certain partners will use the information to  
determine their U.S. withholding tax obligations and to figure and  
report any U.S. tax liability on Form 1042, Annual Withholding  
Tax Return for U.S. Source Income of Foreign Persons; and  
Form 1042-S, Foreign Person's U.S. Source Income Subject to  
Withholding.  
Part III of Schedule K-2 (and Part III of Schedule K-3).  
Used to report information necessary for the partner to  
determine the allocation and apportionment of research and  
experimental (R&E) expense, interest expense, and the FDII  
deduction for purposes of the foreign tax credit limitation. Also  
used to report foreign taxes paid or accrued by the partnership  
and the partner’s distributive share of such taxes. Additionally, it’s  
used to report income adjustments under section 743(b) by  
source and separate category. Partners will use the information  
to figure and claim a foreign tax credit on Form 1116 or 1118.  
Part IV of Schedule K-2 (and Part IV of Schedule K-3).  
Used to report the information necessary for the partner to  
determine its section 250 deduction with respect to FDII.  
Partners will use the information to claim and figure a section  
250 deduction with respect to FDII on Form 8993, Section 250  
Deduction for Foreign-Derived Intangible Income (FDII) and  
Global Intangible Low-Taxed Income (GILTI).  
Part V of Schedule K-2 (and Part V of Schedule K-3).  
Used to report information the partner needs, in combination  
with other information known to the partner, to determine the  
amount of each distribution from a foreign corporation that’s  
treated as a dividend or excluded from gross income because  
the distribution is attributable to previously taxed earnings and  
profits (PTEP) in the partner’s annual PTEP accounts with  
respect to the foreign corporation, and the amount of foreign  
currency gain or loss on the PTEP that the partner is required to  
recognize under section 986(c).  
Part XII. Reserved for future use.  
Part XIII of Schedule K-3. Used to provide information for a  
foreign partner to figure its distributive share of deemed sale  
items on a transfer of an interest in a partnership that is engaged  
in the conduct of a trade or business in the United States.  
Partners will use this information as follows. A partner that:  
Is a nonresident alien individual, foreign trust, or foreign estate  
completes Schedule P (Form 1040-NR), Foreign Partner’s  
Interests in Certain Partnerships Transferred During Tax Year;  
Is a foreign corporation completes Schedule P (Form 1120-F),  
List of Foreign Partner Interests in Partnerships, Parts IV and V;  
Is a foreign partnership completes Form 4797, Sales of  
Business Property; and Form 8949, Sales and Other  
Dispositions of Capital Assets, as needed; or  
Had an installment sale, see Form 6252, Installment Sale  
Income.  
Specific Instructions  
If the information required in a given section exceeds the  
space provided within that section, don't enter “See  
!
CAUTION  
attached” in the section or leave the section blank.  
Partners will report the dividends and foreign currency gain or  
loss on Form 1040 or 1120. If eligible, partners will also use this  
information to figure and claim a dividends received deduction  
under section 245A on Form 1120. Partners will also use the  
Instead, complete all entry spaces in the section and attach the  
remaining information on additional sheets. For all attachments,  
include the part, section, line number, and column of the relevant  
4
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
portions of Schedules K-2 and K-3. The additional sheets must  
conform to the IRS version of that section.  
taking into account that under section 267A they aren’t allowed  
deductions for the amounts listed in the statement with respect  
to box 6.  
Certain partners will use the information reported in  
Schedule K-2, Identifying Information  
attachments with respect to boxes 8 and 9 to identify any  
international tax information reporting forms or other international  
tax forms that may impact the partners’ tax returns.  
At the top of each new page, enter the name of the partnership  
and the employer identification number (EIN) of the partnership  
as they appear on Form 1065.  
Certain partners may use the information reported in  
attachments with respect to box 11 to determine any dual  
consolidated losses which may not be deducted on Form 1120.  
This part is used to report information for international tax  
items not reported elsewhere on Schedule K-2. Check the box to  
indicate whether any of the following international tax items are  
applicable in the tax year. If applicable, attach statements, as  
described below, to Schedule K-2. If applicable, the partnership  
must also complete Schedule K-3, Part I, and include with  
Schedule K-3 the attachment(s) as described below with the  
partner's distributive share of the amounts.  
Item A—Withholding foreign partnership. If the partnership  
is a withholding foreign partnership under Rev. Proc. 2017-21,  
2017-6 I.R.B. 791, check the “Yes” box. Otherwise, check the  
“No” box.  
If the “Yes” box is checked, provide the partnership's  
withholding foreign partnership employer identification number  
(WP-EIN). Enter the partnership's WP-EIN regardless of whether  
the partnership filed this Form 1065 using its WP-EIN.  
Item B—Qualified derivatives dealer (QDD). If the  
partnership (including the home office or any branch) is a QDD,  
check the “Yes” box. Otherwise, check the “No” box.  
Box 1. Gain on personal property sale. In general, income  
from the sale of personal property is sourced according to the  
residence of the seller; see section 865. For sourcing purposes,  
personal property sold by the partnership is treated as sold by  
the partners; see section 865(i)(5). A U.S. citizen or resident  
alien individual with a tax home (as defined in section 911(d)(3))  
in a foreign country is treated as a nonresident with respect to  
the sale of personal property only if an income tax of at least  
10% of the gain derived from the sale is actually paid to a foreign  
country with respect to that gain; see section 865(g). In addition,  
if a U.S. resident maintains an office or other fixed place of  
business in a foreign country, income from the sale of personal  
property attributable to such office or other fixed place of  
business is foreign source only if an income tax of at least 10%  
of the income from the sale is actually paid to a foreign country  
with respect to such income; see section 865(e)(1).  
If the partnership has income from the sale of personal  
property (other than inventory, depreciable personal property,  
and certain intangible property excepted from the general rule of  
section 865(a)), and the partnership pays income tax to a foreign  
country with respect to income from the sale or the income is  
eligible for re-sourcing under an applicable treaty, it must check  
box 1 and attach a statement to Schedules K-2 and K-3 (for  
distributive share) reflecting all the information shown in Table 1.  
Each item of property sold must be listed separately with the  
information shown in Table 1. The partnership may combine  
sales of stock property by country. Otherwise, don't combine  
sales of property. If the gain is capital, enter “long-term” or  
“short-term” in column (b). Enter the two-letter code from the list  
at IRS.gov/CountryCodes in column (f). Don't enter "various" or  
"OC" for the country code. If the property sale is taxed by more  
than one country, complete a separate line for that country, but  
indicate in some manner (for example, a footnote) that the  
property entered on both lines is the same property.  
If the “Yes” box is checked, provide the partnership's qualified  
intermediary employer identification number (QI-EIN).  
Item C—Part applicability. Check the “Yes” box to indicate the  
applicable parts of Schedules K-2 and K-3. Complete each  
applicable part.  
Check the “No” box to indicate the inapplicable parts of  
Schedules K-2 and K-3. Don't complete, file, or attach to Form  
1065 or Schedule K-3 the inapplicable parts.  
Schedule K-3, Identifying Information  
Items A and B. Items A and B should be the same as reported  
on Schedule K-1, Part I, items A and B.  
Items C and D. Items C and D should be the same as reported  
on Schedule K-1, Part II, items E and F.  
Item E. Item E should correspond to Schedule K-2, item C.  
Schedule K-2, Part I (Partnership’s Other  
Current Year International Information), and  
Schedule K-3, Part I (Partner’s Share of  
Partnership’s Other Current Year International  
Information)  
Notes.  
Certain partners will use the information reported in the  
attachments with respect to boxes 1 through 5 and 10 to claim  
and figure a foreign tax credit on Form 1116 or 1118.  
Certain partners will also use the information reported in the  
attachments with respect to box 6 to prepare their tax returns  
(Forms 1040, 1120, 1040-NR, and 1120-F, as applicable) by  
Table 1. Information on Personal Property Sold (For use with Schedules K-2 and K-3 (Form 1065), Part I,  
box 1)  
(a) Property description  
(b) Long-term/  
short-term  
(c) Gains  
(d) Amount of tax paid (e) Amount of tax paid  
in local currency in U.S. dollars  
(f) Taxing country  
(enter two-letter  
country code)  
distributive share). The partnership doesn’t need to complete  
Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through  
4; or Part III, lines 1 and 3. The partnership must attach  
Schedule I (Form 1118) even if there are no corporate partners  
because the limitation applies to individuals eligible to claim a  
foreign tax credit.  
Box 2. Foreign oil and gas taxes. A separate foreign tax credit  
limitation is applied with respect to foreign oil and gas taxes. See  
section 907(a) and Regulations section 1.907(a)-1 for details. If  
the partnership has such taxes, it must check box 2 and attach a  
completed Schedule I (Form 1118), Reduction of Foreign Oil and  
Gas Taxes, to Schedules K-2 and K-3 (with the partner’s  
5
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
                   
The partnership attaches a partially completed Schedule I  
(Form 1118) so that the partner has the information it needs to  
complete Schedule I (Form 1118) or Form 1116. The partnership  
isn't attaching Schedule I (Form 1118) as a form required to be  
filed by the partnership for purposes of the partnership  
determining creditable taxes because a partnership can't claim a  
foreign tax credit.  
The separate category and source of income to which the  
taxes are assigned if determinable by the partnership.  
Section 2 of attached statement—potentially  
unsuspended taxes.  
Origin year of the splitter arrangement.  
Explanation of the splitter arrangement (for example, reverse  
hybrid owned by the partnership).  
Amount of taxes paid or accrued by the partnership in  
Box 3. Splitter arrangements. Foreign taxes with respect to a  
foreign tax credit splitting event are suspended until the related  
income is taken into account by the taxpayer; see section 909.  
There is a foreign tax credit splitting event with respect to foreign  
taxes of a payor if in connection with a splitter arrangement, as  
defined in Regulations section 1.909-2(b), the related income  
was, is, or will be taken into account by a covered person; see  
Regulations section 1.909-2(a). A covered person, as defined in  
Regulations section 1.909-1(a)(4), includes, for example, any  
entity in which the payor holds, directly or indirectly, at least a  
10% ownership interest (determined by vote or value). A payor,  
as defined in Regulations section 1.909-1(a)(3), includes, for  
example, a person that takes foreign income taxes paid or  
accrued by a partnership into account pursuant to section 702(a)  
(6).  
The partnership must report foreign taxes that are potentially  
suspended on Schedule K-2, Part III, Section 4, line 2E, and  
each partner's share of such taxes on Schedule K-3, Part III,  
Section 4, line 2E. A partnership may not be able to determine  
whether taxes are suspended and whether related income is  
taken into account. However, where the partnership is able to  
determine that taxes are potentially suspended, or potentially  
unsuspended, it must report such taxes and the information  
requested in these instructions for box 3. For example, where a  
partnership owns a reverse hybrid and the foreign country  
assesses tax on the partnership for income earned by the  
reverse hybrid, the partnership should report such taxes as  
potentially suspended taxes.  
connection with the splitter arrangement in the origin year of the  
splitter arrangement.  
Amount of related income on which such taxes were paid or  
accrued in the origin year of the splitter arrangement.  
The two-letter code for the country to which the taxes were  
paid or accrued from the list at IRS.gov/CountryCodes. Don't  
enter “various” or “OC” for the country code.  
The separate category and source of income to which the  
taxes are assigned if determinable by the partnership.  
Amount of related income taken into account in the current tax  
year and the amount of taxes originally paid that relate to that  
portion of the related income if determinable by the partnership.  
Box 4. Foreign tax translation. Check box 4 if the partnership  
reports any foreign taxes on Schedules K-2 and K-3, Part III,  
Section 4. Attach the statement described in the instructions for  
those sections to Schedules K-2 and K-3.  
Box 5. High-taxed income. Check box 5 if the partnership has  
passive income and attach a statement to Schedules K-2 and  
K-3 with Worksheet 1 or Worksheet 2, or both, completed. The  
partner will use this information to determine whether its passive  
income is high-taxed passive income.  
Income received or accrued by a U.S. person that would  
otherwise be passive income isn't treated as passive income if  
the income is determined to be high-taxed income; see section  
904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,  
a partner must group its shares of items of passive income from  
a partnership according to the rules in Regulations section  
1.904-4(c)(3), except that the portion, if any, of the share of  
income attributable to income earned by a domestic partnership  
through a foreign qualified business unit (QBU) is separately  
grouped under the rules of Regulations section 1.904-4(c)(4);  
see also Regulations section 1.904-4(c)(5)(ii). For this purpose,  
a foreign QBU is a QBU (as defined in section 989(a)), other  
than a CFC or noncontrolled 10%-owned foreign corporation,  
that has its principal place of business outside the United States;  
see Regulations section 1.904-4(c)(3).  
Check box 3 and attach a statement to Schedules K-2 and  
K-3 that includes the following for each splitter arrangement in  
which the partnership participates that would qualify as a splitter  
arrangement under section 909 if one or more partners are  
covered persons with respect to an entity that took into account  
related income from the arrangement.  
Section 1 of attached statement—potentially suspended  
taxes.  
Explanation of the splitter arrangement (for example, reverse  
hybrid owned by the partnership).  
Amount of taxes paid or accrued by the partnership in  
Note. Passive income isn't treated as subject to a withholding  
tax or other foreign tax when a credit is disallowed in full for such  
foreign tax, for example, under section 901(k).  
connection with the splitter arrangement.  
Amount of related income on which such taxes were paid or  
accrued.  
The two-letter code for the country to which the taxes were  
paid or accrued from the list at IRS.gov/CountryCodes. Don't  
enter “various” or “OC” for the country code.  
Worksheet 1 for Schedule K-2, Part 1, Box 5  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(3).  
6
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
Worksheet 2 for Schedule K-2, Part 1, Box 5  
Name of foreign QBU:  
Complete a separate Worksheet 2 for each foreign QBU.  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(4).  
Example 5—Part I, box 5; high-taxed income. In Year 1,  
USP, a domestic partnership, has two domestic corporate  
partners with equal interests in the partnership. In Year 1, USP  
receives $100 of passive dividend income from a noncontrolled  
10%-owned foreign corporation subject to a 15% withholding  
tax. USP also receives $150 of passive interest income from an  
unrelated person subject to a 30% withholding tax. USP incurs  
$80 of expenses that are allocable to the interest income. USP  
also receives $50 of passive dividend income from a CFC, which  
isn't subject to foreign tax. No expenses are allocable to the  
dividend income. USP’s branch operation in Country X is treated  
as a QBU under section 989(a), receives $100 of passive  
dividend income subject to a 15% withholding tax. Finally, USP  
earns $400 of passive income with respect to its branch  
operation in Country X that is treated as a QBU under section  
989(a). Such income is subject to foreign tax (but not withholding  
tax) of $40. Expenses of $120 are allocable to the distributive  
share of branch income. No expenses are allocable to the  
dividend income.  
For Year 1, USP checks box 5 on Schedule K-2 (Form 1065),  
Part I, and attaches Worksheet 1 and Worksheet 2 to  
Schedule K-2.  
Example 5. Worksheet 1  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
$170  
$60  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
0
50  
0
0
0
0
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
Reference: Regulations section 1.904-4(c)(3).  
Example 5. Worksheet 2  
Name of foreign QBU: Country X QBU  
Complete a separate Worksheet 2 for each foreign QBU.  
I. Passive Income Net of Allocable Expenses  
II. Taxes  
A
B
C
D
Passive income subject to withholding tax of 15% or more  
$100  
$15  
Passive income subject to withholding tax of less than 15% but greater  
than zero  
0
0
0
0
Passive income not subject to any foreign tax  
Passive income subject to no withholding tax, but subject to other  
foreign tax  
280  
40  
Reference: Regulations section 1.904-4(c)(4).  
USP completes the same worksheets with the distributive  
shares and attaches those worksheets to each Schedule K-3  
provided to the partners.  
titled “Section 267A Disallowed Deduction” that separately lists  
the following information.  
The amount of interest paid or accrued by the partnership for  
which the partner isn't allowed a deduction under section 267A.  
The amount of royalty paid or accrued by the partnership for  
Box 6. Section 267A disallowed deduction. Check box 6 if  
the partnership paid or accrued any interest or royalty for which  
the partnership knows, or has reason to know, that one or more  
of its partners aren't allowed a deduction under section 267A.  
See the instructions for Form 1065, Schedule B, line 22, and  
additional information regarding section 267A. In addition, for  
each partner that is disallowed a deduction under section 267A,  
the partnership should check box 6 in Part I of the specific  
partner’s Schedule K-3 and attach to Schedule K-3 a statement  
which the partner isn't allowed a deduction under section 267A.  
The extent to which information reported on other parts of  
Schedule K-3 (for example, a line in Part II, Section 2; or Part IX,  
Section 2) reflects interest or royalty for which the partner isn't  
allowed a deduction under section 267A.  
7
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
When completing other parts of Schedules K-2 and K-3  
(for example, a line in Part II, Section 2; or Part IX,  
Section 2), list an amount without regard to whether the  
If the partnership attached any of the forms identified in  
box 8 or box 9 to Form 1065, the partnership doesn’t  
need to attach them again to Schedule K-2.  
TIP  
!
CAUTION  
partner is disallowed a deduction under section 267A for the  
amount.  
Box 10. Partner loan transactions. Check box 10 and attach  
a statement with the information in the applicable Table 2 or  
Table 3 if the partnership knows or has reason to know that it (a)  
received a loan from its partner (or a member of the partner’s  
affiliated group) (downstream loan), as described in Regulations  
section 1.861-9(e)(8); or (b) loaned an amount to its partner (or a  
member of the partner’s affiliated group) (upstream loan), as  
described in Regulations section 1.861-9(e)(9).  
Downstream loans. On an attached statement, the  
partnership will provide the details with respect to any  
downstream loans from its partner or a member of the partner’s  
affiliated group, including the amount of interest expense paid or  
accrued by the partnership. Report the information on separate  
lines for each separate loan. The reporting should be as follows  
in Table 2.  
Note for boxes 8 and 9. If the filer meets an exception, such as  
the multiple filer exception, to filing Form 5471, Information  
Return of U.S. Persons With Respect to Certain Foreign  
Corporations; or Form 8865, Return of U.S. Persons With  
Respect to Certain Foreign Partnerships, the filer isn't required to  
complete and attach those forms. However, the filer must still  
attach to Form 1065 any required statements to qualify for the  
exception to filing Form 5471 or Form 8865.  
Box 8. Form 5471 information. Check box 8 and attach  
Form(s) 5471 to Form 1065 and Schedule K-1 (Form 1065) if  
either of the following apply.  
The partnership filed one or more Forms 5471.  
The partnership received Form(s) 5471 as an attachment to a  
Schedule K-3 issued to the partnership,  
Table 2. Downstream Loans  
Form 5471 doesn't need to be attached to Schedule K-1 or  
K-3 if the partnership knows or has reason to know that its direct  
partner (and any indirect partners) doesn't need the information  
on Form 5471 to prepare its tax return. For example, the  
partnership wouldn't need to attach Form 5471 to Schedules K-3  
for certain tax-exempt partners. A pass-through entity partner  
that receives Form 5471 with Schedule K-1 or Schedule K-3  
must provide the relevant portions of Form 5471 to its partner  
unless the pass-through entity knows or has reason to know that  
its direct partner (and any indirect partners) doesn't need the  
information on the Form 5471 to prepare its tax return.  
Name of  
Lender  
Lender’s  
TIN  
Date  
of  
Amount  
of  
Interest  
Expense  
for the  
Year  
Loan  
Loan  
If there are any partners in the same affiliated group as the  
lender, attach to each of the Schedules K-2 and K-3 a statement  
to expand the columns in the table to include the information  
requested in the first two columns for each such partner.  
Upstream loans. On an attached statement, the partnership  
will provide the details with respect to any upstream loans to its  
partner or a member of the partner’s affiliated group, including  
the amount of interest income received or accrued by the  
partnership. Report the information on separate lines for each  
separate loan. The reporting should be as follows in Table 3.  
If a partner only needs certain information from Form 5471,  
such as Schedule Q, the partnership needs only to attach that  
portion to Schedule K-3 and not the complete Form 5471.  
Box 9. Other forms. Check box 9 and attach any applicable  
forms to Form 1065 and Schedule K-1 if any of the following  
apply.  
The partnership filed any other international tax forms.  
Another person filed these forms on behalf of the partnership.  
The partnership received these forms as an attachment to  
Schedule K-1 or Schedule K-3 issued to the partnership.  
This includes, but isn't limited to, the following forms.  
Table 3. Upstream Loans  
Form 5713, International Boycott Report.  
Name of  
Borrower  
Borrower’s  
TIN  
Date  
of  
Amount  
of  
Interest  
Income  
for the  
Year  
Form 8833, Treaty-Based Return Position Disclosure Under  
Section 6114 or 7701(b).  
Loan  
Loan  
Form 8621.  
Exception for Form 8621. With respect to Schedule K-3,  
the partnership should check box 9 if the partnership checked  
box 9 on Schedule K-2. The partnership should indicate in an  
attachment to Schedule K-3 that Form(s) 8621 is attached to  
Schedule K-2. The partnership doesn’t need to attach Form  
8621 to Schedule K-1 or K-3.  
If there are any partners in the same affiliated group as the  
borrower, attach to each of the Schedules K-2 and K-3 a  
statement to expand the columns in the table to include the  
information requested in the first two columns for each such  
partner.  
Form 8990. If the partnership has filed Form 8990, check  
box 9 and provide on Schedule K-1 the information needed to  
complete Form 8990, Schedule A, for foreign partners which are  
required to report their distributive share of excess business  
interest expense, excess taxable income, and excess business  
interest income, if any, that is attributable to income effectively  
connected with a U.S. trade or business. See the instructions for  
Schedule K-1 (Form 1065), line 20, code AH.  
Box 11. Dual consolidated loss. Check box 11 if either the  
reporting partnership (a) owns a foreign branch (as defined in  
Regulations section 1.367(a)-6T(g)) or an interest in a hybrid  
entity (as defined in Regulations section 1.1503(d)-1(b)(3)), or  
(b) is a hybrid entity (as defined in Regulations section  
Withholding tax returns. Don’t include any withholding tax  
returns required to be filed under chapters 3 and 4 (sections  
1441 through 1474).  
1.1503(d)-1(b)(3)). However, box 11 should only be checked if  
the reporting partnership knows that one or more of its direct or  
indirect partners are domestic corporations (other than a RIC, a  
real estate investment trust (REIT), or an S corporation). A  
domestic corporate partner's interest in the reporting partnership  
or its indirect interest in a foreign branch or hybrid entity may be  
treated as a separate unit and subject to the dual consolidated  
See Other Forms, Returns, and Statements That May Be  
Required in the Instructions for Form 1065.  
8
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
             
loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1  
through 1.1503(d)-8.  
If box 11 is checked, a reporting partnership should include in  
attachments to the Schedule K-2 and the Schedules K-3 of a  
partner that is either a domestic corporation or a partnership the  
following.  
Information that a partner (whether direct or indirect) needs to  
complete Form 8858 with respect to a foreign branch or foreign  
disregarded entity owned by the partnership, if section 987 is  
applied to the activities of the foreign branch or foreign  
disregarded entity using a method that requires the partner,  
rather than the partnership, to recognize section 987 gain or  
loss.  
The foreign country in which each foreign branch is located.  
The foreign country in which each hybrid entity is subject to an  
Schedule K-2, Parts II and III, and Schedule K-3,  
Parts II and III  
income tax either on their worldwide income or on a residence  
basis.  
For each foreign branch and hybrid entity, including if the  
Certain partners will use the following information to claim and  
figure a foreign tax credit on Form 1116 or 1118. If the  
partnership doesn't qualify for the domestic filing exception,  
Schedules K-2 and K-3, Parts II and III, must be completed  
unless (a) the partnership doesn't have a direct or indirect  
partner that is eligible to claim a foreign tax credit, or (b) no direct  
or indirect partner would have to file Form 1116 or 1118 to claim  
the foreign tax credit.  
reporting partnership owns an interest in a partnership that owns  
a foreign branch or hybrid entity:  
1. On Schedules K-2, separately state the net income or  
loss attributable to each direct and indirect foreign branch or  
hybrid entity of the partnership, as determined under  
Regulations section 1.1503(d)-5(c); and  
2. On Schedule K-3, for each partner that is a domestic  
corporation or a partnership, separately state the partner's  
distributive share of the net income or loss of each direct and  
indirect foreign branch or hybrid entity of the partnership.  
Partners eligible to claim credit. A partner that’s eligible to  
claim a foreign tax credit includes a domestic corporation, a U.S.  
citizen or resident, U.S. citizen or resident beneficiaries of  
domestic trusts and estates, certain foreign corporations, and  
certain nonresident individuals. See sections 901 and 906. An  
indirect partner includes a partner that owns the partnership  
through a pass-through entity (for example, a partnership, an S  
corporation, or a trust (see Regulations section 1.904-5(a)(4)(iv)  
for the definition of pass-through entity)). An indirect partner also  
includes a partner that owns the partnership through a foreign  
corporation. See sections 960 and 1293(f).  
Whether a foreign use (as described in Regulations section  
1.1503(d)-3 and determined as if a net loss attributable to a  
partnership separate unit were a dual consolidated loss)  
occurred during the tax year with respect to a net loss of a  
partnership separate unit.  
Whether a transfer of assets (as described in Regulations  
section 1.1503(d)-6(e)(1)(iv)) or a transfer of an interest in a  
separate unit (as described in Regulations section  
1.1503(d)-6(e)(1)(v)) occurred during the tax year with respect to  
a foreign branch or hybrid entity.  
Form 1116 exemption exception. Under section 904(j),  
certain partners aren't required to file Form 1116 (Form 1116  
domestic partnership isn't required to complete Schedules K-2  
and K-3 if all partners are eligible for the Form 1116 exemption  
and the partnership receives notification of the partners’  
eligibility for such exemption by the 1-month date (as defined  
earlier). If a partnership receives notification from only some of  
the partners that they're eligible for the Form 1116 exemption,  
the partnership doesn’t need to complete Schedule K-3 for those  
exempt partners but must complete Schedules K-2 and K-3 with  
respect to the other partners to the extent that the partnership  
doesn't qualify for the domestic filing exception.  
A partnership that doesn't have or receive sufficient  
information or notice regarding a direct or indirect partner must  
presume such partner is eligible to claim a foreign tax credit and  
such partner would have to file Form 1116 to claim a credit. As  
such, the partnership must complete Schedules K-2 and K-3,  
including Parts II and III, accordingly.  
The organizational chart described in item 5 of Form 8858.  
If a foreign disregarded entity made its election to be treated  
as disregarded from its owner during the tax year, whether the  
tax owner claimed a loss with respect to stock or debt of the  
foreign disregarded entity as a result of the election.  
Box 12. Schedule K-2 (Reserved for future use). Sched-  
ule K-3, Form 8865 information. If the partnership transferred  
property to a foreign partnership that would subject one or more  
of its domestic partners to reporting under section 6038B and  
Regulations section 1.6038B-2(a)(2) but didn't file Schedule O  
(Form 8865), Transfer of Property to a Foreign Partnership,  
containing all the information required under Regulations section  
1.6038B-2, with respect to the transfer, then the partnership  
must provide the necessary information for each partner to fulfill  
its reporting requirements under Regulations section 1.6038B-2.  
The partnership should check box 12 on Schedule(s) K-3 and  
attach the relevant information, as applicable to each partner.  
Box 12 shouldn’t be checked on Schedule K-2.  
Example 6—Form 1116 exemption. A married couple,  
both U.S. citizens, each own a 50% interest in USP, a domestic  
partnership. The couple and USP each have a calendar tax year.  
USP invests in a RIC. USP receives Form 1099 from the RIC  
reporting $400 of creditable foreign taxes paid or accrued on  
passive category foreign source income. USP’s only foreign  
activity is from the RIC. The married couple don't pay or accrue  
any foreign taxes other than their distributive share of USP’s  
foreign taxes. They also don't have any other foreign source  
income. They qualify for the Form 1116 exemption and notify  
USP by the 1-month date that they don't need Schedule K-3.  
Even though USP doesn't qualify for the domestic filing  
exception because the creditable foreign taxes paid or accrued  
by USP are greater than $300, because the married couple  
notify USP by the 1-month date that they don't need  
Box 13. Other international items. If the partnership has  
transactions, income, deductions, payments, or anything else  
that is impacted by the international tax provisions of the Code  
and such events aren't otherwise reported on this part or other  
parts of Schedules K-2 and K-3, report that information on a  
statement that is attached to Schedules K-2 and K-3 and check  
box 13.  
Don't report with respect to box 13 any withholding tax returns  
required to be filed under chapters 3 and 4 (sections 1441  
through 1474). These forms are separately filed with the IRS.  
Do report with respect to box 13 the following.  
Form 926, Return by a U.S. Transferor of Property to a Foreign  
Corporation.  
Information a partner (whether direct or indirect) that is a U.S.  
Schedule K-3 under the Form 1116 exemption, USP doesn’t  
need to complete Schedules K-2 and K-3.  
shareholder of a CFC needs to complete Form 5471.  
Information a filer needs to complete Form 8865 to the extent  
that one of the partners (whether direct or indirect) is an entity for  
which there is a Form 8865 filing requirement.  
Partnerships with no foreign partners and limited or no for-  
eign activity. In many instances, a partnership with no foreign  
9
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
partners, no foreign source income, no assets generating foreign  
source income, and no foreign taxes paid or accrued may still  
need to report information on Schedules K-2 and K-3. For  
example, if the partner claims the foreign tax credit, the partner  
generally needs certain information from the partnership on  
Schedule K-3, Parts II and III, to complete Form 1116 or 1118.  
This information should have been reported in prior years,  
including before the Tax Cuts and Jobs Act, with Schedules K  
and K-1, and is information the partner needs to compute the  
foreign tax credit limitation, which determines the amount of  
foreign tax credit available to the partner.  
partners, and these instructions take this into account by  
excepting the partnership from completing certain portions of  
Schedules K-2 and K-3 with respect to these partners.  
Schedules K and K-1 contain net amounts but don't include  
separately stated reporting for the partnership’s interest expense  
for international tax reporting purposes, or the tax book value of  
the assets; see Regulations section 1.861-9(e). See the  
instructions for Part II, lines 39 through 43, and Part III, Section 2,  
for further guidance.  
Example 7—Parts II and III required for partnership with  
no foreign activity. U.S. citizens A and B own equal interests in  
USP, a domestic partnership. USP has no foreign activity. In Year  
1, A pays $2,000 of foreign income taxes on passive category  
income other than capital gains reported to A on a payee  
statement. A has interest expense of $5,000 and USP doesn't  
have interest expense. None of A’s interest expense is directly  
allocable. A doesn't have an overall domestic loss in tax year  
2023.  
Because A must complete Form 1116 to claim a foreign tax  
credit, A requests a Schedule K-3 by the 1-month date, and  
therefore the domestic filing exception doesn't apply to USP with  
respect to A. USP must complete the relevant portions of Parts II  
and III of Schedules K-2 and K-3 (for A). The tax book value of  
USP’s assets is $100,000 (reported on Schedule K-2, Part III,  
Section 2, column (a)) and A’s share of those assets is $50,000  
(reported on Schedule K-3, Part III, Section 2, column (a)). Not  
including its distributive share of the assets of USP, the tax book  
value of A’s assets is $50,000. Of A’s assets, $10,000 generate  
passive category foreign source income and $40,000 generate  
U.S. source income. A has passive category foreign source  
taxable income before interest expense of $8,000. A’s U.S. tax  
rate is 25%. A’s interest expense and USP’s assets are  
Exception. See Domestic Filing Exception, earlier.  
Section 904 generally limits the foreign tax credit to the  
portion of U.S. tax liability attributable to foreign source taxable  
income. Foreign source taxable income is foreign source gross  
income less allocable expenses. In general, the partnership  
must complete Schedules K-2 and K-3, Parts II and III, because  
the partnership’s gross income, gross receipts, expenses,  
assets, and foreign taxes paid may affect the foreign tax credit  
available to the partner. The source of certain gross income and  
gross receipts is determined by the partner. In addition, some  
expenses of the partnership are allocated and apportioned by  
the partner. Because of this partner determination, it isn't  
possible for the partner to assume that all income of the  
partnership is U.S. source and all expenses of the partnership  
reduce U.S. source income. Also, the allocation and  
apportionment of certain partner expenses take into account  
distributive shares of assets and income of the partnership that  
aren't otherwise reported in the specified format on the  
Schedule K-1.  
For example, for sourcing purposes, personal property sold  
by the partnership is treated as sold by the partners; see section  
865(i)(5). Generally, income from the sale of certain personal  
property (excluding inventory) is sourced according to the  
residence of the seller. In cases in which the partner is a  
pass-through entity, the partnership might not know the ultimate  
residence of the first non-pass-through partner. The partnership  
isn't required to separately state gain from the sale of personal  
property on Schedules K and K-1 because it is generally  
included in ordinary income. However, the gain is separately  
reported on Schedules K-2 and K-3, Part II.  
As another example, the partner’s R&E expense (which  
includes the distributive share of the partnership’s R&E expense)  
is allocated and apportioned by the partner; see Regulations  
section 1.861-17(f). R&E expense is allocated and apportioned  
based on the gross receipts by Standard Industrial Classification  
(SIC) code. R&E expense by SIC code isn't required reporting on  
Schedules K and K-1 but is reported on Schedules K-2 and K-3,  
Part II. The partner needs Schedule K-3, Part III, Section 1, for  
the partner’s share of the partnership’s gross receipts by SIC  
code for purposes of allocating and apportioning R&E expense.  
characterized in the same category under sections 163 and 469  
for purposes of Regulations section 1.861-9T(d). A uses the tax  
book value (as opposed to the alternative tax book value) to  
allocate and apportion interest expense.  
A’s interest expense is apportioned between U.S. source and  
foreign source income ratably based on the tax book value of A’s  
U.S. source and foreign source assets. Without taking into  
account the distributive share of USP’s assets, the amount of A’s  
interest expense that would reduce passive category foreign  
source income is $1,000 ($5,000 x ($10,000/$50,000)).  
Therefore, A’s passive category foreign source taxable income  
would be $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A  
may only use $1,750 (25% (0.25) x $7,000) of the $2,000 of  
foreign taxes. See section 904.  
Taking into account the distributive share of USP’s assets, the  
amount of A’s interest expense that reduces passive category  
foreign source income is $500 ($5,000 x ($10,000/$100,000)).  
Therefore, A’s passive category foreign source taxable income  
would be $7,500 ($8,000 − $500). At a 25% U.S. tax rate, A may  
use $1,875 (25% (0.25) x $7,500) of the $2,000 of foreign  
taxes—an additional foreign tax credit amount of $125 after  
taking into account A’s share of the tax book value of the  
partnership assets. B doesn't request a Schedule K-3 from USP  
for tax year 2023. Under the domestic filing exception, USP  
doesn't need to complete Schedule K-3 for B.  
In some cases, the partner will be able to use the information  
reported on Parts II and III to increase the foreign tax credit  
limitation, and the amount of available foreign tax credit to the  
partner. For example, Part III, Section 2, provides the partner  
with the tax book value of the assets of the partnership. In  
general, a partner apportions interest expense to reduce U.S.  
source income or foreign source income based on the tax book  
value of its assets, including its distributive share of the  
Example 8—Part II, not Part III, required for partnership  
with no foreign activity. The facts are the same as in  
Example 7, except that A has $5,000 of deductions that aren't  
definitely related to any gross income as described in  
partnership’s interest expense and assets; see section 864(e)(2)  
and Regulations section 1.861-9(e). Taking into account the  
assets of a domestic partnership generating solely U.S. source  
income would result in more expense allocated to reducing U.S.  
source income and less expense allocated to reduce foreign  
source income. Additional foreign source income increases the  
partner’s foreign tax credit limitation and the ability of the partner  
to claim foreign tax credits. The regulations provide exceptions to  
asset method apportionment for certain less-than-10% limited  
Regulations section 1.861-8(e)(9), and A and USP have no other  
expenses. Further, A’s share of USP’s gross income is $50,000.  
Not including its distributive share of the income of USP, A’s  
gross income is $50,000. Of A’s gross income, $5,000 is passive  
category foreign source gross income and $45,000 is U.S.  
source gross income. USP doesn't have any gross income the  
source of which is determined by the partner.  
10  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
A’s expenses must be ratably apportioned based on A’s gross  
income (including its distributive share of the income of USP);  
see Regulations section 1.861-8(c)(3). Therefore, USP must  
complete Schedule K-2, Part II, and Schedule K-3, Part II (for A).  
Before taking into account the distributive share of USP’s gross  
income, the amount of A’s expenses described in Regulations  
section 1.861-8(e)(9) that reduce foreign source income is $500  
($5,000 x ($5,000/$50,000)). Therefore, A’s foreign source  
taxable income would be $4,500 ($5,000 − $500). At a 25% U.S.  
tax rate, A may only use $1,125 (25% (0.25) x $4,500) of the  
$2,000 of foreign taxes. See section 904.  
Taking into account the distributive share of USP’s gross  
income, the amount of A’s expenses described in Regulations  
section 1.861-8(e)(9) that reduce foreign source income is $250  
($5,000 x ($5,000/$100,000). Therefore, A’s foreign source  
taxable income would be $4,750 ($5,000 − $250). At a 25% U.S.  
tax rate, A may use $1,187.50 (25% (0.25) x $4,750) of the  
$2,000 of foreign taxes in Year 1, which is an additional foreign  
tax credit amount of $62.50 after taking into account A’s  
distributive share of the gross income of USP.  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns in  
Schedule K-3, Parts II and III.  
Certain gross income, gross receipts, assets, COGS,  
deductions, and taxes aren't assigned to a source or separate  
category by the partnership. See Partner determination, later.  
Schedule K-3. If the partnership knows that some of its  
partners are limited partners that own less than 10% of the value  
of the partnership and that don't hold their interest in the ordinary  
course of the partner's active trade or business, when  
completing the Schedule K-3 for the less-than-10% limited  
partners, the partner's distributive share of the partnership’s  
foreign source gross income and gross receipts should be  
reported as passive category income and its deductions  
allocated and apportioned to foreign source income should be  
reported as reducing passive category income; see Regulations  
section 1.904-4(n)(1)(ii)(A). See Schedule K-3:  
Part II, column (c);  
Part III, Section 1, column (c);  
Part III, Section 3, column (b); and  
Part III, Section 5, column (d).  
Because A and USP don't have R&E expense or interest  
expense, and because USP didn't pay or accrue any foreign  
taxes, USP doesn't need to complete Schedules K-2 and K-3,  
Part III.  
Report the foreign taxes paid or accrued on foreign source  
income as passive category income in Part III, Section 4, column  
(d).  
If the partnership knows that some of its partners are limited  
partners that own less than 10% of a capital and profits interest  
in the partnership, don't complete Schedule K-3, Part III, Section  
2, for these partners. See Regulations section 1.861-9(e)(4)(i).  
Note. A partner may need the distributive share of the  
partnership’s gross income for purposes of allocating and  
apportioning expenses other than those described in  
Regulations section 1.861-8(e)(9).  
Foreign branch category income. A domestic partnership  
itself doesn't have foreign branch category income. However,  
report all amounts that would be foreign branch category income  
of its partners as if all partners were U.S. persons that were not  
pass-through entities. See Schedule K-2:  
General filing instructions. On Schedule K-2, Parts II and III,  
the partnership reports its gross income, gross receipts, cost of  
goods sold (COGS), certain deductions, and taxes by source  
and separate category. The partnership also reports information  
that the partner needs to allocate and apportion expenses and  
determine the source of certain items of gross income and gross  
receipts. Unless specifically noted below, the partnership reports  
on Schedule K-3, Parts II and III, the partner’s share of the  
partnership’s gross receipts, gross income, COGS, certain  
deductions, and taxes by source and separate category. The  
partner adds its share of the partnership’s foreign source gross  
income, gross receipts, COGS, certain deductions, and taxes by  
separate category to its other foreign source gross income,  
gross receipts, COGS, certain deductions, and taxes in that  
separate category to figure its foreign tax credit. The partnership  
also reports on the Schedule K-3 the distributive share of  
expenses and the allocation and apportionment factors so that  
the partner may determine expenses allocated and apportioned  
to foreign source income.  
Part II, column (b);  
Part III, Sections 1 and 2, column (b); and  
Part III, Sections 4 and 5, column (c).  
The partner's distributive share of the amounts determined by  
the partnership are reported on equivalent columns in  
Schedule K-3, Parts II and III.  
Schedule K-3. Any amounts reported on Schedule K-2 as  
foreign branch category income should be reported as general  
category income on the Schedule K-3, Parts II and III, provided  
to foreign individuals and foreign corporations.  
Section 901(j) income. Income derived from each sanctioned  
country is subject to a separate foreign tax credit limitation. If the  
partnership derives such income, enter code 901j on the line  
after category code. See Schedule K-2:  
Part II, Sections 1 and 2, column (e);  
Part III, Sections 1 and 2, column (e);  
Part III, Section 3, column (d); and  
Part III, Sections 4 and 5, column (f).  
Partnership determination. The source and separate  
category of certain gross receipts, gross income, and COGS as  
well as the allocation and apportionment of certain deductions  
can be determined by the partnership. This includes deductions  
that are definitely related to certain gross income of the  
partnership; see Regulations section 1.861-8(b)(1). See  
Schedule K-2:  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns in  
Schedule K-3, Parts II and III. See the Instructions for Form 1118  
for the potential countries to be listed with the section 901(j)  
category of income.  
Part II, columns (a) through (e);  
Part III, Section 1, columns (a) through (e);  
Part III, Section 3, columns (a) through (d); and  
Part III, Section 5, columns (a) through (f).  
Note. As of the date of these instructions, section 901(j) is the  
only category reported on Part II, Sections 1 and 2, column (e);  
Part III, Sections 1 and 2, column (e); Part III, Section 3, column  
(d); and Part III, Section 5, column (f).  
In Part III, Section 2, columns (a) through (e), some  
partnership assets may be characterized by source and  
separate category by the partnership. This includes certain  
assets that attract directly allocated interest expense under  
Temporary Regulations section 1.861-10T(b) and (c); see  
Temporary Regulations section 1.861-10T(d)(2).  
In Part III, Section 4, in the U.S. and Foreign columns, the  
partnership assigns foreign taxes paid or accrued to a separate  
category and source.  
Section 951A category income. Section 951A category  
income is any amount of global intangible low-taxed income  
(GILTI) includible in gross income under section 951A (other  
than passive category income). If the partnership pays or  
accrues tax on the receipt of a distribution of PTEP assigned to  
the reclassified section 951A PTEP group or section 951A PTEP  
11  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
           
group, the partnership must assign those taxes to section 951A  
category income.  
The partnership will enter such taxes on Part III, Section 4,  
column (b). This code isn't utilized in other portions of Parts II  
and III.  
Schedule K-2, Part II, and Schedule K-3, Part II  
(Foreign Tax Credit Limitation)  
Section 1—Gross Income (Lines 1 Through 24)  
Form 1118, Schedule A, requires a corporation to separately  
report certain types of gross income and gross receipts by  
source and separate category. Separate reporting is required  
because each type of gross income and gross receipts has a  
different sourcing rule. See sections 861 through 865 (and  
section 904(h) and, in some cases, U.S. income tax treaties).  
Schedules K-2 and K-3, Part II, Section 1, generally follow the  
separately reported types of gross income and gross receipts on  
Form 1118, Schedule A. Individuals must follow the same  
sourcing rules, but Form 1116 only requires reporting of total  
gross income from foreign sources by separate category.  
Therefore, those required to file Form 1116 will report  
Schedule K-3, Section 1, line 24, by country on their Form 1116,  
Part I, line 1a. Section 1 also generally follows the types of gross  
income and gross receipts separately reported on Form 1065,  
Schedule K.  
Income re-sourced by treaty. If a sourcing rule in an  
applicable income tax treaty treats any U.S. source income as  
foreign source, and there is an election to apply the treaty, the  
income will be treated as foreign source. This category applies if  
the partnership pays or accrues foreign taxes on receipt of a  
distribution of PTEP that is sourced from an annual PTEP  
account that corresponds to the separate category relating to  
U.S. source income included under section 951(a)(1) or 951A  
and re-sourced as foreign source income under a treaty.  
The designations below are only relevant for Part III, Section  
4, column (f).  
Code RBT PAS. If an applicable income tax treaty treats any  
U.S. source passive category income as foreign source passive  
category income, and there is an election to apply the treaty,  
enter code RBT PAS.  
Code RBT GEN. If an applicable income tax treaty treats any  
U.S. source general category income as foreign source general  
category income, and there is an election to apply the treaty,  
enter code RBT GEN.  
For each line in Section 1, report the total for each country in  
column (g).  
Country code. Forms 1116 and 1118 require the taxpayer to  
report the foreign country or U.S. territory with respect to which  
the gross income and gross receipts are sourced. On lines 1  
through 24, for each gross income and gross receipts item, enter  
on a separate line (A, B, or C) the two-letter code from the list at  
IRS.gov/CountryCodes for the foreign country or U.S. territory  
within which the gross income and gross receipts are sourced. If  
a type of income is sourced from more than three countries,  
attach a schedule with the information required on Schedule K-2,  
Part II, and Schedule K-3, Part II, for that type of income.  
Code RBT 951A. If an applicable income tax treaty treats any  
U.S. source section 951A category income as foreign source  
section 951A category income, and there is an election to apply  
the treaty, enter code RBT 951A.  
Partner determination. Enter the gross income, income  
adjustments, and gross receipts of the partnership that are  
required to be sourced by the partner on Schedule K-2:  
If income is U.S. source, enter “US.Don't enter “various” or  
Part II, Section 1, column (f);  
“OC” for the country code.  
Part III, Section 1, column (f);  
Part III, Section 3, lines 1 and 2, column (e); and  
Part III, Section 5, column (g).  
Note. For Part II, column (f), enter the code XX if the partnership  
can't determine the country or U.S. territory with respect to which  
the gross income and gross receipts are sourced because the  
source is determined by the partner. However, don't enter the  
code XX for Part II, column (f), if an income tax of at least 10% of  
the gain derived from the sale is actually paid to a foreign  
country with respect to that gain. See sections 865(e) and  
865(g). Instead, enter for Part II, column (f), the foreign country  
to which the partnership paid the tax of at least 10% of the gain.  
Each gross income and gross receipts item (for example,  
sales vs. interest income) may have different countries listed on  
lines A, B, C, etc., given that the partnership might not have  
sales income and interest income, for example, from the same  
country. Line 24 should sum each country’s total income  
reported on Part II, regardless of the line on which such income  
is reported, whether A, B, C, etc.  
Exceptions. The instructions for Forms 1116 and 1118  
specify exceptions from the requirement to report gross income  
and gross receipts by foreign country or U.S. territory with  
respect to RICs and section 863(b). See the instructions for  
Forms 1116 and 1118 for the exceptions that apply in completing  
Schedules K-2 and K-3, Parts II and III. Don't enter a foreign  
country or U.S. territory (to report on a country-by-country basis)  
for lines 16 through 18.  
This includes income from the sale of most personal property  
other than inventory, depreciable property, and certain intangible  
property sourced under section 865. This also includes certain  
foreign currency gain on section 988 transactions; see the  
instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax  
Credit for Individuals, for additional details. Attach a statement to  
the Form 1065 to identify the separate category of income under  
section 904(d) of the amounts listed in Part II, Section 1, column  
(f).  
Include deductions that are allocated and apportioned by the  
partner on Schedule K-2:  
Part II, Section 2, column (f); and  
Part III, Section 3, lines 3 and 4, column (e).  
This includes most interest expense and R&E expense. See  
Regulations sections 1.861-9(e) and 1.861-17(f).  
Enter the assets that are assigned to a source and separate  
category by the partner on Schedule K-2, Part III, Section 2,  
column (f).  
Enter the foreign taxes that are assigned to a source of  
income by the partner on Schedule K-2, Part III, Section 4, in the  
Partner column. This includes taxes imposed on certain sales  
income.  
Schedules K-2 and K-3 request that gross income and gross  
receipts be reported by country or U.S. territory because such  
information is requested on Forms 1116 and 1118. Income and  
taxes are reported by country on Forms 1116 and 1118 so that,  
for example, the IRS may initially evaluate whether taxpayers are  
claiming credits for compulsory payments to foreign  
governments.  
The partner's distributive share of the amounts determined by  
the partnership are reported in equivalent columns on  
Schedule K-3, Parts II and III.  
12  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
Example 9—Part II: multiple country sources: gross  
income. In Year 1, USP, a domestic partnership, has employees  
who perform services in Country X and Country Y. USP earns  
$25,000 of general category services income, $10,000 with  
respect to Country X and $15,000 with respect to Country Y. The  
two-letter code for Country X is AA and the two-letter country  
code for Country Y is YY. USP makes the following entries on the  
first two lines of Schedule K-2, Part II, line 2.  
Example 10. Schedule K-2, Part II, Section 1, Line  
11  
Foreign Source  
(a) U.S. source  
Description  
(c) Passive category  
income  
11 Net short-term capital  
gains  
Example 9 Table  
A
B
C
D
US  
FR  
CA  
HA  
$1,000  
$400  
($300)  
($200)  
Foreign Source  
Description  
(d) General category  
income  
2
Gross income from performance of services  
Line 12. Net long-term capital gain. On line 12, report net  
long-term capital gain, excluding amounts reported on lines 13,  
14, and 15.  
A
B
AA  
YY  
$10,000  
$15,000  
Line 13. Collectibles (28%) gain. Report collectibles gain on  
Lines 3 and 4. Rental income. These lines are reported  
separately because they're reported separately on Form 1065,  
Schedule K. The sourcing rule may be the same for both types of  
rental income.  
line 13 and not on line 12.  
Line 14. Unrecaptured section 1250 gain. Report  
unrecaptured section 1250 gain on line 14 and not on line 12. If  
gain is both unrecaptured section 1250 gain and net section  
1231 gain, report the gain on line 14 and not on line 15. Include  
an attachment indicating the amount of unrecaptured section  
1250 gain that is also net section 1231 gain.  
Lines 7 and 8. Ordinary dividends and qualified dividends.  
Enter only ordinary dividends on line 7 and only qualified  
dividends on line 8. Don't include as ordinary dividends or  
qualified dividends the amount of any distributions received to  
the extent that they're attributable to PTEP in annual PTEP  
accounts of the partnership. See the instructions for line 19 for  
when a partnership might have an income inclusion with respect  
to a foreign corporation.  
Line 15. Net section 1231 gain. Report net section 1231 gain  
on line 15 and not on line 12 unless such amount is also  
unrecaptured section 1250 gain. See the instructions for line 14.  
Line 28. Net long-term capital loss. Report net long-term  
capital loss on line 28, excluding collectibles loss which is  
reported on line 29.  
Note. The amount of distributions which are attributable to  
PTEP in annual PTEP accounts of a direct or indirect partner  
isn't determined by the partnership and therefore isn't taken into  
account for purposes of determining the ordinary dividends to be  
entered on line 7 or the qualified dividends to be entered on  
line 8.  
Line 29. Collectibles loss. Report collectibles loss on line 29  
and not on line 28.  
Lines 16 and 46. Section 986(c) gain and loss. Include the  
partnership’s share of a lower-tier pass-through entity’s section  
986(c) gain or loss, and the amount of section 986(c) gain or  
loss on distributions of PTEP sourced from an annual PTEP  
account of the partnership. This isn't reported as a net amount  
but rather separate items. Total section 986(c) gains for the year  
are reported on line 16. Total section 986(c) losses for the year  
are reported on line 46.  
Lines 11 through 15 and 27 through 30. Capital gains and  
losses. These lines generally match the types of gains and  
losses reported separately on Form 1065, Schedule K. Further,  
section 904(b)(2)(B) contains rules regarding adjustments to  
account for capital gain rate differentials (as defined in section  
904(b)(3)(D)) for any tax year.  
Example 10—Parts II and III: capital gains and losses.  
Note. A partnership is only responsible for computing and  
reporting foreign currency gain or loss under section 986(c) with  
respect to distributed PTEP sourced from an annual PTEP  
account of the partnership. It isn't responsible for computing or  
reporting foreign currency gain or loss under section 986(c) with  
respect to distributed PTEP sourced from an annual PTEP  
account of a direct or indirect partner.  
Partnership has the following amounts for tax year 2023.  
Sources of Income for Example 10  
Short-term capital gains/losses  
Total  
$900  
Lines 17 and 47. Section 987 gain and loss. The source of  
section 987 gain or loss is generally determined by reference to  
the source of the income or asset giving rise to such gain or loss.  
A partnership may also obtain section 987 gain or loss  
information from Form 8858. This isn't reported as a net amount  
but rather separate items. Total section 987 gains for the year are  
reported on line 17. Total section 987 losses for the year are  
reported on line 47.  
U.S. source  
$1,000  
$400  
Passive category (France)  
Passive category (Canada)  
Passive category (Haiti)  
($300)  
($200)  
Partnership reports these amounts on Schedule K-2, Part II,  
Section 1, line 11, as follows.  
Lines 18 and 48. Section 988 gain and loss. The source of  
foreign currency gain or loss on section 988 transactions is  
generally determined by reference to the residence of the  
taxpayer or QBU on whose books the asset, liability, or item of  
income or expense is properly reflected. If the source is  
determined by reference to the residence of the taxpayer  
13  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
               
partner, the section 988 gain and loss would be reported in  
column (f).  
generated by such partnership property. See Temporary  
Regulations section 1.861-9T(e)(1).  
Line 19. Section 951(a) inclusions. Report section 951(a)  
inclusions if the domestic partnership takes into account such  
income. A domestic partnership doesn't have a section 951(a)  
inclusion with respect to a foreign corporation for tax years of the  
foreign corporation that begin on or after January 25, 2022. A  
domestic partnership may not have a section 951(a) inclusion  
with respect to a foreign corporation for tax years of the foreign  
corporation that begin before January 25, 2022, if, pursuant to  
Regulations section 1.958-1(d)(4), it applies Regulations  
sections 1.958-1(d)(1) through (3) to be treated as not owning  
stock of a foreign corporation within the meaning of section  
958(a) for purposes of section 951, and for purposes of any  
other provision that applies by reference to section 951.  
Lines 41 through 43. Other interest expense. A partner’s  
distributive share of a partnership’s interest expense that isn't  
directly allocable to income from specific partnership property is  
generally allocated and apportioned by the partner, subject to  
certain exceptions, and included in column (f); see Temporary  
Regulations section 1.861-9T(e)(1).  
Interest expense incurred by certain individuals, estates, and  
trusts is characterized based on the categories of interest  
expense in sections 163 and 469: active trade or business  
interest, investment interest, or passive activity interest, adjusted  
for any interest expense directly allocated under Temporary  
Regulations section 1.861-10T; see Regulations section  
1.861-9T(d). The amounts in each category of interest expense  
are reported on lines 41 through 43; see Example 11, later. If the  
partnership’s only partners are corporate partners, the  
partnership doesn’t need to report its interest expense by the  
categories of interest expense in sections 163 and 469. All such  
interest expense may be reported as business interest expense  
on line 41.  
Line 20. Other income. Attach a statement to both Schedules  
K-2 and K-3 describing the amount and type of other income.  
The statement must conform to the format of Part II.  
Line 24. Total gross income. Enter the total gross income  
received from all sources on line 24. Then, add the gross income  
on lines 1 through 23 by country or territory and enter the total by  
country in rows A, B, and C (and additional rows if more than  
three countries). The sum of the amounts in rows A, B, C, etc.,  
doesn't need to equal the amount on line 24, given that not every  
gross income amount is required to be reported by country.  
Exception. With respect to limited partners that each own  
less than 10% of the capital and profits interests of the  
partnership, and such interests aren't owned in the ordinary  
course of the partner’s active trade or business, the partnership  
reports the partners’ distributive shares of interest expense as  
reducing passive category foreign source income in column (c).  
However, if the partnership interest is held in the ordinary course  
of the partner's active trade or business, a partner's share of the  
partnership’s interest expense (other than partnership interest  
expense that is directly allocated to identified property under  
Regulations section 1.861-10T) is apportioned in accordance  
with the partner's relative distributive share of gross foreign  
source income in each separate category and of gross domestic  
source income from the partnership in columns (a) through (e)  
as applicable. See Regulations sections 1.861-9(e)(4)(i) and  
1.904-4(n)(1)(ii) for more information.  
Section 2—Deductions (Lines 25 Through 54)  
Form 1118, Schedule A, requires a corporation to separately  
report certain types of deductions and losses by source and  
separate category. Separate reporting is required because each  
type of deduction may be allocated and apportioned according  
to a different methodology; see, for example, Regulations  
sections 1.861-8 through -20 and Temporary Regulations  
sections 1.861-8T and -10T. For purposes of allocating and  
apportioning expenses, in general, a partner adds the  
distributive share of the partnership's deductions to its other  
deductions incurred directly by the partner; see Regulations  
section 1.861-8(e)(15). Generally, Section 2 follows the  
separately reported types of deductions and losses on Form  
1118, Schedule A. Individuals must generally follow the same  
expense allocation and apportionment rules, but Form 1116 only  
requires separate reporting of certain deductions by separate  
category; see Form 1116, Part I, lines 2 through 5. Section 2 also  
generally corresponds to the deductions separately reported on  
Form 1065, Schedule K.  
Exception. See Regulations sections 1.861-9(e)(8) and (9)  
for a special rule for partnership loans. See also Box 10. Partner  
loan transactions, earlier.  
Interest expense is always included on lines 39 through 43  
and not on other lines.  
Line 45. Foreign taxes not creditable but deductible. See  
the instructions for Forms 1116 and 1118 for examples of foreign  
taxes that are not creditable but deductible. Foreign taxes that  
are creditable (even if a partner chooses to deduct such taxes)  
aren't reported as expenses on Part II. Creditable taxes are  
reported on Part III, Section 4.  
Line 32. R&E expenses. In general, R&E expenses are  
allocated and apportioned by the partner and reported in column  
(f); see Regulations section 1.861-17(f). R&E expenses, as  
described in section 174, are ordinarily definitely related to gross  
intangible income reasonably connected with relevant broad  
product categories of the taxpayer and are allocable to gross  
intangible income as a class related to such product categories.  
The product categories are determined by reference to the  
three-digit classification of the Standard Industrial Classification  
Manual (SIC code); see osha.gov/data/sic-manual.  
Lines 49 and 50. Other deductions. Attach to Schedules K-2  
and K-3 a statement describing the amount and type of other  
deductions. The statement must conform to the format of Part II.  
Schedule K-2, Part III, and Schedule K-3, Part III  
(Other Information for Preparation of Form 1116  
or 1118)  
Section 1—R&E Expenses Apportionment Factors  
Line 38. Charitable contributions. Charitable contribution  
deductions are apportioned solely to U.S. source gross income;  
see Regulations section 1.861-8(e)(12). Therefore, this  
deduction should be reported in column (a).  
This section requires the partnership to report information that a  
partner will use to allocate and apportion its R&E expense for  
foreign tax credit limitation purposes.  
Lines 39 and 40. Interest expense specifically allocable un-  
der Regulations section 1.861-10 and -10T. Apart from  
interest expense entered on line 39, enter on line 40 interest  
expense that is directly allocable under Temporary Regulations  
section 1.861-10T to income from specific partnership property.  
Such interest expense is treated as directly allocable to income  
A partnership isn't required to complete Section 1 of Part III  
unless either (a) the partnership incurs R&E expense; or (b) the  
partner is expected to license, sell, or transfer its intangible  
property to the partnership (as provided in Regulations section  
1.861-17(f)(3)).  
14  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
                     
Deductible R&E expenses, as described in section 174, are  
ordinarily definitely related to gross intangible income  
partner's distributive share of partnership interest expense, is  
apportioned by reference to the partner's assets, including the  
partner’s pro rata share of partnership assets; see Regulations  
section 1.861-9(e)(2). Interest expense is apportioned based on  
the average value of assets; see Regulations section 1.861-9(g)  
(2)(i)(A). A taxpayer can use either the tax book value or the  
alternative book value of its assets; see Regulations section  
1.861-9(i). Under both methods, the partner uses the  
reasonably connected with relevant broad product categories of  
the taxpayer and are allocable to gross intangible income as a  
class related to such product categories. The product categories  
are determined by reference to the three-digit classification of  
the SIC code. In general, R&E expenses are apportioned based  
on gross receipts. R&E expenses are allocated and apportioned  
by the partner; see Regulations section 1.861-17(f)(1). This  
requires that the partnership report to its partners the gross  
receipts by SIC code according to source and separate category  
of income. This also requires that the partnership reports the  
amount of R&E expense performed in the United States and  
outside the United States to apply exclusive apportionment; see  
Regulations section 1.861-17(f)(2).  
partnership's inside basis in its assets, including adjustments  
required under sections 734(b) and 743(b); see Regulations  
sections 1.861-9(e)(2) and -9(e)(3). When reporting the basis in  
an asset which is stock in nonaffiliated 10%-owned corporations,  
adjust such amount for earnings and profits (E&P). See  
Regulations section 1.861-12(c)(2)(i)(A).  
Note. Attach to Form 1065 a second Part III, Section 2, if the  
partnership reports both the tax book value and the alternative  
tax book value of its assets to the partners.  
Column (e). As of the date of these instructions, the only  
separate category that could be included in column (e) is the  
section 901(j) category of income. See the Instructions for Form  
1118 for the potential countries to be listed with the section  
901(j) category of income.  
Column (b). The partnership characterizes its pro rata share of  
the partnership assets that give rise to foreign branch category  
income as assets in the foreign branch category. See  
Regulations section 1.861-9(e)(10).  
Line 1. Enter the gross receipts by SIC code for each grouping.  
Such gross receipts include both the partnership’s gross receipts  
and certain other parties' gross receipts; see Regulations  
sections 1.861-17(d)(3) and (4). Sales of parties controlled by  
the partnership should be included on line 1 if such controlled  
parties can reasonably be expected to benefit from the R&E  
expense connected with the product categories. This includes  
sales that benefit from the partner’s R&E expenses if licensed  
through the partnership. Sales of uncontrolled parties are also  
taken into account if such sales involve intangible property that  
was licensed or sold to the uncontrolled party if the uncontrolled  
party can reasonably be expected to benefit from the R&E  
expense.  
Line 1. On Schedule K-2, report the average of the  
beginning-of-year and end-of-year inside bases in the  
partnership’s total assets; see Regulations section 1.861-9(g)(2)  
(i)(A). On Schedule K-3, report the partner’s distributive share of  
the assets reported on Schedule K-2. Include on line 1 assets  
without directly identifiable yield referred to in Regulations  
section 1.861-9T(g)(3)(iii).  
Line 2. On Schedule K-2, report the partnership’s average of  
the beginning-of-year and end-of-year inside bases adjustments  
under sections 734(b) and 743(b). On Schedule K-3, report the  
partner’s distributive share of the adjustments reported on  
Schedule K-2.  
Line 2. Report the amount of R&E expense related to activity  
performed in the United States and the amount of R&E expense  
related to activity performed outside the United States by SIC  
code. The total of the amounts on Schedule K-2, Part III, Section  
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the  
total of the amounts on Schedule K-3, Part III, Section 1, line 2,  
must equal Schedule K-3, Part II, line 32.  
Lines 3 and 4. On Schedule K-2, report reductions in the  
partnership's asset values to reflect the partnership's directly  
allocable interest under Regulations section 1.861-10(e) and  
Temporary Regulations section 1.861-10T; see also Temporary  
Regulations section 1.861-9T(e)(1). On Schedule K-3, report the  
partner’s distributive share of the reductions in asset values  
reported on Schedule K-2.  
Note. Line 2 isn't reported according to source or separate  
Line 5. On Schedule K-2, report the average value of  
partnership assets excluded from the apportionment formula;  
see section 864(e)(3). On Schedule K-3, report the partner’s  
distributive share of the excluded assets reported on  
Schedule K-2. Include on line 5 assets without directly  
identifiable yield referred to in Regulations section 1.861-9T(g)  
(3)(iii).  
category.  
Note. The SIC code for line 2B(i) doesn't need to be the same  
SIC code for line 2A(i).  
Section 2—Interest Expense Apportionment  
Factors  
Line 6. Individual partners who are general partners or who are  
limited partners with an interest in the partnership of 10% or  
more follow the same rules as corporate partners whose interest  
in the partnership is 10% or more except that their interest  
expense must be apportioned according to the interest expense  
classifications under sections 163 and 469; see Regulations  
section 1.861-9T(d). This includes reporting the assets  
according to such classifications. If the partnership has no such  
partners, the partnership doesn’t need to complete  
This section requires the partnership to report information that a  
partner will use to allocate and apportion its interest expense for  
foreign tax credit limitation purposes.  
Complete this Section 2 only if the partnership or the partners  
have interest or stewardship expenses.  
Stewardship expenses. In the case of the partner’s  
stewardship expenses incurred to oversee the partnership, the  
partnership's value is determined and characterized under the  
asset method in Regulations section 1.861-9 (taking into  
account any adjustments under sections 734(b) and 743(b)); see  
Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the  
instructions with respect to Part III, Section 2, for interest  
expense apportionment factors apply generally to the partner’s  
stewardship expense apportionment.  
Schedule K-2, Part III, Section 2, lines 6b through 6d; or  
Schedule K-3, Part III, Section 2, lines 6b through 6d. The  
partnership includes the total amount on line 6a.  
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,  
and 5. Line 6a is divided into the types of assets on lines 6b, 6c,  
and 6d if the partnership has individual, estate, and certain trust  
partners (whether direct or indirect through a pass-through  
entity).  
With respect to corporate partners with an interest in the  
partnership of 10% or more, interest expense, including the  
15  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Example 11—Parts II and III: asset method  
generate an inclusion under section 951(a)(1) or 951A(a)), if the  
partner meets the requirements for eligibility; see Regulations  
section 1.904(b)-3(c)(2). However, because the partnership may  
not have the information to determine if a partner is eligible for a  
section 245A deduction (for example, due to tiered ownership),  
the partner must determine to what extent the stock is treated as  
an asset in a section 245A subgroup.  
With respect to a partnership-owned specified 10% foreign  
corporation that isn't a CFC, the partnership will report on line 7,  
columns (a) through (e), the total value of the stock in all such  
foreign corporations. The value of the stock is the partnership's  
basis in the stock adjusted to take into account the E&P of the  
foreign corporations as explained in Regulations section  
1.861-12(c)(2). The partnership must attach a statement to  
Schedules K-2 and K-3 with the following information for each  
foreign corporation for which adjusted basis is reported on line 7.  
apportionment of interest expense. A, a U.S. citizen, has a  
10% interest in USP, a domestic partnership. USP is engaged in  
the active conduct of a U.S. trade or business. USP’s business  
generates only domestic source income. USP also has an  
investment portfolio consisting of several less-than-10% stock  
investments. USP has a bank loan. The proceeds of the bank  
loan were divided equally between the business and the  
investment portfolio. A’s only business assets and investment  
assets are its distributive share of those owned by USP. A’s only  
interest expense is that from its distributive share of the USP  
loan.  
A’s share of the interest expense with respect to the loan for  
USP’s business is $2,000. It is apportioned on the basis of  
business assets. Because all business income is domestic  
source, the business assets are domestic assets and reported  
on Schedules K-2 and K-3, Part III, Section 2, line 6b, column  
(a). A’s $2,000 share of the interest expense is reported on  
Schedule K-3, Part II, line 41, column (f). It is apportioned to U.S.  
source income by the partner.  
The interest expense for A’s share of the loan for USP’s  
investments is $2,000 and is reported on Schedule K-3, Part II,  
line 42, column (f). The investment interest must be apportioned  
on the basis of investment assets. Applying the asset method,  
$80,000 of USP’s adjusted basis in its investment portfolio stock  
generates domestic source income and $120,000 of USP’s  
adjusted basis in the stock generates foreign source passive  
income. USP reports these amounts on Schedule K-2, Part III,  
Section 2, line 6c, columns (a) and (c), respectively. A’s  
distributive share of the adjusted basis in USP’s stock is $8,000  
with respect to the stock generating domestic source income  
and $12,000 with respect to the stock generating foreign source  
passive income. Such amounts are reported on Schedule K-3,  
Part III, Section 2, line 6c, columns (a) and (c), respectively. With  
respect to the interest expense on the loan for USP’s  
Name of foreign corporation.  
EIN or reference ID number. Don't enter “FOREIGNUS” or  
“APPLIED FOR.”  
Percentage of voting and value of stock owned by partnership  
in such foreign corporation.  
Value of the stock in such corporation included in each of the  
groupings on lines 6b through 6d (identify separately each of  
those groupings).  
If the specified 10%-owned foreign corporation is a CFC, a  
portion of the value of stock in each separate category and in the  
residual grouping for U.S. source income is subdivided between  
a section 245A and a non-section 245A subgroup under the  
rules described in Regulations section 1.861-13(a)(5).  
However, because the partnership will generally not have the  
information to apply the stock characterization rules described in  
Regulations section 1.861-13(a)(5), the partner must apply those  
rules to characterize the stock.  
With respect to partnership-owned CFCs, the partnership will  
report on line 8, column (f), the total value of its stock in all such  
foreign corporations. The value of the stock is the partnership’s  
inside basis in the stock adjusted to take into account the E&P of  
the foreign corporations as explained in Regulations section  
1.861-12(c)(2). The partnership must attach a statement to  
Schedules K-2 and K-3 with the following information for each  
foreign corporation for which basis is reported on line 8.  
investments, $800 (($8,000/$20,000) x $2,000) is apportioned to  
domestic source income and $1,200 (($12,000/$20,000) x  
$2,000) is apportioned to foreign source passive income.  
Schedule K-3. If the partnership's partners aren't limited to  
corporate partners, when completing Schedule K-3, Part III,  
Section 2, for the corporate partners with an interest of 10% or  
more in the partnership, don't complete lines 6b through 6d.  
Include the total distributive share on line 6a.  
Name of foreign corporation.  
EIN or reference ID number. Don't enter “FOREIGNUS” or  
Lines 7 and 8. The amounts reported on lines 7 and 8 are  
subsets of the amounts reported on line 6 representing the value  
of stock held by the partnership in certain foreign corporations. In  
determining its foreign tax credit limitation, a partner should  
disregard interest expense that is “properly allocable'' to stock of  
a 10%-owned foreign corporation that has been characterized as  
a section 245A asset; see section 904(b)(4) and Regulations  
section 1.904(b)-3(a)(1)(ii). The amount of properly allocable  
deductions is determined by treating the section 245A subgroup  
for each separate category as a statutory grouping for purposes  
of allocating and apportioning interest deductions on the basis of  
assets. Assets in a section 245A subgroup only include stock of  
a specified 10%-owned foreign corporation that has been  
characterized as a section 245A asset.  
The stock is characterized as a section 245A asset to the  
extent it generates income that would generate a dividends  
received deduction under section 245A if distributed. This  
doesn't include income that is included as GILTI, subpart F  
income, or a section 951(a)(1)(B) inclusion or income described  
in section 245(a)(5) (which gives rise to a dividends received  
deduction under section 245 instead of section 245A).  
“APPLIED FOR.”  
Percentage of voting and value of stock owned by the  
partnership in such foreign corporation.  
Value of the stock in such corporation.  
Section 3—Foreign-Derived Intangible Income  
(FDII) Deduction Apportionment Factors  
Don't complete this Section 3 if the partnership knows that it has  
no domestic corporate partners (whether direct or indirect).  
This section requires the partnership to report information that  
a partner will use to allocate and apportion its FDII deduction  
under section 250(a)(1)(A) for foreign tax credit limitation  
purposes. The deduction is definitely related and allocable to the  
class of gross income included in the partner’s foreign-derived  
deduction eligible income (FDDEI) (as defined in section 250(b)  
(4)) and is apportioned within the class, if necessary, ratably  
between the statutory grouping (or among the statutory  
groupings) of gross income and the residual grouping of gross  
income based on the relative amounts of FDDEI in each  
grouping; see Regulations section 1.861-8(e)(13). If the partner  
is a member of a consolidated group, see Regulations section  
1.861-14(e)(4). Accordingly, this section requires the partnership  
to report information that its partners will use to determine the  
In the case of a specified 10%-owned foreign corporation that  
isn't a CFC, all of the value of its stock is potentially in a section  
245A subgroup because the stock generally generates  
dividends eligible for the section 245A deduction (and can't  
16  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
source and separate category of its income so that the partners  
may allocate and apportion the FDII deduction under section  
250(a)(1)(A) for purposes of the foreign tax credit limitation.  
Example of Multiple Types of Income for the Same  
Country  
Lines 1 and 2. Report the partnership’s foreign-derived gross  
receipts and COGS, respectively, by source and separate  
category.  
Description  
(a) Type of tax  
1
Direct (section 901 or 903) foreign taxes: Paid  
Accrued  
Lines 3 and 4. Report the partnership’s deductions allocable to  
foreign-derived gross receipts and other partnership deductions  
apportioned to foreign-derived gross receipts, respectively; see  
Part IV, Section 2, lines 11 and 12. Although these deduction  
amounts are necessary to figure the partner’s FDII deduction,  
once this amount is determined, the actual FDII deduction itself  
is allocated and apportioned as described in Regulations section  
1.861-8(e)(13).  
A
B
AA  
AA  
WHTD  
OTH  
Column (b). Section 951A category income. Taxes assigned  
to section 951A category income are taxes paid or accrued on  
distributions of PTEP assigned to the reclassified section 951A  
PTEP and section 951A PTEP groups. A partnership might not  
be able to complete this column due to lack of information  
regarding the treatment of the current year distributions.  
Column (d). As of the date of these instructions, the only  
separate category that could be included in column (d) is the  
section 901(j) category of income. See the Instructions for Form  
1118 for the potential countries to be listed with the section  
901(j) category of income.  
Column (f). Other category.  
Foreign taxes paid or accrued to sanctioned countries.  
No credit is allowed for foreign taxes paid or accrued to certain  
sanctioned countries.  
Foreign taxes related to PTEP resourced by treaty. If the  
partnership pays or accrues foreign taxes on receipt of a  
distribution of PTEP that is sourced from an annual PTEP  
account that corresponds to the separate category relating to  
U.S. source income included under section 951(a)(1) and  
resourced as foreign source income under a treaty, such taxes  
are included in column (f).  
Section 4—Foreign Taxes  
Don't complete this Section 4 if the partnership doesn't pay or  
accrue foreign taxes.  
In Part III, Section 4, the partnership assigns foreign taxes  
paid or accrued (including on U.S. source income) to a separate  
category and source. Include taxes paid or accrued to foreign  
countries or to U.S. territories.  
On the line after category code, enter one of the following  
codes.  
Code RBT PAS. If an applicable income tax treaty treats any  
Attachment. As previously mentioned in the instructions for  
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for  
distributive share), for each of the amounts listed in lines 1  
through 3, attach to the Schedules K-2 and K-3 a statement  
reporting the following information.  
U.S. source passive category income as foreign source passive  
category income, and there is an election to apply the treaty,  
enter code RBT PAS.  
Code RBT GEN. If an applicable income tax treaty treats any  
U.S. source general category income as foreign source general  
category income, and there is an election to apply the treaty,  
enter code RBT GEN.  
The dates on which the taxes were paid or accrued.  
The exchange rates used.  
The amounts in both foreign currency and U.S. dollars. See  
Code RBT 951A. If an applicable income tax treaty treats any  
section 986(a).  
U.S. source section 951A category income as foreign source  
section 951A category income, and there is an election to apply  
the treaty, enter code RBT 951A.  
Column (a). Enter the code for the type of tax.  
Codes for Types of Tax  
Line 1. Enter in U.S. dollars the total foreign taxes (described in  
section 901 or section 903) that were paid or accrued by the  
partnership (according to its method of accounting for such  
taxes). Don't reduce the amount that you report on line 1 by the  
reductions reported on line 2. Don't report redetermined taxes on  
line 1. Report such taxes on line 3.  
Code  
Type of Tax  
WHTD  
Withholding tax on dividends  
Withholding tax on distributions of  
PTEP  
WHTP  
WHTB  
Note. Don't include on line 1 any foreign taxes not creditable but  
Withholding tax on branch  
remittances  
deductible as reported on Part II, Section 2, line 45.  
If the partnership uses the cash method of accounting, check  
the "Paid" box and enter foreign taxes paid during the tax year on  
line 1. Report each partner's share on Schedule K-3, Part III,  
Section 4, line 1.  
If the partnership uses the accrual method of accounting,  
check the “Accrued” box and enter foreign taxes accrued on  
line 1. Report each partner's share on Schedule K-3, Part III,  
Section 4, line 1.  
Withholding tax on rents, royalties,  
and license fees  
WHTR  
WHTI  
Withholding tax on interest  
Taxes paid or accrued to foreign  
countries or territories on certain  
effectively connected income  
ECI  
Other foreign taxes paid or accrued  
on sales income  
OTHS  
Note. Check only one box “Paid” or “Accrued” depending on the  
method of accounting the partnership takes into account foreign  
taxes.  
Other foreign taxes paid or accrued  
on services income  
OTHR  
OTH  
Other foreign taxes paid or accrued  
Enter on a separate line, indicated by the letters A through F,  
taxes paid or accrued to each country. Enter the two-letter code  
from the list at IRS.gov/CountryCodes. Don't enter “various” or  
“OC” for country code.  
If there are multiple types of tax for the same country,  
generate multiple alpha rows for the same country, one row for  
each type of tax. For example, see below.  
17  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
Exceptions. The instructions for Forms 1116 and 1118  
specify exceptions from the requirement to report gross income  
and gross receipts by foreign country or U.S. territory with  
respect to RICs and section 863(b). These exceptions apply as  
well to reporting of taxes in this section.  
to which the tax relates. Report the date on which the tax was  
paid. If there is more than one date tax is paid, enter one of the  
dates paid on the schedule itself and then attach to the  
Schedules K-2 and K-3 a statement including all of the  
information reported on the schedule with the other dates paid.  
If there is more than one redetermination in a year with  
respect to different countries, report such redeterminations on  
separate lines. Enter the two-letter code from the list at IRS.gov/  
Exceptions. The instructions for Forms 1116 and 1118  
specify exceptions from the requirement to report gross income  
and gross receipts by foreign country or U.S. territory with  
respect to RICs and section 863(b). Don't enter “various” or “OC”  
for the country code.  
Similarly, if there is more than one redetermination in a year  
with respect to the same country, but the redeterminations are  
related to different years, report such redeterminations on  
separate lines.  
In addition, if the direct or indirect partners are corporations,  
attach a statement that includes the information on Schedule L  
(Form 1118), Parts I and II, as applicable, with respect to each  
foreign tax redetermination. If the direct or indirect partners are  
individuals, estates, or trusts, attach a statement that includes  
the information on Schedule C (Form 1116), Parts I and II, as  
applicable, with respect to each foreign tax redetermination. If  
the indirect partners are unknown, attach a statement that  
includes both the information on Schedule L (Form 1118), Parts I  
and II, as applicable, and Schedule C (Form 1116), Parts I and II,  
as applicable.  
Example 12—Part III, Section 4: multiple country  
sources: foreign taxes. The facts are the same as in  
Example 9, earlier. USP uses the cash method of accounting  
and pays taxes of $1,000 and $3,000 to Countries AA and YY,  
respectively. USP completes Part III, Section 4, line 1, as follows.  
Example 12 Table  
(e) General  
category income  
Description  
(a) Type of tax  
Foreign  
1
Direct (section 901 or 903) foreign  
ߛ
taxes:  
A AA  
B YY  
Paid  
Accrued  
OTHR  
OTHR  
$1,000  
$3,000  
Line 2. Enter on line 2, as negative number, the sum of the  
taxes in the following categories.  
Taxes on foreign mineral income (section 901(e)).  
Taxes attributable to boycott operations (section 908).  
Reduction in taxes for failure to timely file (or furnish all of the  
information required on) Forms 5471 and 8865 (section  
6038(c)).  
Contested taxes. In general, a contested foreign income tax  
liability doesn't accrue until the contest is resolved and the  
amount of the liability has been finally determined. In addition, a  
contested foreign income tax liability isn't a reasonable  
approximation of the final foreign income tax liability and,  
therefore, isn't considered an amount of tax paid for purposes of  
section 901 until the contest is resolved. Thus, a partnership  
generally doesn't take into account a contested liability as a  
creditable foreign tax expenditure until the contest is resolved  
and the liability has been paid; see Regulations section  
1.905-1(f)(1). However, to the extent that a partnership has  
remitted a contested foreign income tax liability to a foreign  
country, partners may elect to claim a provisional foreign tax  
credit for their distributive share of such contested foreign  
income tax liability; see Regulations section 1.905-1(f)(2).  
Foreign income taxes paid or accrued during the current tax  
year with respect to splitter arrangements under section 909.  
Foreign taxes on foreign corporate distributions. For example,  
report taxes on dividends eligible for a deduction under section  
245A and ineligible for credit under section 245A(d). Also,  
include taxes on a distribution of PTEP assigned to the following  
PTEP groups: reclassified section 965(a) PTEP, reclassified  
section 965(b) PTEP, section 965(a), section 965(b) PTEP, a  
portion of which isn’t creditable. The partnership may be unable  
to determine the amount of a distribution that is attributable to  
non-previously taxed E&P or PTEP for which a foreign tax credit  
may be partially or entirely disallowed. However, it is important to  
track this amount as a tax on a distribution.  
Other. Attach a statement to Schedules K-2 and K-3  
indicating the reason for the reduction.  
Partnerships that are contesting a foreign income tax liability  
with a foreign country but that have remitted all or a portion of  
such contested liability should report information about the  
contested tax on line 3, and check the “Contested tax” box. In  
addition, partnerships should attach a statement and include  
information necessary for partners to complete Form 7204 and  
Schedule L (Form 1118) (for direct or indirect corporate  
partners), or Schedule C (Form 1116) (for direct or indirect  
individual, trust, or estate partners), including a description of the  
contest and a description of the contested foreign income tax. If  
it is unknown whether the partners are corporations, individuals,  
estates, or trusts, provide the information necessary for the  
partners to complete both Schedule L (Form 1118), Parts I and II  
(as applicable), and Schedule C (Form 1116), Parts I and II (as  
applicable).  
There isn’t a need to report the amounts on line 2 by country.  
Line 3. Enter in U.S. dollars the change in foreign tax as a result  
of a foreign tax redetermination; see section 905(c) and  
Regulations sections 1.905-3 through -5. If the amount is less  
than the original foreign tax, report the change as a negative  
amount. If the amount is more than the original foreign tax, report  
the change as a positive amount.  
Exception. Partnerships subject to subchapter C of  
chapter 63 of the Code (BBA partnerships) are generally  
required to file an administrative adjustment request (AAR)  
under Regulations section 1.905-4(b)(2)(ii) to account for a  
foreign tax redetermination. If an AAR is filed with respect to a  
foreign tax redetermination (or if an AAR will be timely filed),  
don't report the foreign tax redetermination on line 3.  
Partnerships must also file a statement each year for which  
there are one or more contested liabilities outstanding or in  
which a contested tax is resolved that includes information  
necessary for partners to complete both Schedule L (Form  
1118), Part V, and Schedule C (Form 1116), Part V.  
Note. Payment of additional foreign taxes that relate to an  
earlier tax year by a partnership that uses the cash method of  
accounting doesn't result in a foreign tax redetermination; see  
Regulations section 1.905-3(a). Such amounts should be  
reported on line 1 as foreign taxes paid by the partnership in the  
current year.  
Report the U.S. tax year to which the foreign tax relates. This  
is the U.S. tax year that includes the close of the foreign tax year  
18  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Section 5—Other Tax Information  
Schedule K-2, Part IV (Information on Partners’  
Section 250 Deduction With Respect to  
This section provides other tax information that a partner needs  
to figure its foreign tax credit limitation.  
Foreign-Derived Intangible Income (FDII)), and  
Schedule K-3, Part IV (Information on Partner’s  
Section 250 Deduction With Respect to  
Column (b). Don't report any amounts in this column.  
Column (f). As of the date of these instructions, this column will  
only include the section 901(j) category and the countries  
relevant to that category. See the Instructions for Form 1118 for  
the potential countries to be listed with the section 901(j)  
category of income. No credit is allowed for taxes paid or  
accrued to a country described in section 901(j). However, a  
deduction is generally allowed with respect to a tax described in  
section 901(j).  
Foreign-Derived Intangible Income (FDII))  
Note. Certain partners will use the following information to claim  
and figure a section 250 deduction with respect to FDII on Form  
8993.  
This part is used by the partnership to report information to a  
direct domestic corporate partner (other than REITs, RICs, and S  
corporations) or to a partner which is a partnership that has a  
direct or indirect domestic corporate partner (other than REITs,  
RICs, and S corporations) needed to determine the domestic  
corporate partner's FDII. A partnership that doesn't have or  
receive sufficient information or notice regarding a partner must  
presume the partner is a domestic corporate partner or a  
partnership that has a direct or indirect domestic corporate  
partner, and the partnership must complete Schedules K-2 and  
K-3, Part IV, accordingly. Any partnership with direct or indirect  
domestic corporate partners must complete this part, even if the  
partnership doesn't have foreign-derived gross receipts. Even if  
a partnership has no foreign activities, and therefore has no  
FDDEI as reported in Section 2 of this part, the partnership must  
still report the information required by Sections 1 and 3 of this  
part so that any direct or indirect domestic corporate partner can  
correctly determine its section 250 deduction. For example, a  
domestic corporate partner would still need information about  
the partnership’s qualified business asset investment (QBAI)  
(see the instructions for line 8 of this part) in such a case to  
determine its deemed tangible income return and deemed  
intangible income (DII); see section 250(b)(2).  
Line 1. For partnerships other than PTPs, report the total of all  
partners’ shares of the net positive income adjustments resulting  
from all section 743(b) basis adjustments. Net positive income  
adjustments from all section 743(b) basis adjustments means  
the excess of all section 743(b) adjustments allocated to the  
partner that increase the partner's taxable income over all  
section 743(b) adjustments that decrease the partner's taxable  
income.  
Attach to Schedules K-2 and K-3 a statement showing each  
section 743(b) basis adjustment making up the total and identify  
the assets to which it relates and the separate category and  
source of the income generated by the assets. Make sure to  
include the class of gross income or deduction, for example,  
sales income, interest income, or depreciation deduction. The  
partnership may group these section 743(b) basis adjustments  
by asset category or description in cases where multiple assets  
are affected if the assets generate the same separate category  
and source of income. The section 743(b) positive income  
adjustments should be included as relevant on other parts of  
Schedule K-2. For example, the section 743(b) income  
adjustments should be reflected as part of the total depreciation  
reported on Part II, Section 2.  
Section 250 allows a domestic corporation a deduction for its  
FDII, and a direct or indirect domestic corporate partner must  
take into account certain activities of a partnership in computing  
the domestic corporation's FDII. For the treatment of a domestic  
corporation that is a partner in a partnership, see Regulations  
sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These  
instructions generally indicate how a partnership should  
complete Part IV (of both Schedules K-2 and K-3). However,  
Schedule K-2 includes the total of all partners’ amounts and  
Schedule K-3 includes each partner’s share.  
Line 2. For partnerships other than PTPs, report the total of all  
partners' shares of the net negative income adjustment resulting  
from all section 743(b) basis adjustments. Net negative income  
adjustments from all section 743(b) basis adjustments means  
the excess sum of all section 743(b) adjustments allocated to the  
partner that decrease the partner’s taxable income over all  
section 743(b) adjustments that increase the partner’s taxable  
income. Attach to Schedules K-2 and K-3 a statement showing  
each section 743(b) basis adjustment making up the total and  
identify the assets to which it relates and the separate category  
and source of the income generated by the assets. Make sure to  
include the class of gross income or deduction, for example,  
sales income, interest income, or depreciation deduction. The  
partnership may group these section 743(b) basis adjustments  
by asset category or description in cases where multiple assets  
are affected if the assets generate the same separate category  
and source of income. The section 743(b) negative income  
adjustments should be included as relevant in other parts of  
Schedule K-2. For example, the section 743(b) income  
Enter each amount and total amounts in U.S. dollars. The  
partnership should determine and report the partner's share of  
each item of the partnership contained on this form in  
accordance with the partner's distributive share of the underlying  
item of income, gain, deduction, and loss of the partnership. The  
partnership should report these amounts based on the best  
information available to it about how its partners might use this  
information to determine their FDII deduction. The partnership  
may report certain information differently to each partner  
depending on federal income tax determinations that the partner  
makes. Each partner must then figure its FDII deduction using  
Form 8993 including the information reported to it on  
Schedule K-3, Part IV, taking into account partner  
adjustments should be reflected as part of the total depreciation  
reported on Part II, Section 2.  
determinations. A partner must obtain (and if requested by a  
partner, the partnership must provide) any further necessary  
information from the partnership to correctly determine its FDII  
deduction.  
Special rules for determining foreign use apply to transactions  
that involve property or services provided to related parties; see  
section 250(b)(5)(C) and Regulations section 1.250(b)-6.  
For special substantiation requirements under the  
regulations, see Regulations sections 1.250(b)-3(f),  
1.250(b)-4(d)(3), and 1.250(b)-5(e)(4). In all other cases, a  
19  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
taxpayer claiming a deduction under section 250 will still be  
required to substantiate that it is entitled to the deduction even if  
it isn't subject to the specific substantiation requirements  
contained in the regulations; see section 6001 and Regulations  
section 1.6001-1(a). Therefore, the partner must be able to  
satisfy the general or special substantiation requirements to be  
eligible for the deduction. To the extent the partner doesn't have  
the necessary information in its possession to substantiate the  
deduction, the partnership must maintain the information.  
Line 2a. DEI gross receipts. Enter DEI gross receipts.  
Line 2b. DEI COGS. Enter the amount of COGS attributable to  
the amount on line 2a.  
Line 2c. DEI properly allocated and apportioned deduc-  
tions. Enter the amount of deductions (including taxes) properly  
allocable to gross DEI, without interest and R&E expense. See  
Regulations section 1.250(b)-1(d)(2) for more details. Enter the  
amounts of interest and R&E expenses on Section 3, lines 13  
and 16, respectively. Deductions properly allocable to gross DEI  
are determined without regard to sections 163(j), 170(b)(2), 172,  
246(b), and 250.  
As described above, the partnership should determine the  
partner's share of each item below in accordance with the  
partner's distributive share of the underlying item of income,  
gain, deduction, and loss of the partnership.  
Example 13—partners’ reporting of DEI and QBAI. DC is  
a domestic corporation that owns a 50% interest in a domestic  
partnership, USP. USP manufactures and sells Product A and  
provides services, both solely to U.S. persons. The services give  
rise to domestic oil and gas extraction income (DOGEI) for  
purposes of section 250(b)(3)(A)(i)(V). USP has $200 in gross  
receipts from sales of Product A, $100 in COGS, and $50 in  
properly allocated and apportioned deductions (none of which  
are interest or R&E expenses). USP reports these amounts on  
Schedule K-2, Part IV, Section 1, lines 2a through 2c,  
Lines 3 through 7 are exclusions from DEI used to determine  
the partner’s DEI.  
Line 3. Section 951(a) inclusions. Enter any amounts  
included in the partnership’s gross income under section 951(a)  
(1). Include the section 78 gross-up with respect to the inclusion  
under section 951(a)(1). A domestic partnership doesn't have a  
section 951(a) inclusion with respect to a foreign corporation for  
tax years of the foreign corporation that begin on or after January  
25, 2022. A domestic partnership may not have a section 951(a)  
inclusion with respect to a foreign corporation for tax years of the  
foreign corporation that begin before January 25, 2022, if,  
pursuant to Regulations section 1.958-1(d)(4)(i), it applies  
Regulations sections 1.958-1(d)(1) through (3) to such tax years,  
which treats a domestic partnership as not owning stock of a  
foreign corporation within the meaning of section 958(a) for  
purposes of section 951, and for purposes of any other provision  
that applies by reference to section 951.  
respectively, and 50% of these amounts on the same section  
and lines of the Schedule K-3 that USP issues to DC, because  
this information is necessary for DC to compute its deduction  
eligible income (DEI). The net amount increases DC’s DEI,  
which increases its DII and in turn increases its section 250  
deduction for FDII. DC uses these amounts to calculate its gross  
DEI on Form 8993, Part I, line 4.  
Note. Partners will determine whether any amount included in  
the gross income of such corporate partner is GILTI under  
section 951A (or the section 78 gross-up with respect to this  
inclusion under section 951A), which can only be determined by  
the partner and therefore isn't reported on Schedules K-2 and  
K-3, Part IV, Section 1.  
USP has $100 in gross receipts from services, $50 in cost of  
services, and $25 in properly allocated and apportioned  
deductions (none of which are interest or R&E expenses).  
Because the performance of these services results in DOGEI, it  
doesn't give rise to DEI, but rather the net amount ($25) is  
reported on Schedule K-2 Part IV, Section 1, line 6, and 50% of  
the net amount is reported to DC on the same line and section of  
Schedule K-3, so that DC can treat this amount as an exclusion  
from its DEI. DC’s DEI is determined without this amount by  
subtracting the amount from DEI on Form 8993, Part I, line 2e.  
USP owns two properties, Asset C which has an adjusted  
basis of $1,000, and Asset D which has an adjusted basis of  
$1,200. Asset C is used in the production of Product A and Asset  
D is used in providing the DOGEI services. Because sales of  
Product A give rise to DEI, USP should report the partnership’s  
adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV,  
Section 1, line 8 (and $500 is reported to DC on the same  
section/line of Schedule K-3). This increases DC’s QBAI, and  
thereby increases DC’s deemed tangible income return (DTIR).  
The increase to DTIR decreases DC’s DII which in turn  
Line 4. Controlled foreign corporation (CFC) dividends.  
Enter the amount of any dividend received from a CFC with  
respect to which the partner is a U.S. shareholder as defined  
under section 951(b). Don't include as a dividend any amount  
received from a CFC to the extent that such amount is  
attributable to PTEP in the annual PTEP accounts of the  
partnership. See sections 959(a) and 959(d).  
Note. The amount by which distributions are attributable to  
PTEP in annual PTEP accounts of a direct or indirect partner  
isn't taken into account for purposes of determining the CFC  
dividends to be entered on line 4.  
Line 5. Financial services income. Enter the amount of net  
financial services income (as defined in section 904(d)(2)(D))  
before interest and R&E deductions.  
decreases its section 250 deduction for FDII. DC uses the  
amount to determine its DTIR from partnerships on Form 8993,  
Part I, line 7b. The services, however, don't give rise to DEI, so  
USP shouldn’t include the partnership’s adjusted basis in Asset  
D ($1,200) on Schedule K-2, Part IV, Section 1, line 8.  
USP has no sales or services provided to foreign persons and  
therefore no FDDEI to report on Part IV, Section 2. Even though  
the partnership has no interest or R&E deductions, in many  
cases, the partnership would still have to complete Part IV,  
Section 3.  
Line 6. Domestic oil and gas extraction income. Enter the  
amount of net DOGEI before interest and R&E deductions. The  
term “domestic oil and gas extraction income” means income  
described in section 907(c)(1) determined by substituting “within  
the United States” for “outside the United States.”  
Line 7. Foreign branch income. Enter the amount of net  
foreign branch income before interest and R&E deductions (as  
defined in section 904(d)(2)(J)). A partnership should report all  
income that would be foreign branch income of its partners as if  
all partners were U.S. persons.  
Section 1—Information To Determine Deduction  
Eligible Income (DEI) and Qualified Business  
Asset Investment (QBAI) on Form 8993  
Line 8. Partnership QBAI. Enter the amount, if any, of the  
partnership QBAI. A domestic corporation’s QBAI is its share of  
the average of the aggregate adjusted bases, determined as of  
the close of each quarter of the tax year, in certain specified  
tangible property. See Regulations section 1.250(b)-2(b).  
Line 1. Net income (loss). This amount may equal line 1 of  
Analysis of Net Income (Loss) on Form 1065, page 5.  
20  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
The adjusted basis is determined by using the alternative  
depreciation system under section 168(g) and allocating  
depreciation deductions with respect to such property ratably to  
each day during the period in the tax year to which such  
depreciation relates. See Regulations section 1.250(b)-2(e).  
The specified tangible property is that which is used in the  
trade or business of the corporation in the production of gross  
income included in the domestic corporation’s gross DEI and is  
of a type with respect to which a deduction is allowable under  
section 167. See Regulations section 1.250(b)-2(b).  
of income from B assets is non-DEI. Thus, the B assets are  
partnership specified tangible property with respect to X only,  
and USP includes a proportionate amount of the adjusted bases  
of all B assets only in calculating X’s partnership QBAI. The C  
assets are dual-use property, because the production of only  
part of the income from the C assets is DEI with respect to X and  
Y. Thus, the C assets are partnership specified tangible property  
with respect to both X and Y, but USP includes a proportionate  
amount of the adjusted bases of all C assets in calculating each  
partner’s partnership QBAI only in the proportion that the amount  
of the gross income included in DEI produced with respect to the  
C assets bears to the total amount of gross income produced  
with respect to the C assets.  
If a domestic corporation holds an interest in one or more  
partnerships during a tax year (including indirectly through one  
or more partnerships that are partners in a lower-tier  
partnership), the QBAI of the domestic corporation for the tax  
year is increased by the sum of the domestic corporation’s  
partnership QBAI with respect to each partnership for the tax  
year. See Regulations section 1.250(b)-2(g)(1).  
Section 2—Information To Determine  
Foreign-Derived Deduction Eligible Income  
(FDDEI) on Form 8993  
Partnership QBAI is the sum of the domestic corporation’s  
proportionate share of the partnership’s adjusted basis in the  
property and the domestic corporation’s partner specific QBAI  
basis in the property for the partnership tax year that ends with  
or within the tax year. See Regulations section 1.250(b)-2(g)(2).  
Foreign-derived gross receipts means, with respect to a  
partnership, gross receipts of the partnership for the  
partnership's tax year that are used to figure the amount of gross  
FDDEI as defined in Regulations section 1.250(b)-1.  
Partnership specified tangible property means, with respect  
to a domestic corporation, tangible property that is used in the  
trade or business of the partnership, of a type with respect to  
which a deduction is allowable under section 167, and used in  
the production of gross income included in the domestic  
corporation’s gross DEI. See Regulations section 1.250(b)-2(g)  
(5).  
If a partnership can't determine the portion of partnership  
specified tangible property (for example, if the partnership  
doesn't know if property gives rise to the production of gross  
income in one of the excluded categories from DEI that is  
determined by the partner, which would cause such property to  
not be classified as partnership specified tangible property), then  
in reporting the amount of a partner's share of the partnership  
QBAI, the partnership must separately state any information so a  
direct or indirect domestic corporate partner can distinguish  
between the amount of the adjusted bases in a partnership's  
tangible property that the domestic corporation would include in  
its adjusted bases in the partnership specified tangible property  
and the amount of the adjusted bases in the partnership's  
tangible property that the domestic corporation wouldn't include  
in its adjusted bases in the partnership specified tangible  
property.  
Each place where general property is listed refers to amounts  
connected to the sale, lease, exchange, or other disposition of  
general property to a foreign person, and is for a foreign use as  
defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d).  
The term “general property” means any property other than  
intangible property; a security (as defined in section 475(c)(2));  
an interest in a partnership, trust, or estate; or a commodity  
described in section 475(e)(2)(A) that isn't a physical commodity  
or a commodity described in section 475(e)(2)(B) through (D).  
Each place where intangible property is listed refers to  
amounts connected to the sale, license, exchange, or other  
disposition of intangible property to a foreign person and, is for a  
foreign use as defined in Regulations sections 1.250(b)-3 and  
1.250(b)-4(d)(2).  
Each place where services are listed refers to amounts  
connected to services that, as established to the satisfaction of  
the Secretary, are provided to any person, or with respect to  
property, located outside the United States as defined in  
Regulations section 1.250(b)-5.  
If a transaction includes both a sales component and a  
service component, the transaction is classified as either a sale  
or as a service according to the overall predominant character of  
the transaction. See Regulations section 1.250(b)-3(d).  
If tangible property was used in the production of DEI and in  
the production of income that is non-DEI, then it is considered  
dual-use property and treated as specified tangible property in  
the same proportion that the amount of the gross income  
included in DEI produced with respect to the property bears to  
the total amount of gross income produced with respect to the  
property. See Regulations section 1.250(b)-2(g)(8), Example 2,  
for guidance on how to figure the partner adjusted basis. If  
specified tangible property is only partially depreciable, then only  
the depreciable portion is QBAI.  
Example 14—domestic corporate partner; specified  
tangible property. X and Y are both domestic corporations that  
are partners in USP, a partnership that holds three types of  
assets: A, B, and C. All types of assets are tangible property  
used in the trade or business of USP and with respect to which a  
deduction is allowable under section 167. The production of  
income from A assets is DEI with respect to X and Y. Thus, the A  
assets are partnership specified tangible property with respect to  
X and Y, and USP includes a proportionate amount of the  
adjusted bases of all A assets in calculating each partner’s  
partnership QBAI. The production of income from B assets is  
DEI with respect to X. However, with respect to Y, the production  
For purposes of determining a domestic corporation’s  
deductions that are properly allocable to gross FDDEI, the  
corporation’s deductions are allocated and apportioned to gross  
FDDEI under the rules of Regulations sections 1.861-8 through  
1.861-14T and 1.861-17 by treating section 250(b) as an  
operative section described in Regulations section 1.861-8(f).  
See Regulations section 1.250(b)-1(d)(2).  
Line 9. Gross receipts. Enter the amount, if any, of the  
partnership's foreign-derived gross receipts separately for  
aggregate sales of general property, aggregate sales of  
intangible property, and aggregate services. Foreign-derived  
gross receipts means gross receipts that are used to figure gross  
FDDEI as defined in Regulations section 1.250(b)-1(c)(16).  
Line 10. COGS. Enter the amount of COGS attributable to the  
amount(s) on line 9.  
For purposes of this form, when figuring FDDEI, COGS  
includes the COGS to customers, and adjusted basis of  
21  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
         
non-inventory property sold or otherwise disposed of in a trade  
or business.  
In making that determination, attribute costs of goods sold to  
gross receipts using a reasonable method in accordance with  
Regulations section 1.250(b)-1(d)(1).  
COGS must be attributed to gross receipts with respect to  
gross DEI or gross FDDEI regardless of whether certain costs  
included in COGS can be associated with activities undertaken  
in an earlier tax year (including a year before the effective date of  
section 250).  
see Regulations section 1.861-9T(g)(1)(i). A taxpayer can use  
either the tax book value or the alternative tax book value of its  
assets; see Regulations section 1.861-9(i). Under both methods,  
the partner whose interest in the partnership is 10% or more  
uses the partnership's inside basis in its assets, including  
adjustments required under sections 734(b) and 743(b); see  
Regulations sections 1.861-9(e)(2) and -9(e)(3). When reporting  
the basis in an asset which is stock in nonaffiliated 10%-owned  
corporations, adjust such amount for E&P; see Regulations  
section 1.861-12(c)(2)(i)(A).  
The total interest expense deductions for the members of the  
corporation's affiliated group are allocated and apportioned to  
the statutory and residual groupings under proposed, final, and  
Temporary Regulations sections 1.861-8 through 1.861-14.  
Line 11. Allocable deductions. Enter the amount of the  
allocable deductions. See Regulations section 1.250(b)-1(d)(2)  
for more details. Enter the amounts of interest and R&E  
expenses on Section 3, lines 13 and 16, respectively.  
Deductions are determined without regard to sections  
163(j),170(b)(2), 172, 246(b), and 250.  
A corporate partner with a less than 10% interest in a  
partnership shall directly allocate its distributive share of the  
partnership’s interest expense to its distributive share of  
partnership gross income. See Regulations section 1.861-9(e)  
(4).  
Column (a). General property. Enter the amount of the  
deductions that are allocated and apportioned to gross FDDEI  
from all sales of general property.  
Note. The Total column isn't a sum of DEI and FDDEI but rather  
refers to the partnership’s specific line totals (that is, that would  
also include non-DEI).  
Column (b). Intangible property. Enter the amount of the  
deductions that are allocated and apportioned to gross FDDEI  
from all sales of intangible property.  
Line 14A. Total average value of assets. Enter the amount of  
the average of the beginning-of-year and end-of-year inside  
bases in the partnership's total assets. See Regulations section  
1.861-9(g)(2)(i)(A).  
Column (c). Services. Enter the amount of the deductions that  
are allocated and apportioned to gross FDDEI from all services.  
Line 12. Other apportioned deductions. Enter all other  
apportioned deductions that relate to gross FDDEI that aren't  
otherwise included on lines 11, 13, and 16. If a deduction  
doesn't bear a definite relationship to a class of gross income  
constituting less than all of gross income, it shall ordinarily be  
treated as definitely related and allocable to all of the taxpayer's  
gross income, including gross DEI and gross FDDEI, except  
where otherwise directed in the regulations.  
Line 14B. Sections 734(b) and 743(b) adjustments to as-  
sets. Enter the amount of the average of the beginning-of-year  
and end-of-year inside bases adjustments under sections 734(b)  
and 743(b).  
Lines 14C and 14D. Assets attracting directly allocable in-  
terest expense under Regulations sections 1.861-10(e)  
and -10T. Enter the amount of the reductions in the  
partnership's asset values to reflect the partnership's directly  
allocable interest under Regulations section 1.861-10(e) and  
Temporary Regulations section 1.861-10T. See also Temporary  
Regulations section 1.861-9T(e)(1).  
Section 3—Other Information for Preparation of  
Form 8993  
Line 13. Interest deductions. The term “interest” refers to the  
gross amount of interest expense incurred by a taxpayer in a  
given year. Generally, interest expense includes any expense  
that is currently deductible under section 163 (including original  
issue discount (OID)), and interest equivalents. See Regulations  
section 1.861-9(b)(1) for the definition of interest equivalents and  
Temporary Regulations section 1.861-9T(c) for sections that  
disallow, suspend, or require the capitalization of interest  
deductions. Include excess business interest expense (EBIE)  
determined under section 163(j)(4) on this line. Under  
Regulations section 1.250(b)-1(d)(2)(ii), deductions are  
determined without regard to section 163(j).  
Line 14E. Assets excluded from apportionment factors.  
Enter the amount of the average value of assets excluded from  
the apportionment formula. See section 864(e)(3).  
Lines 15 and 16. R&E expenses apportionment factors.  
These lines require the partnership to report information that a  
partner will use to allocate and apportion its R&E expense for  
FDII purposes. A partnership isn't required to complete lines 15  
and 16 unless either (a) the partnership incurs R&E expense; or  
(b) the partner is expected to license, sell, or transfer its  
intangible property to the partnership (as provided in  
Regulations section 1.861-17(f)(3)). R&E expenses deducted, or  
amortized and deducted, under section 174 are definitely related  
to all gross intangible income reasonably connected with  
relevant broad product categories of the taxpayer and are  
allocable to all items of gross intangible income as a class  
related to such product categories. The product categories are  
generally determined by reference to the three-digit SIC code.  
R&E expenses are apportioned between the statutory and  
residual groupings based on an analysis of the taxpayer’s gross  
receipts from certain sales, leases, licenses, and services; see  
Regulations section 1.861-17. The exclusive apportionment rule  
in Regulations section 1.861-17(c) doesn't apply for purposes of  
apportioning R&E to gross DEI and gross FDDEI.  
Lines 13A and 13B. Interest expense specifically allocable  
under Regulations sections 1.861-10(e) and -10T. Apart  
from interest expense entered on line 13A, enter on line 13B  
interest expense that is directly allocable under Temporary  
Regulations section 1.861-10T to income from specific  
partnership property. Such interest expense is treated as directly  
allocable to income generated by such partnership property. See  
Temporary Regulations section 1.861-9T(e)(1).  
Line 13C. Other interest expense. Enter all interest  
deductions not otherwise included on lines 13A and 13B.  
Line 14. Interest expense apportionment factors. This line  
requires the partnership to report information that a partner will  
use to allocate and apportion its interest expense for FDII  
purposes.  
R&E expenses are allocated and apportioned by the partner.  
This requires that the partnership report to its partners the gross  
receipts related to certain income within the statutory and  
residual groupings within a SIC code and the partner’s  
Interest deductions are apportioned to gross DEI and FDDEI  
ordinarily based on the tax book value of the taxpayer’s assets;  
22  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
     
distributive share of the partnership’s R&E deductions, if any,  
connected with the SIC codes.  
respect to its stock that the partnership (directly or through  
pass-through entities) owns (within the meaning of section 958)  
other than solely by reason of applying section 318(a)(3)  
(providing for downward attribution) as provided in section  
958(b). Each row should relate to the partnership’s direct  
ownership of stock in the foreign corporation or direct ownership  
of the ownership interests in a pass-through entity that (directly  
or through other pass-through entities) owns (within the meaning  
of section 958) stock in the foreign corporation other than solely  
by reason of applying section 318(a)(3) (providing for downward  
attribution) as provided in section 958(b). For example, if a  
partnership (upper-tier partnership) directly owns 50% of the  
foreign corporation's stock and owns 50% of the foreign  
corporation's stock through another partnership (lower-tier  
partnership), then distributions by the foreign corporation to both  
the upper-tier partnership and the lower-tier partnership are to  
be reported on separate rows on the upper-tier partnership's  
Schedules K-2 and K-3 (Form 1065), Part V. If the partnership  
owns stock of a foreign corporation through another partnership  
(lower-tier partnership) from which it receives Schedule K-3  
(Form 1065 or 8865), Part V, the partnership must replicate each  
line of Schedule K-3 (Form 1065 or 8865), Part V, on its  
Schedules K-2 and K-3 (Form 1065), Part V. Rows for  
Line 15. Gross receipts by SIC code. Enter the gross receipts  
that resulted in gross income for each category, DEI, FDDEI, and  
then total gross receipts. Note that the Total column isn't a sum  
of DEI and FDDEI but rather refers to all the partnership’s gross  
receipts. Such gross receipts include both the partnership's  
sales and certain other parties' sales; see Regulations section  
1.861-17(d). Gross receipts from certain transactions of parties  
both controlled or uncontrolled by the partnership may be  
included on line 15; see generally Regulations section  
1.861-17(d).  
Line 16. R&E expenses by SIC code. Enter the amount of  
R&E expense by SIC code.  
Schedule K-2, Part V, and Schedule K-3, Part V  
(Distributions From Foreign Corporations to  
Partnership)  
Note. Certain partners will use the following information, in  
combination with other information known to the partners,  
including Schedule P (Form 5471), to exclude from gross income  
distributions to the extent that they're attributable to PTEP in their  
annual PTEP accounts and report foreign currency gain or loss  
with respect to the PTEP on Forms 1040 and 1120. If eligible,  
partners will also use this information to figure and claim a  
dividends received deduction under section 245A on Form 1120.  
distributions with respect to a partnership's direct ownership of  
foreign corporation stock should be listed before rows for  
distributions with respect to a partnership’s ownership of foreign  
corporation stock through a pass-through entity.  
If the partnership is a domestic partnership, the partnership  
may have annual PTEP accounts with respect to the foreign  
corporation, or the foreign corporation may have E&P that, when  
distributed, are excludable from the partnership’s gross income  
under section 1293(c). Don't report distributions to the extent  
that they're attributable to PTEP in annual PTEP accounts of the  
partnership or to E&P that are excludable from the partnership’s  
gross income under section 1293(c). Distributions by the foreign  
corporation to the partnership that are attributable to PTEP in  
annual PTEP accounts of the partnership should be properly  
reflected on the Schedules J (Form 5471) for the foreign  
corporation. The partnership should provide this information to  
its partners as appropriate.  
However, to the extent a distribution is attributable to PTEP in  
an annual PTEP account of the partnership with respect to a  
foreign corporation, or attributable to E&P that are excludable  
from the partnership’s gross income under section 1293(c), that  
corresponds to a tax year of the foreign corporation that ended  
with or within a tax year of the partnership (a) that began after  
December 31, 2012; and (b) for which an election under  
Regulations section 1.1411-10(g) wasn't made by the  
partnership (such PTEP, NII PTEP), append Worksheet 3 to  
Schedule K-2 and Worksheet 4 to each K-3 in the format shown,  
adding additional rows as necessary for each distribution by a  
foreign corporation. For more information about net investment  
income (NII) and net investment income tax (NIIT) relating to  
CFCs and qualified electing funds (QEFs), see Regulations  
section 1.1411-10.  
Use Schedule K-2, Part V, to report the distributions made by  
foreign corporations to the partnership.  
Use Schedule K-3, Part V, to report the partner's share of the  
amounts reported on Schedule K-2, Part V.  
Exception. Schedule K-2, Part V, isn't required to be  
completed with respect to distributions by a foreign corporation if  
the partnership knows that (a) none of the distributions by the  
foreign corporation are attributable to PTEP in annual PTEP  
accounts of any direct or indirect partner, and (b) none of the  
partnership’s direct or indirect partners are eligible to claim a  
deduction under section 245A with respect to any distribution by  
the foreign corporation. Nevertheless, the partnership may be  
required to append Worksheet 3 to Schedule K-2 (discussed  
below).  
Exception. Schedule K-3, Part V, for a partner doesn't need  
to be completed with respect to distributions by a foreign  
corporation if the partnership knows that (a) none of the  
distributions by the foreign corporation are attributable to PTEP  
in annual PTEP accounts of the partner or any U.S. person that  
is treated as indirectly owning stock of the foreign corporation  
through the partner (relevant indirect partners), and (b) the  
partner and relevant indirect partners aren't eligible to claim a  
deduction under section 245A with respect to any distributions  
by the foreign corporation. Nevertheless, the partnership may be  
required to append Worksheet 4 to Schedule K-3 for the partner  
(discussed below). If this exception is applicable with respect to  
a foreign corporation, the sum of the amounts reported on  
Schedules K-3, Part V, with respect to the foreign corporation  
may not equal the amounts reported on Schedule K-2, Part V,  
with respect to the foreign corporation.  
Note. If additional rows are required, attach statements to  
Schedules K-2 and K-3 that look like the current versions of  
Schedule K-2, Part V, and Schedule K-3, Part V, respectively.  
Rows A through O. Use rows A through O to report information  
with respect to each distribution by a foreign corporation with  
23  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Worksheet 3  
Worksheet 3 (Schedule K-2)  
(a) Name of distributing foreign  
corporation  
(b) EIN or reference ID (c) Date of  
number distribution  
(d) Functional  
currency of  
(e) Amount of NII (f) Spot rate  
PTEP in functional (functional  
(g) Amount of NII  
PTEP in U.S.  
dollars  
distributing foreign currency  
corporation  
currency to U.S.  
dollars)  
Worksheet 4  
Worksheet 4 (Schedule K-3)  
(a) Name of distributing foreign  
corporation  
(b) EIN or reference ID (c) Date of  
number distribution  
(d) Functional  
currency of  
(e) Partner’s share (f) Spot rate  
(g) Partner’s share  
of NII PTEP in U.S.  
dollars  
of NII PTEP in  
(functional  
distributing foreign functional currency currency to U.S.  
corporation  
dollars)  
Column (b). Enter the EIN or reference ID number of the  
distributing foreign corporation. Don't enter "FOREIGNUS" or  
"APPLIED FOR." For basic information about reference ID  
numbers (including the requirements as to the characters  
permitted), see the Instructions for Form 1118.  
Column (j). If the distributing foreign corporation is a qualified  
foreign corporation, determined without regard to section 1(h)  
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).  
Schedule K-2, Part VI (Information on Partners’  
Section 951(a)(1) and Section 951A Inclusions),  
and Schedule K-3, Part VI (Information on  
Partner’s Section 951(a)(1) and Section 951A  
Inclusions)  
Column (c). Enter the year, month, and day in which the  
distribution was made using the format YYYYMMDD.  
Column (d). Enter the applicable three-character alphabet  
code for the foreign corporation’s functional currency using the  
ISO 4217 standard. These codes are available at ISO.org/  
Note. Certain partners will use the following information to  
complete Form 8992 and Forms 1040 and 1120 with respect to  
income inclusions under section 951(a) (subpart F income  
inclusions), section 951(a)(1)(B) inclusions, and section 951A  
inclusions.  
Note. Columns (e) and (f) are reported in functional currency.  
Column (e). This represents the partnership’s share of the  
amount distributed in functional currency. See Schedule R (Form  
5471), column (c).  
Schedules K-2 and K-3, Part VI, must be completed with  
respect to a CFC if the partnership owns (within the meaning of  
section 958) stock of the CFC, unless the partnership owns  
stock of the CFC solely by reason of applying section 318(a)(3)  
(providing for downward attribution) as provided in section  
958(b).  
Column (f). This represents the partnership's share of the  
amount of E&P distributed in functional currency. See  
Schedule R (Form 5471), column (d). The total of the amounts  
reported in column (f) with respect to a distributing foreign  
corporation should equal the partnership's share of the total  
reported on line 9 of all Schedules J on a separate category of  
income basis as reported in Schedule J (Form 5471) TOTAL filed  
with respect to the distributing foreign corporation.  
If a Schedule J (Form 5471) with code TOTAL entered on line  
a isn’t filed with respect to the distributing foreign corporation,  
then the total of the amounts reported in column (f) with respect  
to a distributing foreign corporation should equal the  
partnership's share of the amount reported in Schedule J (Form  
5471), line 9, column (f), filed with respect to the distributing  
foreign corporation.  
Generally, a foreign corporation is a CFC if more than 50% of  
either the total combined voting power of all classes of stock  
entitled to vote or the total value of the stock of the corporation is  
owned (within the meaning of section 958(a)) or is considered as  
owned by applying the rules of section 958(b) by U.S.  
shareholders. For this purpose, a U.S. shareholder is a U.S.  
person (as defined in section 957(c)) who owns (within the  
meaning of section 958(a)), or is considered as owning by  
applying the rules of ownership of section 958(b), 10% or more  
of the total combined voting power of all classes of stock entitled  
to vote, or 10% or more of the total value of shares of all classes  
of stock of such foreign corporation.  
Column (g). Enter the exchange rate on the date of distribution  
used to translate the amount of the distribution in functional  
currency to U.S. dollars; see section 989(b)(1). Report the  
exchange rate using the "divide-by convention" specified under  
Reporting exchange rates on Form 5471 in the Instructions for  
Form 5471.  
If the partnership is a domestic partnership, then the domestic  
partnership doesn't have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for  
tax years of the foreign corporation that begin on or after January  
25, 2022, under Regulations section 1.958-1(d)(1). A domestic  
partnership may not have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for a  
tax year of the foreign corporation that begins before January 25,  
2022, if, pursuant to Regulations section 1.958-1(d)(4)(i), the  
partnership applies Regulations sections 1.958-1(d)(1) through  
(3) to such tax year and, thus, is treated as not owning stock of a  
foreign corporation within the meaning of section 958(a) for  
Column (h). Enter the amount of the distribution in U.S. dollars.  
Translate column (e) using the spot rate reported in column (g).  
Column (i). Enter the amount of E&P distributed in U.S. dollars.  
Translate column (f) using the spot rate reported in column (g).  
24  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
purposes of section 951, or the partnership isn't a U.S.  
shareholder of the foreign corporation during such tax year. If the  
partnership doesn't have subpart F income inclusions or section  
951(a)(1)(B) inclusions with respect to a foreign corporation for a  
tax year of the foreign corporation, the subpart F income  
inclusions and section 951(a)(1)(B) inclusions with respect to the  
foreign corporation for such tax year that are reported in  
Schedule K-2, Part VI, columns (e) and (f), aren't inclusions of  
the partnership. Schedule K-3, Part VI, columns (e) and (f),  
report the information partners will need to figure and report their  
subpart F income inclusions and section 951(a)(1)(B) inclusions  
with respect to the CFC.  
A partner's GILTI is figured based on its share of the following  
amounts for each CFC with respect to which it is a U.S.  
shareholder: tested income, tested loss, QBAI, tested loss QBAI  
amount, tested interest income, and tested interest expense  
(collectively, GILTI items) (a CFC's subpart F income and GILTI  
items, CFC items).  
A partner's share of a CFC's subpart F income, amounts used  
to determine its section 956 amount with respect to a CFC, and a  
CFC's GILTI items may not be limited to the partner's share of  
such income, amounts, or items through its ownership in the  
partnership. However, for purposes of completing Schedules K-2  
and K-3, Part VI, use only the partner's share of a CFC's subpart  
F income, amounts used to determine its section 956 amount  
with respect to a CFC, and a CFC's GILTI items through the  
partner's ownership in the partnership.  
Note. If the partnership is a domestic partnership that is treated  
as owning stock of a foreign corporation within the meaning of  
section 958(a) for purposes of section 951 for a tax year that  
begins before January 25, 2022, because it doesn't apply  
Regulations sections 1.958-1(d)(1) through (3) to such tax year,  
and is a U.S. shareholder of the foreign corporation during such  
tax year, then any subpart F income inclusions and section  
951(a)(1)(B) inclusions with respect to the foreign corporation for  
such tax year are inclusions of the partnership, which are  
therefore not reported in Schedules K-2 and K-3, Part VI,  
columns (e) and (f), and are instead reported on Schedules K  
and K-1, line 11, Other income (loss).  
Exception. Schedule K-2, Part VI, doesn't need to be  
completed with respect to a CFC if the partnership knows that it  
doesn't have a direct or indirect partner (through pass-through  
entities only) that is a U.S. shareholder of the CFC required to  
include in gross income a subpart F income inclusion and/or  
section 951(a)(1)(B) inclusion with respect to the CFC, or figure  
section 951A inclusions by taking into account GILTI items  
(defined below) of the CFC.  
Exception. Schedule K-3, Part VI, for a partner doesn't need  
to be completed with respect to a CFC if the partnership knows  
that (a) the partner isn't a U.S. shareholder of the CFC required  
to include in gross income a subpart F income inclusion and/or  
section 951(a)(1)(B) inclusion with respect to the CFC, or figure  
section 951A inclusions by taking into account GILTI items  
(defined below) of the CFC; and (b) no U.S. person that indirectly  
owns (through pass-through entities only) an interest in the CFC  
through the partner is a U.S. shareholder of the CFC required to  
include in gross income a subpart F income inclusion and/or  
section 951(a)(1)(B) inclusion with respect to the CFC, or figure  
section 951A inclusions by taking into account GILTI items  
(defined below) of the CFC. If the partnership doesn't complete  
Schedule K-3, Part VI, for a partner with respect to a CFC, the  
sum of each partner’s share of the CFC’s subpart F income,  
section 951(a)(1)(B) inclusion with respect to the CFC, and  
share of the CFC’s GILTI items (defined below) reported on all  
Schedules K-3 may not equal the aggregate share of subpart F  
income of the CFC, the aggregate section 951(a)(1)(B) inclusion  
with respect to the CFC (defined below), and the aggregate  
share of the CFC’s GILTI items (defined below), respectively,  
reported on Schedule K-2.  
A partner's share through its ownership in the partnership of  
subpart F income and GILTI items is generally anticipated to be  
figured by multiplying the percentage in column (d) by the  
amount of subpart F income or GILTI items, respectively. For  
example, in general, a partner's share through its ownership  
interest in the partnership of tested income in column (i) is  
anticipated to be figured by multiplying the percentage in column  
(d) by the amount of tested income in column (g). If the partner's  
share through its ownership in the partnership of subpart F  
income or GILTI items isn't figured by multiplying the percentage  
in column (d) by the amount of subpart F income or GILTI items,  
respectively (for example, because of special allocations), then,  
instead of entering a percentage in column (d) for that CFC,  
attach a statement to Schedules K-2 and K-3 explaining the  
partner's share through its ownership in the partnership of the  
CFC's subpart F income and GILTI items.  
Line a. Complete a separate Part VI for each applicable  
separate category of income. However, all GILTI items must be  
reported on only one Part VI. If GILTI items include passive  
category income, report all GILTI items on the Part VI completed  
for passive category income; otherwise, report all GILTI items on  
the Part VI completed for general category income. Enter the  
appropriate code on line a.  
Note. The other reporting requirements of a partnership with  
respect to reporting income by separate category don't change  
by reason of the partnership reporting GILTI items that include  
general category income on a Part VI completed for passive  
category income.  
Codes for Categories of Income  
Code  
PAS  
Category of Income  
Passive Category Income  
Section 901(j) Income  
901j  
GEN  
General Category Income  
Use Schedule K-3, Part VI, to report the partner's share of the  
amounts needed to figure its subpart F income inclusions, its  
section 951(a)(1)(B) inclusions, and its share of items of CFCs  
needed to determine the partner's GILTI inclusion, with respect  
to CFCs owned (within the meaning of section 958) by the  
partnership.  
Line b. If any portion of a CFC item is U.S. source, complete a  
separate Part VI for U.S.-source CFC items, and check the box  
on line b on such separate Part VI.  
Line 1. Use lines A through K to report information with respect  
to CFCs owned (within the meaning of section 958) by the  
partnership, and for which Schedules K-2 and K-3, Part VI, must  
be completed. If the partnership owns a CFC through another  
partnership (lower-tier partnership) from which it receives a  
Schedule K-3 (Form 1065 or 8865), Part VI, the partnership must  
replicate each line of Schedule K-3 (Form 1065 or 8865), Part VI,  
that is related to the CFC on its Schedule K-2 (Form 1065), Part  
VI. For example, if a partnership directly owns 50% of the CFC's  
stock and owns 50% of the CFC's stock through a lower-tier  
partnership, the CFC should be listed on two lines with one line  
If the partnership must complete Schedules K-2 and K-3, Part  
VI, with respect to a CFC, then the partnership must complete  
Schedules K-2 and K-3, Part VI, by assuming that each partner  
in the partnership is a U.S. shareholder of the CFC and is  
required to include in gross income its share of the CFC's  
subpart F income, an amount determined under section 956 with  
respect to the CFC (section 951(a)(1)(B) inclusion), and its  
GILTI.  
25  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
related to the partnership's direct ownership and the other line  
related to the partnership's ownership through the lower-tier  
partnership. Lines related to a partnership's direct ownership of  
CFCs should be listed before lines related to a partnership's  
non-direct ownership of CFCs. If additional lines are required,  
attach a statement to Schedules K-2 and K-3 that looks like the  
current version of Part VI.  
Column (l). If the CFC has tested income in column (g), enter  
zero. If the CFC has a tested loss in column (h), enter as a  
negative number the aggregate share of the CFC's tested loss  
QBAI amount; see Regulations section 1.951A-4(b)(1)(iv). A  
CFC's tested loss QBAI amount is reported on Schedule I-1  
(Form 5471), line 9c, which must be translated to U.S. dollars.  
Column (m). Enter the aggregate share of the CFC’s tested  
interest income. A CFC’s tested interest income is reported on  
Schedule I-1 (Form 5471), line 10c.  
Column (a). Enter the name of each CFC for which Part VI  
must be completed.  
Column (b). Enter the EIN or reference ID number of the CFC.  
Don't enter "FOREIGNUS" or "APPLIED FOR." For basic  
information about reference ID numbers (including the  
requirements as to the characters permitted), see the  
Instructions for Form 1118.  
Column (n). Enter the aggregate share of the CFC’s tested  
interest expense. A CFC’s tested interest expense is reported on  
Schedule I-1 (Form 5471), line 9d.  
Schedule K-2, Part VII, and Schedule K-3, Part  
VII (Information Regarding Passive Foreign  
Investment Companies (PFICs))  
Column (c). Enter the end of the CFC’s tax year using the  
format YYYYMMDD.  
Column (d). Enter the partners' shares of CFC items through  
the partners' ownership in the partnership (aggregate share).  
See Regulations sections 1.951-1(b), 1.951-1(e), and  
Note. Partners will use the following information to complete  
Form 8621 and/or determine income inclusions with respect to  
the PFICs reported on Schedules K-2 and K-3, Part VII.  
1.951A-1(d)(1) for rules on determining the partners' shares.  
Except as otherwise provided, Schedules K-2 and K-3, Part  
VII, must be filed by every partnership that owns PFIC stock,  
directly or indirectly. However, the following exceptions apply.  
Note. A domestic partnership that is treated as owning stock of  
a CFC within the meaning of section 958(a) for a tax year of the  
CFC that begins before January 25, 2022, because it doesn't,  
pursuant to Regulations section 1.958-1(d)(4)(i), apply  
Regulations sections 1.958-1(d)(1) through (3) to such tax year,  
and is a U.S. shareholder of the CFC listed in column (a), doesn't  
report amounts with respect to that CFC for that tax year in  
column (e) or (f).  
A partnership that knows it has no direct or indirect partners  
that are U.S. persons, including U.S persons that own an indirect  
interest in the partnership through one or more foreign entities,  
isn't required to complete Schedules K-2 and K-3, Part VII.  
A domestic partnership that has elected to treat a PFIC as a  
pedigreed QEF or made a market-to-market (MTM) election  
under section 1296 with respect to a PFIC applicable to the  
partnership’s tax year (other than a domestic partnership making  
an MTM election under section 1296 with respect to PFIC stock  
in the current tax year if the current tax year isn't the first year of  
the partnership’s holding period in the stock (non-initial section  
1296 MTM election)) isn't required to complete Schedules K-2  
and K-3, Part VII, with information regarding that PFIC if the  
partnership files Form 8621 for that PFIC. The term “pedigreed  
QEF” is defined in Regulations section 1.1291-1(b)(2)(ii).  
Column (e). Enter the aggregate share of the amount of the  
CFC's subpart F income, if any. Note that an amount determined  
under section 956(a) isn't considered subpart F income. For  
guidance on computing a CFC's subpart F income and the  
partners' shares of a CFC's subpart F income, see Worksheet A  
in the Instructions for Form 5471.  
Column (f). Enter the amount determined under section 956  
with respect to the partners that relate to the partners’ ownership  
in the partnership, as described in these instructions for column  
(f) (aggregate section 951(a)(1)(B) inclusion). In determining the  
section 956 amount, use only the partners’ shares through their  
ownership in the partnership of:  
A partnership that owns stock of a foreign corporation that is  
treated as a qualifying insurance corporation (QIC) (as defined in  
section 1297(f)(1)) and which isn't treated as a PFIC by reason  
of section 1298(b)(1), or a domestic partnership that satisfies the  
deemed election requirements of Regulations section  
The average of the amounts of U.S. property held (directly or  
indirectly) by the CFC as of the close of each quarter of the  
CFC’s tax year, and  
1.1297-4(d)(5)(iv) with respect to a foreign corporation eligible to  
be treated as a QIC (and that isn't treated as a PFIC by reason of  
section 1298(b)(1)), isn't required to complete Schedules K-2  
and K-3, Part VII, with respect to that foreign corporation.  
The applicable earnings of the CFC.  
Don't reduce the amount reported in column (f) for any reduction  
to the partners’ section 956 amount under Regulations section  
1.956-1(a)(2). For guidance on computing the partners’ shares  
of a CFC’s earnings invested in U.S. property, see Worksheet B  
in the Instructions for Form 5471.  
A partnership that knows that all of its direct and indirect  
partners that are U.S. persons are either (a) not subject to the  
PFIC rules with respect to the corporation under section 1297(d)  
because they're subject to the subpart F rules with respect to the  
corporation, (b) tax-exempt entities that aren't subject to the  
PFIC rules with respect to the corporation under Regulations  
section 1.1291-1(e), or (c) pass-through entities with no direct or  
indirect U.S. taxable owners isn't required to complete  
Column (g). Enter the CFC’s tested income, if any, from  
Schedule I-1 (Form 5471), line 6, for each CFC.  
Column (h). Enter the CFC’s tested loss, if any, from  
Schedule I-1 (Form 5471), line 6, for each CFC. The loss  
amounts should be shown as negative numbers.  
Schedules K-2 and K-3, Part VII, with respect to the corporation.  
A partnership that marks to market stock of a PFIC as  
described in Regulations section 1.1291-1(c)(4) doesn't need to  
report information about the PFIC on Schedules K-2 and K-3,  
Part VII. The partnership should report its MTM gain or loss on  
Form 1065, Schedule K, and report the partners’ shares of those  
amounts on Schedule K-1 (Form 1065), Part III. Note, however,  
there may be instances in which the partnership will need to  
provide its partners with additional information to meet their tax  
obligations with respect to a PFIC the stock of which the  
partnership has marked to market as described in Regulations  
section 1.1291-1(c)(4), such as when section 1291 rules apply  
because the stock wasn't marked in the first year of the  
Column (i). Enter the aggregate share of the tested income  
listed in column (g) for each CFC with tested income.  
Column (j). Enter the aggregate share of the tested loss listed  
in column (h) for each CFC with tested loss. The loss amounts  
should be shown as negative numbers.  
Column (k). If the CFC has a tested loss in column (h), enter  
zero. If the CFC has tested income in column (g), enter the  
aggregate share of QBAI. A CFC’s QBAI is reported on  
Schedule I-1 (Form 5471), line 8.  
26  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
partnership’s holding period. In such instances, the partnership  
may use Part VII to provide the needed information.  
Part VII, and its corresponding Schedules K-3, Part VII, with the  
information contained in Table 4 and/or Table 5.  
Use Schedule K-2, Part VII, to report certain information with  
respect to any PFIC owned, directly or indirectly, by the  
partnership for which reporting is required, including PFICs with  
respect to which no QEF or section 1296 MTM election has  
been made, and unpedigreed QEFs (section 1291 funds), and  
PFICs with respect to which pedigreed QEF, section 1296 MTM,  
or other elections have been, or may be, made, and for which the  
partnership isn't filing a Form 8621.  
If the partnership has additional PFICs for which to report  
information that don't fit on single Schedules K-2 and K-3, Part  
VII, it can attach additional Parts VII of Schedules K-2 and K-3,  
as needed.  
Section 1—General Information  
Columns (a) through (c). Enter the name, U.S. EIN or  
reference ID number, and address of each PFIC held directly or  
indirectly by the partnership during its tax year. Don't enter  
“FOREIGNUS” or “APPLIED FOR.”  
For basic information about reference ID numbers (including  
the requirements as to the characters permitted), see the  
Instructions for Form 8621.  
Domestic partnerships must also use Schedule K-2, Part VII,  
to report information for any PFIC with respect to which the  
partnership is making a non-initial section 1296 MTM election,  
and for any foreign corporation eligible to be treated as a QIC  
that is treated as a PFIC by reason of section 1298(b)(1),  
regardless of whether it files Form 8621 for that PFIC. See  
section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for  
more information related to non-initial section 1296 MTM  
elections.  
Columns (d) and (e). Enter the beginning and end of the  
PFIC's tax year using the format YYYYMMDD.  
Column (f). Enter each class of shares in the PFIC owned by  
Use Schedule K-3, Part VII, to report the partner's share,  
through its ownership in the partnership, of the amounts reported  
on Schedule K-2, Part VII.  
the partnership using the following codes.  
Codes for Classes of PFIC Shares  
Complete only one line on both Sections 1 and 2 for each  
PFIC for which reporting on Schedule K-2, Part VII, and  
Schedule K-3, Part VII, is required. Each line completed for a  
PFIC in Section 1 should correspond to the same line on Section  
2. If there is no information to report with respect to a PFIC in  
Section 2, columns (c) through (o), only complete the name and  
EIN of the PFIC in Section 2, columns (a) and (b), and leave  
columns (c) through (o) blank for that PFIC. For additional  
information on determining indirect ownership of PFICs, see  
Regulations section 1.1291-1(b)(8).  
Code  
COM  
PRE  
OTH  
VAR  
Class of PFIC Shares  
Common or Ordinary Shares  
Preferred Shares  
Other Equity Interest  
Multiple Classes of Shares or Equity  
Interests  
Column (g). If the partnership acquired any PFIC shares during  
its tax year, provide the date(s) of acquisition of those shares  
using the format YYYYMMDD. If the partnership acquired no  
shares in a particular PFIC during its tax year, leave this column  
blank with respect to that PFIC.  
The partnership may have additional required information with  
respect to a PFIC for certain columns (for example, scenarios  
where the partnership may have multiple different events with  
respect to the PFIC in the same tax year, such as multiple dates  
of acquisitions of, or distributions with respect to, the PFIC  
stock). In that case, complete Schedules K-2 and K-3, Part VII,  
with the first of those entries for a PFIC and attach a statement  
including the remaining entries for that PFIC to Schedule K-2,  
Note. If the partnership acquired shares in a PFIC on multiple  
dates during the tax year, attach a statement with the information  
contained in Table 4 to Schedule K-2, Part VII, and its  
corresponding Schedules K-3, Part VII, providing those dates.  
Table 4  
Additional Information for Part VII, Section 1  
General Information  
Annual Information  
(a) Name of PFIC  
(b) EIN or reference ID number  
(g) Dates PFIC shares acquired during tax  
year (if applicable)  
value and the information provides a more reasonable estimate  
of the PFIC’s value.  
Column (h). Enter the total number of all classes of shares of  
the PFIC the partnership owned at the end of its tax year.  
Note. A partner may need additional information not required to  
be reported on this Schedule K-2, Part VII, (or the partner’s  
Schedule K-3, Part VII) from the partnership with respect to the  
value of the PFIC shares as of a particular date to aid the partner  
in making certain elections under Regulations section  
1.1291-10, 1.1297-3, or 1.1298-3.  
Column (i). Enter the total value of all shares in the PFIC held  
by the partnership at the end of the tax year. If the PFIC shares  
aren't publicly traded, the partnership may rely upon periodic  
account statements provided at least annually to determine the  
value of a PFIC unless the partnership has actual knowledge or  
reason to know based on readily accessible information that the  
statements don't reflect a reasonable estimate of the PFIC’s  
27  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
Column (j). If the partnership is a domestic partnership and has  
made either of the following elections with respect to the PFIC,  
indicate which election was made using the following codes. If  
the partnership hasn't made an election with respect to the PFIC,  
leave this column blank with respect to that PFIC.  
Completing Part VII, Section 1, Column (n)  
THEN...  
IF...  
• this is the first year of the  
partnership's holding period in stock  
check the box.  
of the foreign corporation, and  
• the partnership has determined  
(directly or otherwise) that the foreign  
corporation is a PFIC under the  
income test or asset test of section  
1297(a)  
Partnership Election Codes  
Code  
QEF  
Partnership Election Type  
Qualified Electing Fund Election  
Section 1296 Mark-to-Market Election  
• the foreign corporation was a PFIC  
in a prior tax year of the partnership's  
holding period, and  
check the box.  
MTM  
• the partnership hasn't determined  
(directly or otherwise) the foreign  
corporation is a former PFIC within  
the meaning of Regulations section  
1.1291-9(j)(2)(iv)  
Reminder. If the partnership is a domestic partnership and has  
made a pedigreed QEF election or section 1296 MTM election  
(other than a non-initial section 1296 MTM election) with respect  
to a PFIC, and the partnership files Form 8621 for that PFIC, it  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. If the partnership has marked  
stock in a PFIC to market as described in Regulations section  
1.1291-1(c)(4), it isn't required to report information regarding  
that PFIC on Schedule K-2 or K-3, Part VII.  
• the foreign corporation was a PFIC  
in a prior tax year of the partnership's  
holding period, and  
• the partnership has determined  
(directly or otherwise) the foreign  
corporation is a former PFIC within  
the meaning of Regulations section  
1.1291-9(j)(2)(iv)  
don't check the box.  
Column (k). Check the box if the foreign corporation has  
indicated that it has documented eligibility to be treated as a  
QIC. See section 1297(f) and Regulations section 1.1297-4 for  
additional information on QICs.  
Column (l). Check the box if the PFIC has indicated that its  
shares are “marketable stock” as defined in section 1296(e) and  
Regulations section 1.1296-2.  
Note. If the foreign corporation is a former PFIC within the  
meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may  
need additional information not required to be reported on this  
Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)  
from the partnership with respect to the PFIC to aid the partner in  
making certain elections under Regulations section 1.1298-3.  
Column (m). Check the box if the PFIC also constitutes a CFC  
within the meaning of section 957 (PFIC/CFC).  
Reminder. A partnership that knows that all of its direct and  
indirect partners that are U.S. persons aren't subject to the PFIC  
rules with respect to a PFIC/CFC under section 1297(d) because  
they're subject to the subpart F rules with respect to the  
PFIC/CFC isn't required to complete Schedules K-2 and K-3,  
Part VII, with respect to the PFIC/CFC.  
Section 2—Additional Information on PFIC or  
Qualified Electing Fund (QEF)  
General Information  
Columns (a) and (b). Enter the name and U.S. EIN (or  
reference ID number) of each PFIC held directly or indirectly by  
the partnership during its tax year. Don't enter "FOREIGNUS" or  
"APPLIED FOR."  
Note. If the PFIC is a PFIC/CFC, a partner may need certain  
additional information with respect to the PFIC/CFC’s E&P not  
required to be reported on this Schedule K-2, Part VII, (or the  
partner’s Schedule K-3, Part VII) from the partnership to aid the  
partner in making certain elections under Regulations section  
1.1291-9, 1.1297-3, or 1.1298-3.  
QEF Information  
Column (n). Complete column (n) in the following manner.  
Columns (c) and (d). Enter the partnership's share of the total  
ordinary earnings and net capital gain (as defined in Regulations  
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year  
in which or with which the tax year of the PFIC ends in columns  
(c) and (d), respectively. The PFIC should provide the  
partnership with a statement that provides information to assist  
the partnership in determining these amounts. See Regulations  
section 1.1295-1(g) for additional information on annual PFIC  
statements.  
A domestic partnership must provide this information for any  
PFIC with respect to which it has made a pedigreed QEF  
election but for which it doesn't file Form 8621, and for any PFIC  
it has elected to treat as an unpedigreed QEF. A foreign  
partnership must provide this information if it has received an  
annual information statement with respect to the PFIC, unless  
the partnership knows that no direct or indirect partner has  
made, or intends to make, a QEF election with respect to the  
PFIC; the partnership may obtain this knowledge in any  
reasonable manner, provided it retains a written record in its  
books and records.  
28  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
Reminder. If the partnership is a domestic partnership and has  
made a pedigreed QEF election with respect to a PFIC, and if  
the partnership files Form 8621 for that PFIC, the partnership  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. The partnership should report its  
inclusion of its share of the QEF’s ordinary earnings and net  
capital gain on Form 1065, Schedule K, and report the partners’  
shares of those amounts on Schedules K-1, Part III. However,  
certain partners which receive a distributive share of the  
partnership’s QEF inclusions may be entitled to claim foreign tax  
credits under section 960 with respect to those inclusions. See  
the instructions for Schedules K-2 and K-3, Part VIII, regarding  
deemed paid foreign tax credits under section 960, including for  
inclusions with respect to a QEF under section 1293(f).  
section 1296(a) MTM gain or loss on Form 1065, Schedule K,  
and report the partners’ shares of those amounts on  
Schedule K-1, Part III.  
If the partnership has marked stock in a PFIC to market as  
described in Regulations section 1.1291-1(c)(4), it isn't required  
to report information regarding that PFIC on Schedule K-2 or  
K-3, Part VII, though it may use Part VII to provide its partners  
with additional information to meet their tax obligations with  
respect to the PFIC in certain instances, such as when the  
section 1291 rules apply because the partnership didn't mark the  
stock to market in the first year of its holding period.  
Note. If the partnership is a domestic partnership that has made  
an MTM election under section 1296 with respect to a PFIC but  
doesn't file Form 8621 for that PFIC, a partner may need  
additional information not required to be reported on this  
Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)  
regarding its share of the partnership’s adjusted tax basis in the  
partnership’s MTM PFIC stock in order to complete Form 8621.  
Note. Certain partners may need additional information not  
required to be reported on this Schedule K-2, Part VII, (or the  
partner’s Schedule K-3, Part VII) from the QEF with respect to its  
computation of its net capital gain (as defined in Regulations  
section 1.1293-1(a)(2)) to perform certain computations under  
section 1061 or the regulations thereunder. The partnership may  
aid the partner in obtaining this information from the QEF, though  
the QEF isn't required to provide it. See section 1061 and  
Regulations sections 1.1061-4 and 1.1061-6 for more  
information.  
Section 1291 and Other Information  
Generally, the information in columns (g) through (o) is to assist  
shareholders of section 1291 funds in satisfying any information  
reporting obligations and in computing income inclusions with  
respect to section 1291 funds. However, this information may be  
relevant to PFICs with respect to which a QEF election  
Section 1296 Mark-to-Market Information  
(pedigreed or unpedigreed), section 1296 MTM election  
(including a non-initial section 1296 MTM election), or other  
election has been made by the partnership, partner, or other  
indirect PFIC shareholder. Accordingly, the partnership must  
complete columns (g) through (o) with respect to each PFIC for  
which reporting on Schedules K-2 and K-3, Part VII, is required.  
However, note the instructions for column (k) regarding reporting  
distributions from PFICs with respect to which the partnership  
has made a pedigreed QEF election or section 1296 MTM  
election (other than a non-initial section 1296 MTM election) and  
for which the partnership doesn't file Form 8621.  
Columns (e) and (f). Enter the fair market value (FMV) of the  
PFIC stock at the beginning and end of the partnership’s tax year  
in columns (e) and (f), respectively. If any shares of the PFIC  
were acquired during the tax year for which the Form 1065 is  
being filed, the FMV in column (e) should reflect the FMV of  
those shares as of the date of acquisition. A domestic  
partnership must provide this information for any PFIC with  
respect to which it has made an MTM election under section  
1296 but for which it doesn't file Form 8621 and for any PFIC  
with respect to which it is making a non-initial section 1296 MTM  
election. A foreign partnership must provide this information  
unless it knows that no direct or indirect partner has made, or  
intends to make, an MTM election under section 1296 with  
respect to the PFIC; the partnership may obtain this knowledge  
in any reasonable manner, provided it retains a written record in  
its books and records.  
Reminder. If the partnership has additional required information  
with respect to a PFIC for any of columns (g) through (j) or (l)  
through (m) (for example, if the partnership received multiple  
distributions with respect to stock in a PFIC), it must complete  
that column with the first of those entries and attach a statement  
including the remaining entries to Schedule K-2, Part VII, and its  
corresponding Schedules K-3, Part VII, with the information  
contained in Table 5.  
Reminder. If the partnership is a domestic partnership and has  
made an MTM election under section 1296 with respect to a  
PFIC (other than a non-initial section 1296 MTM election), and if  
the partnership files Form 8621 for that PFIC, the partnership  
isn't required to report information regarding that PFIC on  
Schedule K-2 or K-3, Part VII. The partnership should report its  
Column (g). Enter the date(s) on which the partnership initially  
acquired each block of stock in the PFIC using the format  
YYYYMMDD.  
29  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
 
Table 5  
Additional Information for Part VII, Section 2  
Section 1291 and Other Information  
General Information  
(a) Name of PFIC  
(b) EIN or  
(g) Dates  
PFIC shares  
were acquired  
(h) Amount of (i) Dates of  
(j) Total  
(l) Dates  
(m) Amount (n) Tax basis  
(o) Gain or  
(loss) on  
disposition of  
PFIC shares  
reference ID  
number  
cash and  
FMV of  
distribution  
creditable  
PFIC shares  
realized on  
of PFIC  
shares on  
date of  
foreign taxes disposed of disposition of  
property  
attributable to  
distribution  
by PFIC  
during tax  
year (if  
PFIC shares  
distributed by  
PFIC during  
the current  
tax year (if  
applicable)  
disposition  
applicable)  
Column (h). Enter the amount of each distribution of cash  
and/or the FMV of any other property distributed to the  
partnership by the PFIC during the tax year, if any.  
Column (n). If the partnership disposed of any block of stock in  
the PFIC during the partnership's tax year, enter the  
partnership's tax basis in the shares of the PFIC on the date of  
disposition.  
Note. Deemed distributions by QEFs don't need to be reported  
on this Schedule K-2, Part VII (or the partner’s Schedule K-3,  
Part VII). However, partners which have made, or intend to make,  
an election under section 1294, and which are deemed to have  
received a distribution from the QEF, may require this information  
to complete any computations under section 1294 (including for  
Form 8621, if required). See section 1294(f) and Regulations  
section 1.1294-1T for additional information.  
Schedule K-3. Enter the partner's share, through its  
ownership in the partnership, of the partnership's tax basis in the  
PFIC shares. The partner's share of the basis in the PFIC shares  
should include any applicable adjustments specific to the  
partner, such as section 743(b) adjustments or adjustments  
made under the PFIC regime. See sections 1293(d) and  
1296(b), and Regulations sections 1.1291-9, 1.1291-10,  
1.1297-3, and 1.1298-3 for adjustments made under the PFIC  
regime.  
Column (i). Enter the date(s) of distribution of the amounts  
entered in column (h) using the format YYYYMMDD.  
Column (o). Enter the partnership's gain or loss on the  
disposition of PFIC shares. This equals column (m) minus  
column (n).  
Column (j). Enter the total creditable foreign taxes attributable  
to a distribution from the PFIC. See section 1291(g) and the  
instructions for Form 8621, Part V, line 16d, for additional  
information on creditable foreign taxes attributable to PFIC  
distributions, including apportioning creditable foreign taxes to  
the portion of a distribution which constitutes an excess  
distribution and certain rules related to creditable foreign taxes  
on a disposition of PFIC stock.  
Schedule K-2, Part VIII (Partnership’s Interest in  
Foreign Corporation Income (Section 960)), and  
Schedule K-3, Part VIII (Partner’s Interest in  
Foreign Corporation Income (Section 960))  
Note. Certain partners will use the following information to figure  
Note. Creditable foreign taxes entered in column (j) don't  
include taxes attributable to QEF inclusions under section  
1293(f). Enter only creditable foreign taxes within the meaning of  
section 1291(g) in column (j). See the instructions for Schedules  
K-2 and K-3, Part VIII, regarding deemed paid foreign tax credits  
under section 960, including for inclusions with respect to a QEF  
under section 1293(f).  
a deemed paid foreign tax credit on Form 1118.  
Reporting currency. Report all amounts on Part VIII in  
functional currency.  
The partnership must complete a separate Schedule K-2,  
Part VIII, for each CFC with respect to which it has a direct or  
indirect interest, unless the partnership doesn't have a direct or  
indirect partner that is a domestic corporation that is a U.S.  
shareholder or that is eligible to make a section 962 election to  
claim a deemed paid foreign tax credit with respect to such CFC.  
An indirect interest is one that the partnership owns through  
other pass-through entities. Indirect partners are partners who  
own the partnership through a foreign corporation or through a  
pass-through entity.  
Column (k). Enter the total amount of distributions the  
partnership received from the PFIC in the 3 preceding tax years,  
or, if shorter, the total amount of distributions the partnership  
received during its holding period of the PFIC stock. However,  
don't enter any amount in this column with respect to a PFIC for  
which the partnership has made a pedigreed QEF election or  
section 1296 MTM election (other than a non-initial section 1296  
MTM election) and for which the partnership doesn't file Form  
8621.  
Schedule K-3, Part VIII, must be completed and provided to  
(a) direct partners that are domestic corporation U.S.  
shareholders or that may be eligible to make a section 962  
election to claim a deemed paid foreign tax credit, and (b) direct  
partners who may have direct or indirect partners who may be  
eligible to claim the indirect credit.  
Column (l). Enter the date(s) on which the partnership  
disposed of any block of stock in the PFIC during the  
partnership's tax year, if any, using the format YYYYMMDD.  
Column (m). If the partnership disposed of any block of stock in  
the PFIC during the partnership's tax year, enter the amount  
realized by the partnership on each disposition.  
A partnership that doesn't have or receive sufficient  
information or notice regarding a direct or indirect partner must  
30  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
   
presume the partner is eligible to claim the indirect credit and  
must complete Schedules K-2 and K-3 accordingly.  
Exception. Part VIII isn't required to be completed with  
respect to dormant foreign corporations (as defined in section 3  
of Rev. Proc. 92-70).  
In general, a domestic corporate U.S. shareholder of a CFC is  
deemed to pay all or a portion of the foreign income taxes paid or  
accrued by the CFC that are properly attributable to subpart F  
income or tested income of the CFC that the U.S. shareholder  
includes in its gross income; see sections 960(a) and (d). See  
also section 1293(f) with respect to QEF inclusions from a PFIC.  
The domestic corporate U.S. shareholder may claim a credit for  
such foreign taxes, subject to certain limitations. Individuals,  
estates, and trusts may also claim a foreign tax credit for foreign  
income taxes deemed paid with respect to a CFC if they make  
an election under section 962.  
To figure the foreign taxes deemed paid by a corporate U.S.  
shareholder, the income, deductions, and taxes of the CFC must  
be assigned to separate categories of income and then included  
in income groups within those separate categories; see  
Regulations section 1.960-1(c)(1). The applicable separate  
categories of income are general category income, passive  
category income, and section 901(j) income. The income groups  
include the subpart F income groups, the tested income group,  
and the residual income group. Each single item of foreign base  
company income (as defined in Regulations section 1.954-1(c)  
(1)(iii)) is a separate subpart F income group; see Regulations  
section 1.960-1(d)(2)(ii)(B).  
On Schedule K-2, Part VIII, the partnership reports in column  
(ii) its share of the CFC's net income by income groups and by  
units. In column (iii), the partnership reports the CFC’s total net  
income by income groups and units as reported in Schedule Q  
(Form 5471), column (xvi). In column (iv), the partnership reports  
the CFC’s current year foreign taxes for which credit is allowed  
by income groups and units as reported in Schedule Q (Form  
5471), column (xii). In column (i), consistent with the reporting  
requirement on Form 1118, enter the two-letter code (from the  
list at IRS.gov/CountryCodes) of each foreign country and U.S.  
territory within which income is sourced and/or to which taxes  
were paid or accrued. Enter "US" for income sourced in the  
United States. Don't enter “various” or “OC” for the country code.  
Don't enter a country in column (i) of line 5, later. See the  
instructions for line D for further information.  
On Schedule K-3, Part VIII, the partnership reports each  
partner's share of the net income in the income group by unit and  
country.  
Enter "US" for income sourced in the United States.  
Line A. On line A, enter the EIN or reference ID number of the  
CFC as listed on Form 5471. Don't enter "FOREIGNUS" or  
"APPLIED FOR."  
Line B. The partnership must file separate Schedules K-2 and  
K-3, Part VIII, to report the net income or loss of the CFC in each  
separate category. Use the applicable code from the table below.  
Category of Income Codes  
Line 1f allows the partnership to report foreign personal  
holding company income under section 954(c)(1)(F) (income  
from notional principal contracts), section 954(c)(1)(G)  
(payments in lieu of dividends), and section 954(c)(1)(H)  
(personal service contracts). A partnership must report a  
separate line 1f for income in each of sections 954(c)(1)(F), (G),  
and (H). Income within one of these income groups may need to  
be further subdivided on separate lines to the extent it is  
attributable to more than one country, source of income, passive  
grouping, etc. See the instructions for Schedule Q (Form 5471).  
The tested income group consists of tested income within a  
section 904 category; see Regulations section 1.960-1(d)(2)(ii)  
(C). The residual income group consists of any income not in the  
other income groups or in a PTEP group; see Regulations  
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)  
(2) with respect to the PTEP groups. The PTEP groups aren't  
reported on this Part VIII.  
Code  
PAS  
Category of Income  
Passive Category Income  
Section 901(j) Income  
General Category Income  
901j  
GEN  
Line C. With respect to passive category income, separate  
Schedules K-2 and K-3, Part VIII, must be completed for each  
applicable grouping under Regulations section 1.904-4(c). This  
includes the groups in Regulations section 1.904-4(c)(3)  
reported on Schedule Q (Form 5471).  
The partnership should use the following codes to report  
each of these groupings for each unit.  
Passive Group Codes  
Lines 1 through 4. The partnership's share of the CFC's net  
income in each of the subpart F income groups, tested income  
group, and residual income group by unit is reported on lines 1  
through 4. The CFC’s net income and taxes in each of these  
groups are figured on Schedule Q (Form 5471), and then  
included in columns (iii) and (iv), respectively. See the  
Code  
Passive Group  
i
All passive income received during the tax year that is subject to a  
withholding tax of 15% or greater must be treated as one item of  
income. See Regulations section 1.904-4(c)(3)(i).  
ii  
All passive income received during the tax year that is subject to a  
withholding tax of less than 15% (but greater than zero) must be  
treated as one item of income. See Regulations section 1.904-4(c)(3)  
(ii).  
instructions for Schedule Q (Form 5471) for the meaning of unit.  
However, don't include on line 1 (including lines 1a through 1j  
and any subset lines (1), (2), etc., under line 1) any amounts  
excluded from subpart F income under the high-tax exception in  
section 954(b)(4) (subpart F high-tax exception); these amounts  
are reported on line 4 (and on lines (1), (2), etc., under line 4).  
Also, don't include on line 3 (or lines (1), (2), etc., under  
line 3) any amounts excluded under the GILTI high-tax exclusion  
in Regulations section 1.951A-2(c)(7); these amounts are  
reported on line 4 (including any subset lines (1), (2), etc., under  
line 4).  
The PTEP groups aren't reported on this Part VIII. Don't report  
by unit with respect to the following subpart F income groups: (a)  
international boycott income; (b) bribes, kickbacks, and other  
payments; and (c) section 901(j) income. Also don't report by  
unit with respect to the recaptured subpart F income group.  
iii  
iv  
All passive income received during the tax year that is subject to no  
withholding tax or other foreign tax must be treated as one item of  
income. See Regulations section 1.904-4(c)(3)(iii).  
All passive income received during the tax year that is subject to no  
withholding tax but is subject to foreign tax other than a withholding  
tax must be treated as one item of income. See Regulations section  
1.904-4(c)(3)(iv).  
Example 15—Part VIII: subpart F income group  
reporting by unit. In Year 1, USP, a domestic partnership,  
wholly owns foreign corporation CFC, with reference ID number  
1234, and the CFC owns a foreign disregarded entity organized  
in Country X. CFC has two separate units, the foreign  
31  
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)  
       
disregarded entity and the CFC itself. See the tables for  
Example 15.  
Example 15. Foreign Source Income  
For the Year 1 tax year, the separate units have the following foreign source income.  
Tax  
Country Code  
Net Income  
100u  
Country X Foreign Disregarded Entity  
(FDE) Passive Interest Income  
20% withholding tax  
AA  
CFC Passive Rental Income  
10% withholding tax  
No tax  
YY  
ZZ  
50u  
CFC General Category Tested Income  
300u  
Example 15. Partnership USP’s First Schedule K-2, Part VIII  
USP completes Schedule K-2, Part VIII, as shown below.  
A
B
C
Enter EIN or reference ID number of CFC:  
Separate category (enter code—see instructions)  
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1234  
PAS  
i
.
.
.
.
.
.
.
.
(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)  
.
.
.
.
.
.
.
.
.
.
.
.
.
(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  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1234  
PAS  
ii  
.
.
.
.
.
.
.
.
.
.
.
.
.
(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)  
.
.
.
.
.
.
.
.
.
.
.
.
.
(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)  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1234  
GEN  
.
.
.
.
.
.
.
.
.
.
.
.
.
(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  
.
.
.
.
.
.
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  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1234  
GEN  
.
.
.
.
.
.
.
ߛ
Enter amounts in functional currency of the foreign  
corporation (unless otherwise noted).  
(ii) Partnership’s share of foreign corporation’s net  
(i) Country code  
income (functional currency)  
1
Subpart F income groups  
g
Foreign base company sales income (total)  
.
.
.
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  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
1234  
GEN  
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
ߛ
Enter amounts in functional currency of the foreign  
corporation (unless otherwise noted).  
(ii) Partnership’s share of foreign corporation’s net  
(i) Country code  
income (functional currency)  
1
Subpart F income groups  
g
Foreign base company sales income (total)  
(3) Unit: CFC  
.
.
.
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  
Identifying info., partners 5  
Identifying info., partnership 5  
Income re-sourced by treaty 12  
Example 08—Part II, not Part III,  
required for partnership with no  
foreign activity 10  
methods for deductions 40  
B
Interest expense apportionment  
Example 09—Part II: multiple country  
sources: gross income 13  
factors 15  
Base erosion and anti-abuse tax  
Interest expense on U.S. booked  
(Section 59A) 33  
Example 10—Parts II and III: capital  
gains and losses 13  
liabilities 40  
Base erosion payments and base  
Interest expense specifically  
allocable under Reg. 1.861–10  
and -10T 14  
erosion tax benefits 34  
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  
Capital gains and losses 13  
N
Category of income codes 31  
Charitable contributions 14, 40  
Codes for categories of income 25  
Codes for classes of PFIC shares 27  
Codes for types of tax 17  
Name of partnership 5  
Net income (loss):  
Example 13—partners’ reporting of  
DEI and QBAI 20  
Controlled foreign corporation  
(CFC) 31  
Example 14—domestic corporate  
partner; specified tangible  
property 21  
Deduction eligible income (DEI) 20  
Compensation/consideration paid for  
services excepted by section  
59A(d)(5) 35  
Effectively connected income  
(ECI) 40  
Example 15—Part VIII: subpart F  
income group reporting by unit 31  
Compensation/consideration paid for  
services not excepted by section  
59A(d)(5) 35  
Example 16—Part VIII: more than two  
source countries 33  
O
Example 17—pass-through partner;  
need to complete Part X 37  
Other forms 8  
Computer-generated Schedules  
Other income 14  
K-2 3  
Example 18—Part X; OID 39  
Exception for Form 8621 8  
Other information for preparation of  
Cost of goods sold (COGS):  
Form 8993 22  
Deduction eligible income (DEI) 20  
Excluded foreign source income 31  
Other international transactions 5, 9  
Other tax information 19  
Effectively connected income  
(ECI) 41  
F
Foreign-derived deduction eligible  
income (FDDEI) 21  
P
FDII deduction apportionment  
factors 16  
Part applicability 5  
In general 11  
Country codes 6, 12  
Currency 4  
Foreign branch category income 11  
Foreign oil and gas taxes 5  
Partner determination 12  
Partner loan transactions 8  
Partners eligible to claim credit 9  
Partnership determination 11  
Partnership election codes 28  
Partnership QBAI 20  
Foreign partner’s distributive share of  
deemed sale items 41  
D
Foreign partners’ character and  
source of income and  
deductions 37  
Deductions 14  
Deductions, other 14  
DEI and QBAI on Form 8993 20  
Partnership’s interest in foreign  
Foreign tax translation 6  
Foreign taxes 14  
corporation 30  
Distributions from foreign corps. to  
Partnerships with no foreign partners  
partnership 23  
Foreign taxes deductible but not  
and limited or no foreign activity 9  
creditable 18  
Dividends, ordinary and qualified 13  
Downstream loans 8  
Parts of Sch. K-2 and Sch. K-3, in  
Foreign taxes paid or accrued to  
general 4  
sanctioned countries 17  
Dual consolidated loss 8  
Passive group codes 31  
Foreign taxes related to PTEP  
PFIC, QEF general information 27  
resourced by treaty 17  
E
Purchase or creation of property  
Foreign-derived DEI on Form 8993 21  
Foreign-derived gross receipts 21  
Form 1116 exemption exception 9  
Form 5471 information 8  
rights for intangibles 34  
EIN 5  
Examples:  
Q
Example 01—Part IX required to  
determine base erosion  
payments 2  
Qualified derivatives dealer (QDD) 5  
Form 8621, information for 26  
Example 02—domestic filing  
exception met; issuance of  
Schedule K-3 not required 3  
R
G
R&E expenses:  
Gains on sales personal property 5  
General filing instructions 11  
General property 22  
Apportionment factors 14, 22  
By SIC code 23  
Example 03—domestic filing  
exception not met 3  
Effectively connected income  
(ECI) 40  
Example 04—domestic filing  
exception met; Schedule K-3  
issuance still required 3  
Gross income 12  
Gross receipts 21  
Foreign tax credit 14  
Example 05—Part I, box 5; high-taxed  
income 7  
Rental income 13  
H
Rents, royalties, and license fees 34  
High-taxed income 6  
Example 06—Form 1116 exemption 9  
How to complete Schs. K-2 and K-3 4  
44  
Section 951A category income 11  
Section 986(c) gain and loss 13  
Section 987 gain and loss 13  
Section 988 gain and loss 13  
Splitter arrangements 6  
Tiered partnerships 42  
Total deductions (Part IX) 33  
Total gross income 14  
S
Section 1291 and other  
Information 29  
U
Section 250 deduction re FDII 19  
Section 267A disallowed deduction 7  
Section 59(e)(2) expenditures 40  
Stewardship expenses 15  
Upstream loans 8  
T
Section 871(m) covered  
W
partnerships 41  
Table 1. Information on Personal  
When to file 3  
Section 901(j) income 11  
Property Sold 5  
Where to file 3  
Section 951(a) inclusions 14  
Taxes assigned to section 951A  
Withholding foreign partnership 5  
Section 951(a)(1) and section 951A  
category 17  
inclusions 24  
45