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                                                                                                         Department of the Treasury
                                                                                                         Internal Revenue Service
2023

Instructions for

Schedule M-3

(Form 1120-F)

Net Income (Loss) Reconciliation for Foreign Corporations with Reportable Assets 
of $10 Million or More

Section references are to the Internal Revenue   that are reported on Form 1120-F,           Schedule M-3 (Form 1120-F) must 
Code unless otherwise noted.                     Schedule L. Foreign banks are foreign       either (i) complete Schedule M-3 (Form 
                                                 corporations described in Regulations       1120-F) in its entirety, or (ii) complete 
Future Developments                              section 1.882-5(c)(4).                      Schedule M-3 (Form 1120-F) through 
For the latest information about                                                             Part I and complete Schedule M-1 
developments related to Schedule M-3             Who Must File                               instead of completing Parts II and III of 
(Form 1120-F) and its instructions, such         Any foreign corporation required to file    Schedule M-3 (Form 1120-F). If the filer 
as legislation enacted after they were           Form 1120-F that reports on                 chooses to complete Schedule M-1 
published, go to IRS.gov/Form1120F.              Schedule L, line 17, column (d), of Form    instead of completing Parts II and III of 
                                                 1120-F total assets at the end of the       Schedule M-3 (Form 1120-F), line 1 of 
General Instructions                             corporation's tax year that equal or        Schedule M-1 must equal line 11 of Part 
                                                 exceed $10 million, must complete and       I of Schedule M-3 (Form 1120-F).
Purpose of Schedule                              file Schedule M-3 in lieu of                Filers must answer all questions on 
Schedule M-3, Part I, determines the             Schedule M-1, Reconciliation of Income      page 1 of the form. Furthermore, for any 
adjusted financial net income (loss) of          (Loss) per Books With Income per            part of Schedule M-3 (Form 1120-F) 
the non-consolidated (see                        Return.                                     that is completed, all columns must be 
                                                                                             completed, all numerical data requested 
Non-consolidated financial statement,            A foreign corporation filing Form           must be provided, and any statement 
later, for the definition) foreign               1120-F that is not required to file         required to support a line item must be 
corporation filing Form 1120-F, U.S.             Schedule M-3 may voluntarily file           attached. All additional statements 
Income Tax Return of a Foreign                   Schedule M-3.                               specifically referenced in these 
Corporation. Schedule M-3, Parts II and 
III, reconcile this financial result with the    Note. A foreign corporation that is         instructions must be completed and 
corporation's taxable income before the          required to complete (or voluntarily        attached to the Schedule M-3 when 
NOL deduction and special deductions             completes) Schedule M-3 is still            filed. If Part III is completed, please note 
on Form 1120-F, Section II, line 29.             required to complete Schedule M-2,          that Part III requires that results from 
                                                 Analysis of Unappropriated Retained         Schedule I (Form 1120-F), Interest 
For purposes of this reconciliation,             Earnings per Books.                         Expense Allocation Under Regulations 
Part I, line 1, provides rules for                                                           Section 1.882-5, and Schedule H (Form 
                                                                                             1120-F), Deductions Allocated To 
determining the financial statement(s)           When and Where To File                      Effectively Connected Income Under 
the taxpayer must use in reporting the 
net income (loss) to be reported on Part         Attach Schedule M-3 (Form 1120-F) to        Regulations Section 1.861-8, also be 
I, line 4. Part I, lines 5 through 10 then       the foreign corporation's Form 1120-F       included. See instructions for Part III, 
provide adjustments to include or                income tax return. Be sure to check the     lines 26b, 26c, and 31, later.
exclude financial results to reconcile the       box at the top of Form 1120-F, page 1, 
financial statement results reportable on        indicating that Schedule M-3 is 
                                                                                             Other Form 1120-F 
Part I, line 4, to the foreign corporation's     attached.
                                                                                             Schedules Affected by 
adjusted financial net income (loss) 
reportable on Part I, line 11.                   Completion of                               Schedule M-3 
                                                 Schedule M-3                                Requirements
For foreign corporations other than              Form 1120-F filers that are required to 
                                                                                             Schedule L
foreign banks (see definition in the             file Schedule M-3 (Form 1120-F) and 
instructions for Part I, line 1, later), Part I, have at least $50 million total assets at   Generally, the assets and liabilities 
line 11 includes the worldwide financial         the end of the tax year must complete       required to be reported on Schedule L 
net income (loss) of the                         Schedule M-3 (Form 1120-F) in its           are the total assets and liabilities 
non-consolidated foreign corporation,            entirety.                                   reflected on the set(s) of books of the 
adjusted for the results of non-includible                                                   foreign corporation that include assets 
entities and includible disregarded              Form 1120-F filers that (a) are             that give rise to U.S. effectively 
entities (see definition later under Entity      required to file Schedule M-3 (Form         connected income and U.S. booked 
Considerations for Schedule M-3). For            1120-F) and have less than $50 million      liabilities (as defined in Regulations 
foreign banks, Part I, line 11, is generally     total assets at the end of the tax year, or section 1.882-5(d)(2)). The total assets 
limited to the financial income (loss)           (b) are not required to file Schedule M-3   and liabilities include the interbranch 
derived from the same set(s) of books            (Form 1120-F) and voluntarily file          assets and liabilities and the 

Dec 12, 2023                                               Cat. No. 50152J

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noneffectively connected assets            that give rise to U.S. booked liabilities   1.882-5(d)(2)(ii). However, the 
reflected on such books. Such books        under Regulations section 1.882-5(d)        Schedule M-3 reporting on Part I, line 11 
will reflect the assets of the foreign     (2). Under such circumstances, the set      must always reflect the worldwide profits 
corporation located in the United States   of books would remain reportable on         and losses of the foreign corporation 
and all other of its assets used in its    Schedule L for Code-based reporting         filing the Form 1120-F even if the 
trade or business within the United        purposes, but for treaty-based reporting    Schedule L books determined under 
States (other than its assets giving rise  purposes, such transfer may effect          Regulations section 1.882-5(d)(2)(ii) 
to effectively connected income under      attribution to another part of the          gives rise to less than worldwide 
sections 864(c)(6) or (7)). A foreign      corporate enterprise under a functional     reporting under the facts and 
corporation may instead elect to report    and factual analysis and no longer be       circumstances.
its worldwide assets and liabilities on    reportable on Schedule L as part of the 
Schedule L under Regulations section       U.S. permanent establishment after the      Entity Considerations for 
1.6012-2(g)(1)(iii). If a foreign          transfer. Additionally, a set of books      Schedule M-3
corporation (including a foreign bank)     having no effectively connected income      For purposes of Schedule M-3, 
elects worldwide reporting on              or U.S. booked liabilities under            references to the classification of an 
Schedule L, the same set(s) of books       Regulations section 1.882-5(d)(2) might     entity (for example, as a corporation, a 
must be used to report the adjusted        still constitute a set of books of the U.S. partnership, or a trust) are to the 
worldwide net income (loss) results in     permanent establishment because the         classification of the entity for U.S. 
Part I, line 11.                           items recorded thereon are primarily        federal income tax purposes.
                                           attributable to the U.S. permanent 
  If the foreign corporation has more      establishment under the application by      For a foreign corporation other than a 
than one set of books and records          analogy of the OECD Transfer Pricing        bank, the financial results of an entity 
relating to assets located in the United   Guidelines as expressly authorized by       that is disregarded as separate from the 
States or used in a trade or business      or pursuant to a U.S. income tax treaty     foreign corporation filing Form 1120-F 
conducted in the United States, it must    and accompanying documents.                 for federal income tax purposes 
report the combined amounts shown on                                                   (“disregarded entity”) are reported on 
all such books and records on              Schedule M-2                                Schedule M-3, Part I, line 4, if the 
Schedule L, as adjusted to eliminate       If the foreign corporation is a bank (and   foreign corporation's applicable income 
transactions recorded between the          checked the “Yes” box on Part I, line 1 of  statement includes the net income of 
reportable books. However, amounts         Schedule M-3), the amount shown on          such disregarded entity. Otherwise, the 
recorded for transactions between the      Schedule M-2, line 2 (Net income (loss)     results of the disregarded entity are 
set(s) of books and other divisions of     per books) must equal the amount            separately reported on Part I, line 5. On 
the foreign corporation or includible      shown on Schedule M-3, Part I, line 11.     Parts II and III, any item of income, gain, 
disregarded entities (see definition later Both the foreign bank's Form 1120-F,        loss, or deduction of a disregarded 
under Entity Considerations for            Schedule L reporting and Schedule M-3       entity must be reported as an item of the 
Schedule M-3) reportable on                (Form 1120-F) reporting are based on        foreign corporation, and is not reported 
Schedule M-3, Part I, line 5, are not      the same set(s) of Schedule L books         on Part II, line 9, 10, or 11, as from a 
eliminated for Schedule L purposes         which are generally determined on the       partnership or pass-through entity. The 
(except for certain transactions with      basis of Regulations section 1.882-5(d)     applicable financial statement may 
disregarded entities that are also         (2)(iii). If, however, the foreign bank     include a disregarded entity only if it is 
reportable on Schedule L), unless the      elects to complete its Form 1120-F,         owned directly or indirectly by the 
taxpayer elects worldwide reporting        Schedule L on the basis of its worldwide    foreign corporation. An applicable 
under Regulations section 1.6012-2(g)      books, then the bank will be required to    financial statement may not include a 
(1)(iii).                                  report its net income (loss) on             disregarded entity that is the direct or 
  Adaptation of Form 1120-F,               Schedule M-2 and Schedule M-3 from          indirect owner of the foreign corporation 
Schedule L for treaty-based                the same worldwide set(s) of books          filing Form 1120-F.
reporting. The set(s) of books that        used for Form 1120-F, Schedule L            Foreign bank disregarded entity 
must be reported on Form 1120-F,           purposes.                                   books—reporting for lines 4 and 5. 
Schedule L are those of the U.S.                                                       For foreign banks, the net income (loss) 
permanent establishment. These books       If the foreign corporation is not a 
                                                                                       of certain disregarded entities are not 
will generally be the same set(s) of       bank (and therefore checked the “No” 
                                                                                       combined with other U.S.-based sets of 
books reported on Schedule L, as           box on Part I, line 1), the amount shown 
                                                                                       books reported on line 4. The set(s) of 
described above. However, certain          on Schedule M-2, line 2 (Net income 
                                                                                       books with respect to disregarded 
books that give rise to effectively        (loss) per books) should reflect the net 
                                                                                       entities are included on Part I, line 5, if 
connected income might not necessarily     income (loss) associated with the 
                                                                                       the set(s) of books of such disregarded 
give rise to treaty-based reporting. For   Schedule L books. This amount will 
                                                                                       entities give rise to U.S. booked 
example, the assets on a set of books      equal the amount shown on 
                                                                                       liabilities under Regulations section 
could still be attributed to a U.S. office Schedule M-3, Part I, line 11 only if the 
                                                                                       1.882-5(d)(2)(iii). Transactions between 
for effectively connected income           corporation voluntarily chooses to 
                                                                                       the set(s) of books reported on line 4 
reporting purposes even when               complete Form 1120-F, Schedule L on 
                                                                                       and line 5 are eliminated on line 8. 
considered transferred from the U.S.       the basis of the corporation's worldwide 
                                                                                       However, the net income (loss) of a U.S. 
permanent establishment for treaty         set(s) of books under Regulations 
                                                                                       LLC that is a disregarded entity whose 
reporting purposes (see, for example,      section 1.6012-2(g)(1)(iii), or, if the 
                                                                                       set(s) of books do not give rise to U.S. 
Regulations section 1.864-4(c)(5)(iii)) if Schedule L books determined under the 
                                                                                       booked liabilities of the foreign bank 
under the facts and circumstances, such    facts and circumstances constitute the 
                                                                                       under Regulations section 1.882-5(d)(2)
assets also constitute a set of books      same results as worldwide income 
                                                                                       (iii) is not included on line 4 or line 5. 
                                           reporting under Regulations section 

2                                                                           Instructions for Schedule M-3 (Form 1120-F)(2023)

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Transactions between such disregarded      type, (5) the state or country in which it   Question A. Treaty position taken on 
entities and set(s) of books reported on   is organized, (6) the date on which it first Form 1120-F, Section II, for taxable 
line 4 are not eliminated.                 became a reportable entity partner, (7)      income. If a foreign corporation is a 
                                           the date with respect to which it is         resident in a country having an income 
Related Filing                             reporting a change in its ownership          tax treaty with the United States, answer 
Requirements—Requirements                  interest in the partnership, if applicable,  “Yes” if the corporation reports income 
of Reportable Entity Partners              (8) the interest in the partnership it owns  under the treaty method in lieu of the 
                                           or is deemed to own in the partnership,      effectively connected income rules 
Reportable entity partner.         For     directly or indirectly (as defined under     under sections 864(c) and 882. For 
purposes of these instructions, a          these instructions), as of the date with     reporting under this method in Parts II 
reportable entity partner with respect to  respect to which it is reporting, and (9)    and III, see Treatment of Items Under an 
a partnership filing Form 1065, U.S.       any change in that interest as of the        Eligible Treaty-Based Return Position to 
Return of Partnership Income, is an        date with respect to which it is reporting.  Attribute Business Profits to a U.S. 
entity that (1) owns or is deemed to 
own, directly or indirectly, under these   The reportable entity partner must           Permanent Establishment, later.
instructions a 50% or greater interest in  retain a copy of each required report it 
                                                                                        Questions B through D.     For 
the income, loss, or capital of the        makes to each partnership under these 
                                                                                        Schedule M-3, Part I, questions B 
partnership on any day of the tax year,    instructions. Each partnership must 
                                                                                        through D, use only the financial 
and (2) was required to file               retain copies of the required reports it 
                                                                                        statements of the foreign corporation 
Schedule M-3 on its most recently filed    receives under these instructions from 
                                                                                        filing Form 1120-F. If the foreign 
U.S. federal income tax return or return   reportable entity partners.
                                                                                        corporation prepares its own financial 
of income filed prior to that day.         Example 1.  A, an LLC filing a Form          statements but is controlled by another 
For purposes of these instructions,        1065 for 2023, is owned 50% by Z, a          corporation (U.S. or foreign) that 
(1) the owner of a disregarded entity is   foreign corporation engaged in a trade       prepares financial statements that 
deemed to own all corporate and            or business within the United States. A      include the foreign corporation, the 
partnership interests owned or deemed      owns 50% of each of B, C, D, and E,          foreign corporation must use for its 
to be owned under these instructions by    each of which is also an LLC filing a        Schedule M-3, Part I, its own financial 
the disregarded entity; (2) the owner of   Form 1065 for calendar year 2023. Z          statements rather than the financial 
50% or more of a corporation by vote on    was first required to file Schedule M-3      statements of the controlling 
any day of the corporation's tax year is   (Form 1120-F) for its corporate tax year     corporation. These financial statements 
deemed to own all corporate and            ended December 31, 2022, and filed its       are used for completing line 4.
partnership interests owned or deemed      Form 1120-F with Schedule M-3 for 
to be owned under these instructions by    2022 on October 16, 2023. As of              Non-consolidated financial 
the corporation during the corporation's   October 17, 2023, Z was a reportable         statement.   A foreign corporation's 
tax year; (3) the owner of 50% or more     entity partner with respect to A and,        “non-consolidated” financial statement 
of partnership income, loss, or capital    through A, with respect to B, C, D, and      may include a financial statement which 
on any day of the partnership tax year is  E. On November 6, 2023, Z reports to A,      reports a consolidation of entities or 
deemed to own all corporate and            B, C, D, and E, as it is required to do      subsidiaries that the foreign corporation 
partnership interests owned or deemed      within 30 days of October 17, that Z is a    owns. In such a case, the net income or 
to be owned under these instructions by    reportable entity partner directly owning    (loss) of such entities or subsidiaries 
the partnership during the partnership     (with respect to A) or deemed to own         would be included in the amount 
tax year; and (4) the beneficial owner of  indirectly (with respect to B, C, D, and E)  reported on line 4 and, except for 
50% or more of the beneficial interest of  a 50% interest. Therefore, because Z         disregarded entities, would be 
a trust or nominee arrangement on any      was a reportable entity partner for 2023,    eliminated by reporting these amounts 
day of the trust or nominee arrangement    each of A, B, C, D, and E is required to     on line 7 (see line 7, later). Any 
tax year is deemed to own all corporate    file Schedule M-3 (Form 1065) for 2023,      adjustments associated with removing 
and partnership interests owned or         regardless of whether they would             such amounts would be reported on 
deemed to be owned under these             otherwise be required to file                line 8.
instructions by the trust or nominee       Schedule M-3 for that year. Z must           Example 2.   FC1 is a foreign 
arrangement.                               retain a copy of each of the required        corporation other than a bank, resident 
                                           reports it makes to A, B, C, D, and E        in Country X, and engaged in a trade or 
Reporting requirements of                  under these instructions, including the      business in the United States. FC1 is 
reportable entity partner.   A             reports it makes on November 6, 2023.        required to file Form 1120-F. FC1 
reportable entity partner with respect to                                               reports on Schedule L more than $10 
a partnership (as defined above) must      Specific Instructions for                    million in assets and, therefore, is 
report the following to the partnership                                                 required to file Schedule M-3. FC1 is 
within 30 days of first becoming a         Part I—Financial 
                                                                                        owned 100% by FC, its non-banking 
reportable entity partner and, after first Information and Net                          parent corporation also resident in 
reporting to the partnership under these   Income (Loss)                                Country X. FC1's net income (loss) 
instructions, thereafter within 30 days of                                              results are included in a certified audited 
the date of any change in the interest it  Reconciliation
                                                                                        consolidated financial statement of FC. 
owns or is deemed to own, directly or      When To Complete Part I                      FC1 also has an unconsolidated 
indirectly, under these instructions, in   Part I must be completed for any tax         financial statement that is not certified. 
the partnership: (1) its name, (2) its     year for which the foreign corporation       In answering questions B through D, 
mailing address, (3) its taxpayer          files Schedule M-3.                          FC1 may not use FC's consolidated 
identification number (TIN or EIN), if                                                  financial statement. FC1's 
applicable, (4) its entity or organization                                              “non-consolidated financial statement” 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                                  3

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is its own unconsolidated, worldwide Part I, lines 2b and 2c, regarding reportable on Schedule L are excluded
financial statement, which is a restatements of income statements, from line 4 unless they are included in
statement described in question C. If FC refer to the income statement issued by the corporation's financial consolidation
was also engaged in a trade or business the corporation filing the U.S. income of its Schedule L books in accordance
within the United States with reportable tax return. Answer “Yes” on lines 2b with the bank's ordinary and
assets over $10 million, then FC would and/or 2c if the corporation's annual consistently applied internal accounting
be required to file its own Schedule M-3 income statement has been restated for practices. Disregarded entities
and would be required to use its any reason. Attach a statement includible in Schedule L that are not
certified audited financial statement providing a short explanation of the included in a non-tax financial
described in question B. In such reason for the restatement for each consolidation of the corporation's
circumstances, FC1 would continue to applicable period, including the original Schedule L books in accordance with
use its own non-consolidated statement amount and restated amount of each the bank's ordinary and consistently
described in question C. annual statement period's net income. applied internal accounting practices,
Example 3. Same facts as are separately reported on Part I, line 5.
Example 2, except FC1 is a disregarded Line 3. Publicly Traded Stock Ordinary and consistent internal
entity. Under U.S. tax principles, FC is accounting practices. If the foreign
the taxpayer treated as directly engaged If the foreign corporation's stock is bank's ordinary and consistently applied
in trade or business within the United traded on any exchange, domestic or accounting practices include the
States and is required to file Form foreign, please report the name of the consolidation of more than one set of
1120-F and Schedule M-3. FC's exchange(s) on the line provided. If books that is reportable on Schedule L,
“non-consolidated” financial statement additional room is needed, attach a as determined under Regulations
is its consolidated, certified audited statement. section 1.882-5(d)(2)(iii), the foreign
financial statement, described in bank may use such consolidated books
question B, because it is the financial For purposes of line 3, if the foreign for completing Part I, line 4. If additional
statement of the company engaged in a corporation's stock is not publicly traded set(s) of books that constitute
trade or business within the United (as defined above) and its voting stock Schedule L books are not included in
States that is required to file Form is owned or controlled 50% or more by the consolidated books, then such other
1120-F and Schedule M-3. FC's another foreign corporation whose stock Schedule L books must also be
consolidated entities (other than any is publicly traded (as defined above), reported on line 4, or if such other books
disregarded entities) are eliminated as check the “Yes” box and report the are set(s) of books of includible
“non-includible” entities on Part I, line 7. name of the exchange(s) on the line disregarded entities, they must be
provided. The foreign corporation reported on line 5. Interbranch
Line 1. Foreign Banks Described in whose stock is publicly traded does not transactions between the Schedule L
Regulations Section 1.882-5(c)(4) need to file Schedule M-3 (Form books must be eliminated and reported,
1120-F) unless such corporation is also if necessary, on line 8.
engaged in a trade or business within If the foreign bank does not have the
If a foreign corporation is a foreign bank the United States and has reportable certified audited financial statements
described in Regulations section assets of $10 million or more. described in question D, the bank
1.882-5(c)(4), answer “Yes” to Part I,
line 1. Special rules pertain to the should use any other financial statement
corporation for Part I, lines 4 through 11. Line 4. Net Income (Loss) From the from which the balance sheet reported
For Schedule M-3 purposes, a foreign Income Statement Identified in on Form 1120-F, Schedule L, is derived.
bank is defined based on section 581 Part I, Line 1 For this purpose, the term “any other
principles with respect to its banking financial statement” includes unaudited
activities on a worldwide level, without Part I, line 4, reports the net income financial statements prepared by the
regard to whether it conducts a banking (loss) from the applicable income corporation under the method of
trade or business within the United statement identified in Part I, line 1. accounting generally used by the
States. These requirements include corporation's U.S. operations. If no such
having a substantial part of its Foreign banks. If the foreign bank statements are available, trial balances
worldwide business consist of receiving has the type of non-consolidated, prepared from general ledgers or similar
deposits and making loans and worldwide financial statement described other records should be used.
discounts, or of exercising fiduciary in question B or C, the foreign bank
powers similar to those permitted to should check the “Yes” box for the Foreign corporations other than
national banks. In addition, the foreign applicable question B or C. However, do banks. If the foreign corporation is not
corporation must be subject to bank not report these results on Part I, line 4, a bank, Part I, questions B, C, and D,
regulatory supervision in its country of unless the foreign bank also chooses provide a hierarchy of applicable income
incorporation. worldwide reporting of the set(s) of statements for reporting on Part I, line 4.
books on Form 1120-F, Schedule L, If the corporation has the
Line 2. Questions Regarding under Regulations section 1.6012-2(g) non-consolidated, worldwide, certified
(1)(iii). If the foreign bank has certified audited financial statement described in
Income Statement Period and audited financial statements from which question B, report the net income (loss)
Restatements the balance sheet reported on Form from such statements on line 4. If the
1120-F, Schedule L, is derived (as corporation does not have a financial
Enter the beginning and ending dates described in question D), the net statement of that type but does have the
on line 2a for the corporation's annual income (loss) from such statements is non-consolidated, worldwide, unaudited
income statement period ending with or used to complete line 4, except that any financial statement described in
within the current tax year. disregarded entities whose results are question C, report the net income (loss)

4 Instructions for Schedule M-3 (Form 1120-F)(2023)

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from such statements on line 4. These includible disregarded entities reported depending on the foreign corporation's
unaudited financial statements should on line 5. accounting principles. However,
first include those prepared by the inclusion of disregarded entities will be
corporation under the method of Line 5. Net Income (Loss) From necessary on line 5 when a taxpayer
accounting generally used by the Includible Disregarded Entities has reported on Part I, line 4, amounts
corporation. If no such unaudited from financial statements described in
statements are available, other financial (“Includible Entities”) question D or similar unaudited
statements may be used, including trial statements.
balances prepared from the Include the net income (loss) of any
corporation's worldwide books and disregarded entity that is not included in Adjustments for intercompany
records that are based on the method of the income reported on Part I, line 4, but transactions between the foreign
accounting generally used by the should be included in Part I, line 11. The corporation and includible disregarded
corporation. financial results of disregarded foreign entities may be required. See the
entities are reported on lines 5a instructions for Part I, line 8, later.
If the foreign corporation has none of (income) and 5b (loss), and the financial All foreign corporations. Attach a
these financial statements, then the net results of disregarded U.S. entities are supporting statement that lists for each
income (loss) derived from the set(s) of reported on lines 5c (income) and 5d includible disregarded entity reported on
books described in question D is used (loss). The applicable financial lines 5a through 5d the name, EIN (if
to report net income (loss) on line 4, statement of the disregarded entity to be applicable), and net income (loss) per
excluding disregarded entities. All used is determined first under question the financial statement of that includible
disregarded entities are reported on B, if available, then under question C. disregarded entity.
Part I, line 5. For corporations other than However, a foreign bank should only use
banks, the set(s) of books described in the set(s) of books from the disregarded
Line 6. Net Income (Loss) Not
question D are those that give rise to entity that are reportable on Schedule L.
U.S. booked liabilities under Included on Lines 4 and 5 From
Regulations section 1.882-5(d)(2)(ii). Foreign banks. A foreign bank Includible Foreign Locations
should include on line 5 each
All foreign corporations. The disregarded entity that meets the Line 6 applies only to foreign
amount on line 4 must equal the following two conditions. corporations other than banks whose
financial statement net income (loss) for
the income statement period ending 1. The disregarded entity is either books and records are not sufficient to
with or within the tax year, as indicated itself engaged in a trade or business report worldwide income on lines 4 and
on line 2a. within the United States and has 5. Line 6 reporting will be necessary
generated income effectively connected only when the corporation does not
If the income statement period differs with it, or it is not engaged itself in a have a worldwide trial balance to report
from the corporation's tax year, the trade or business within the United its worldwide income as satisfaction of
income statement period indicated on States but has income effectively the requirements of question C. In such
line 2a applies for purposes of Part I, connected with a trade or business circumstances, the corporation will have
lines 4 through 8. within the United States of the foreign used Form 1120-F, Schedule L, books
Combined Reporting of bank; and determined under Regulations section
Schedule L set(s) of books— 2. The net income (loss) of the entity 1.882-5(d)(2)(ii) on lines 4 and 5 and will
Question D filers. All foreign banks would be includible on Part I, line 4, if need to report the net income (loss)
(and any other foreign corporation that the assets and liabilities of such entity from all non-Schedule L books on line 6.
reports on Part I, line 4, the financial were held directly by the foreign bank Line 6 reporting does not apply to
results from the set(s) of books used in rather than by the disregarded entity. corporations that are able to report
preparing Form 1120-F, Schedule L, worldwide net income (loss) on lines 4
excluding disregarded entities) must If the income of the includible and 5 from financial statements
attach a statement that identifies each disregarded entity is effectively described in questions B or C, or from
book (for example, New York Branch, connected with a trade or business worldwide trial balances.
International Banking Facility, Cayman within the United States but would not
Branch) and its net income (loss) that is have been includible on Part I, line 4, if Attach a supporting statement that
included on Part I, line 4. However, if a the assets giving rise to such income provides, by country, the name and net
foreign bank in its ordinary business were held directly by the foreign income (loss) per the financial
practice prepares a consolidation of one corporation rather than by the includible statement on Part I, line 6, of all foreign
or more books required to be reported entity, then any effectively connected locations. Foreign corporations other
on Schedule L, such consolidated income of the includible entity is than banks that have effectively
results may be reported on line 4 in lieu reported on Part II, line 23, columns (b) connected income with respect to
of reporting the separate results for through (e), instead of Part I, line 5. transactions entered into as a global
dealer in securities must report
each book in the consolidation. If a Foreign corporations other than a separately in this supporting statement
consolidation of reportable books does bank. If the foreign corporation is not a the net income (loss) for each set(s) of
not exist, then transactions recorded bank, include on line 5 all disregarded books for which the effectively
between these books must be entities not included on Part I, line 4. connected dealer income is recorded
separately eliminated and shown in the When a foreign corporation reports within each separate country. All foreign
aggregate as a separate reconciling income (loss) from a financial statement corporations must report their effectively
elimination line item on this schedule. In identified in question B or C, net income connected global dealing income in Part
such a case, report on Part I, line 8, the (loss) of a disregarded entity may or II, line 16.
eliminations for transactions between may not be included on line 4,
set(s) of books reported on line 4 and

Instructions for Schedule M-3 (Form 1120-F)(2023) 5

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Line 7. Net Income (Loss) of               Part I, line 5. For example, adjustments    on Part I, line 8, must be made. The 
Nonincludible Entities                     must be reported on line 8 to eliminate     foreign corporation must restore on 
                                           any intercompany dividends received by      Schedule M-3, Part I, line 8, the equity 
                                           the foreign corporation from any            income inclusion from that entity. If the 
This line will generally not apply to 
                                           disregarded entity whose results are        foreign corporation does not account for 
foreign banks (unless a nonincludible 
                                           included on Part I, line 5. However, if a   the entity on the equity method on its 
entity is consolidated in the Schedule L 
                                           disregarded entity is not reportable in     own general ledger, it will not have 
set(s) of books for line 4 purposes), nor 
                                           Part I (for example, because it does not    eliminated the equity income for 
does it apply to foreign corporations 
                                           give rise to U.S. booked liabilities under  non-consolidated, worldwide financial 
other than banks that report on Part I, 
                                           Regulations section 1.882-5(d)(2)(iii)),    statement purposes, and therefore will 
lines 4 and 5, income (loss) from the 
                                           the dividend received by the foreign        have no elimination of equity income to 
financial statements described in 
                                           bank is not eliminated on Part I, line 8.   reverse.
question D. For other corporations, 
                                           Instead, the dividend is eliminated as an 
remove the net income (in line 7a) or                                                  The attached supporting statement 
                                           interbranch transaction on Part II, line 3, 
loss (in line 7b) of any other entity                                                  for Part I, line 8, must identify the type 
                                           column (c).
whose income (loss) is reported on Part                                                (for example, minority interest, 
I, line 4, but should be excluded from     Foreign corporations other than             intercompany dividends, etc.) and 
Part I, line 11. Examples of such entities banks. For foreign corporations other       amount of consolidation or elimination 
are the foreign corporation's              than a bank, adjustments are necessary      entries reported, as well as the names 
subsidiaries (other than disregarded       in order to ensure that the consolidation   of the entities to which they pertain. It is 
entities) and partnerships that were       entries and intercompany elimination        not necessary to report intercompany 
combined with the corporation in the       entries included in the amount reported     eliminations that net to zero on Part I, 
type of consolidated financial statement   on Part I, line 11, are only those          line 8, such as intercompany interest 
described in questions B or C. Do not      applicable to worldwide income of the       income and expense. For instance, if 
remove in Part I the financial statement   non-consolidated foreign corporation.       the foreign corporation reports interest 
net income (loss) of any nonincludible     Adjustments on line 8 may be with           income on Part I, line 4, from 
entity accounted for in the financial      respect to transactions between the         transactions with a disregarded entity 
statements on the equity method.           foreign corporation and either a            included on Part I, line 5, it is not 
Adjustments are made for these entities    disregarded entity reported on Part I,      necessary to report the offsetting gross 
on Part II, lines 8 through 11.            line 5, or a nonincludible entity reported  interest income and gross interest 
                                           on Part I, line 7. Adjustments for          expense on Part I, line 8.
  In addition, on Part I, line 8,          transactions with nonincludible entities    Example 4. F is a foreign 
adjustments for intercompany               are required only when the foreign          corporation other than a bank and has a 
transactions between the foreign           corporation reports worldwide income        fiscal financial and tax year end. F files 
corporation and nonincludible entities     on Part I, line 4, from a financial         Form 1120-F because it engaged in a 
may be required. See instructions for      statement described in Part I, questions    trade or business within the United 
line 8.                                    B or C. For example, adjustments must       States and is required to file 
                                           be reported on line 8 to remove minority    Schedule M-3. F owns two U.S. 
  Attach a supporting statement that       interests and to reverse the elimination    subsidiaries, S1 and S2, and has made 
provides the name, EIN (if applicable),    of intercompany dividends included on       a check the box election for S1 to be 
and net income (loss) per the financial    Part I, line 4, that relate to the net      treated as a disregarded entity. Both S1 
statement or books and records             income of entities removed on Part I,       and S2 have the same fiscal year end as 
included on line 4 that is removed on      line 7, because the income to which the     F. In addition, F's home country 
this line 7 for each separate              consolidation or elimination entries        accounting rules require the inclusion of 
nonincludible entity.                      relate has been removed. In addition,       S2's income and expenses in F's 
                                           consolidation or elimination entries must   non-consolidated, worldwide, certified 
Line 8. Adjustments to                     be reported on line 8 to eliminate any      audited financial statements. However, 
                                           intercompany dividends received by the      S1's income and expenses are not 
Intercompany Transactions                  foreign corporation from any                included in F's non-consolidated, 
                                           disregarded entity whose results are        worldwide, certified audited financial 
Include on Part I, line 8 (i) adjustments  included on Part I, line 5.                 statements.
to consolidation entries and elimination 
entries that are contained in the amount   Special treatment of equity                 On Schedule M-3, F must check 
reported on Part I, line 4 (see line 4     method inclusions for a foreign             “Yes” to question B. F must report its net 
instructions), required as a result of     corporation other than a bank.         If a income (loss) from its non-consolidated, 
adding amounts on Part I, lines 5 and 6;   foreign corporation other than a bank       worldwide, certified audited financial 
and (ii) amounts of any additional         reports worldwide income on Part I,         statements on Part I, line 4. On Part I, 
consolidation entries and elimination      line 4, and is an owner of an interest in   line 5, F must include the net income 
entries that are required as a result of   another entity that (1) is accounted for in (line 5c) or loss (line 5d) generated by 
removing amounts on Part I, line 7.        the foreign corporation's separate          S1, the disregarded U.S. entity. 
                                           general ledger on the equity method,        Because S2 is included in the 
  Foreign banks. For foreign banks,        and (2) is fully consolidated in the        non-consolidated, worldwide, certified 
adjustments are necessary to account       foreign corporation's worldwide financial   audited financial statements, it is not 
for the elimination of certain             statements (thus eliminating the equity     reported on Part I, line 5, since it is 
transactions between the Schedule L        inclusion) and, if that entity is also      already included on Part I, line 4.
books reported on line 4 and for           reported on Part I, line 7, as a            Any adjustments necessary to 
transactions between the foreign bank      nonincludible entity, then an adjustment    remove intercompany transactions 
and each disregarded entity reported on 

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between F and S1 must be reported on disregarded entity FDE2 with net loss of engaged in trade or business within the
Part I, line 8. ($5,000). FDE1 and FDE2 do not have United States and required to file Form
any effectively connected income and 1120-F and Schedule M-3. FC has
Line 9. Adjustments to Reconcile do not have books that give rise to U.S. certified audited income statements that
Income Statement Period to Tax booked liabilities under Regulations report its non-consolidated, worldwide
section 1.882-5(d)(2)(ii). FC reports net net income and unaudited income
Year income on these financial statements of statements for the set(s) of books it
$50,000. In addition, FC has foreign reports on Schedule L for its trade or
Include on line 9 any adjustments locations that are not included in such business within the United States. FC
necessary to reconcile differences income statements. These locations do reports net income on the set(s) of
between the income statement period not have effectively connected income books of its trade or business within the
reported on line 2a and the on set(s) of books that give rise to U.S. United States of $50,000, which
corporation's tax year. Attach a booked liabilities. The financial net includes the results of U.S. disregarded
supporting statement identifying the income of such foreign locations is entity USDE1 with net income of
type of transaction and amount of each $25,000. $15,000 and U.S. disregarded entity
adjustment. USDE2 with a net loss of ($5,000).
FC must answer “No” to questions B
through D in Part I. FC must report on Although FC must answer “Yes” to
Line 10. Other Adjustments to Part I, line 4, $35,000 (total income question B, FC must not report on Part I,
Reconcile to Amount on Line 11 reported of $50,000, excluding the line 4, the results of these
results of FDE1 and FDE2). On Part I, non-consolidated, worldwide, certified
Include on line 10 any other line 5a, FC will include the $20,000 of audited income statements. FC must
adjustments, not reportable on lines 5 net income of FDE1 and will include on also answer “No” to question D. FC must
through 9, to reconcile net income (loss) Part I, line 5b, the ($5,000) net loss of report on Part I, line 4, the amount from
on Part I, line 4, with net income (loss) FDE2. The net income of $25,000 from the unaudited income statements for the
on Part I, line 11. foreign locations must be included on set(s) of books it reports on Schedule L
Part I, line 6, such that $75,000 is the of $40,000 (total income reported of
For any adjustments reported on Part net income reportable on line 11. $50,000, excluding the results of
I, line 10, attach a supporting statement Example 6. Foreign corporations USDE1 and USDE2 which also give rise
that provides, for each entity to which an other than a bank. FC is a non-bank to effectively connected income and are
adjustment relates, the name and EIN (if foreign corporation engaged in trade or set(s) of books included in Form 1120-F,
applicable) of the entity, the nature of business within the United States and is Schedule L). On Part I, line 5c, FC will
the adjustment, the amount of net required to file Form 1120-F and include the $15,000 of net income of
income (loss) included in Part I before Schedule M-3. FC owns NI, a C USDE1 and will include on Part I,
any adjustments on line 10, and the corporation for federal income tax line 5d, the ($5,000) net loss of USDE2.
amount of net income (loss) included on purposes. FC has certified audited Assuming no other adjustments are
Part I, line 11. income statements that report its required on Part I, lines 8 through 10,
worldwide income and that of NI. FC the net income reported on Part I, line 4,
Line 11. Adjusted Financial Net reports net income on these statements is $40,000, and the net income reported
Income (Loss) of the of $120,000. Included in these results on line 11 is $50,000.
Non-Consolidated Foreign are foreign disregarded entity FDE1 with Specific Instructions for Parts II
net income of $30,000, foreign and III
Corporation disregarded entity FDE2 with net loss of
($5,000), and NI's net income of General Reporting Information
The sum of lines 4 through 10 $40,000. FDE1 and FDE2 both have
constitutes the adjusted financial net effectively connected income that gives A statement or explanation may be
income (loss) of the non-consolidated rise to U.S. booked liabilities. Interest attached to any line item even if none is
foreign corporation that is to be income of $5,000 received by FC from required. For each line item in Parts II
reconciled in Parts II and III with the NI is eliminated in the preparation of and III, report in column (a) the amount
foreign corporation's taxable income these statements. of the item included in the net income
reported on Form 1120-F, Section II, (loss) reported on Part I, line 11. For
FC must answer “Yes” to question B.
line 29. each line item, report in column (e) the
FC must report on Part I, line 4,
Example 5. Foreign corporations $120,000. The results of FDE1 and amount included in determining taxable
other than a bank. FC is a non-bank FDE2 are not reported on Part I, line 5, income (loss) on Form 1120-F,
foreign corporation engaged in trade or since their results are already included Section II, line 29.
business within the United States and on Part I, line 4. NI's income of $40,000
required to file Form 1120-F and is reported on Part I, line 7, because NI Columns (b), (c), and (d)
Schedule M-3. FC does not have is a nonincludible entity. The $5,000 of
income statements that report its interest income is reported on Part I, The temporary and permanent
non-consolidated, worldwide income, line 8. Assuming no other adjustments differences reportable in columns (b)
but FC does have unaudited income are required on Part I, lines 9 and 10, and (c) are those book-to-tax
statements for the set(s) of books it the total income reported on Part I, differences determined through a
reports on Schedule L with respect to its line 11, is $85,000 ($120,000 – $40,000 comparison of the financial statement
trade or business within the United + $5,000). and tax amounts, under the Code or an
States. Included in these results are applicable income tax treaty, for each of
Example 7. Foreign bank. FC is a
foreign disregarded entity FDE1 with net the line items included on Part I, line 11,
foreign corporation that is a bank
income of $20,000 and foreign and shown in Parts II and III.

Instructions for Schedule M-3 (Form 1120-F)(2023) 7

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  Column (b). Temporary                    under U.S. tax principles and also be         expense in Part III, line 26. Expenses 
book-to-tax differences.   In column       apportioned to non-ECI under section          allocable from Schedule H, line 20, are 
(b), report the book-to-tax difference for 864(c). In such cases, a permanent            reportable in Part III, line 31, in columns 
each item expected to reverse in a         difference may not be double counted          (d) and (e) as a positive number.
future year or which reverses a prior      by including it a second time in column 
year difference (whether or not so         (d). In such circumstances, where an          Column (d). Foreign corporations 
reported on a prior year's                 amount includible in column (a) is both a     other than banks.  Foreign 
Schedule M-3). Temporary differences       permanent difference and apportionable        corporations other than banks use 
that increase the amount shown in          to non-ECI, the amount is reported in         column (d) to report apportionments 
column (a) are reported as a positive      column (c) and not in column (d).             only to non-ECI. In Part II, column (d), 
number.                                    Accordingly, non-ECI tax-exempt               report apportionments of income as a 
                                           interest is reported in column (c) as a       negative amount and report losses as a 
  Column (c). Permanent                    permanent difference under U.S. tax           positive number. Combine columns (a), 
book-to-tax differences.   In column       principles. No additional apportionment       (b), (c), and (d) to reconcile the amount 
(c) report any book-to-tax difference not  is necessary in column (d) for such           apportioned to ECI in column (e). For 
expected to reverse in a future year, and  amounts.                                      Part III, except for lines 26 and 31, report 
that also does not constitute a reversal                                                 expenses that are apportioned to 
of a prior year difference. The            Special treatment may apply for               non-ECI as a negative number in 
determination as to whether a difference   column (c) reporting on Part III, lines       column (d). See special instructions for 
is temporary or permanent should be        26d (substitute interest payments), 26e       the reporting of interest expense on 
based on the facts available at the time   (interest equivalents), and 27 (substitute    line 26. Corporations other than banks 
the foreign corporation files its U.S. tax dividend payments). See instructions for      do not report the allocation of expenses 
return. If the foreign corporation is      those lines below.                            under Regulations section 1.861-8 from 
unable to determine whether a              Apportionments between                        Schedule H (Form 1120-F), line 20, on 
difference between column (a) and          effectively and non-effectively               Schedule M-3, Part III, line 31.
column (e) for an item will reverse in a   connected income (ECI and                     Part III, lines 26d, 26e, and 27.       In 
future tax year or reverses a prior year   non-ECI).  The combination of columns         Part III, line 26d (substitute interest 
book-to-tax difference, report the         (a), (b), and (c) results in the gross        payments), line 26e (interest 
difference for that item in column (c).    taxable income or deduction amount            equivalents), and line 27 (substitute 
  Amounts that are permanent               under U.S. tax principles for each line       dividend payments), amounts in these 
differences that reduce the income or      item in Parts II and III that is eligible for categories paid by the foreign 
expense amount shown in column (a)         allocation and apportionment between          corporation that are not included in 
are recorded as negative numbers. For      ECI and non-ECI.                              column (a) are reported in column (c) as 
example, interbranch income and                                                          a positive number. Amounts described 
expense amounts recorded on a foreign      Column (d). Foreign bank. 
bank's books reportable on Schedule L      Column (d) is used to report the portion      in lines 26d, 26e, and 27 are reported in 
(and therefore included in column (a))     of the combined amount of columns (a),        column (c) whether or not any of the 
that are disregarded under U.S. tax        (b), and (c) that is allocated and            amount is apportionable in whole or in 
principles are permanent differences       apportioned to non-ECI. If an amount          part to ECI in column (e). Column (d) is 
reportable as negative amounts in          apportioned to non-ECI is included in         used for these line items only to 
column (c).                                column (a), then report such amount as        apportion amounts to non-ECI.
                                           a negative number in column (d). If the       Example 9. FC is a foreign bank that 
  If interbranch amounts recorded on       apportioned amount included in column         is required to file Form 1120-F and 
Schedule L books are treated as            (a) is a loss, then include the               Schedule M-3. FC included on Part I, 
third-party amounts under Proposed         apportioned loss as a positive number in      line 11, $100 of interest income, of 
Regulations sections 1.863-3(h) and        column (d). Certain income may be             which $60 is effectively connected 
1.475(g)-2 of the global dealing rules, or apportioned to ECI that is not reported       tax-exempt interest income and $40 is 
recognition treatment is otherwise         on the Schedule L books and is not            noneffectively connected tax-exempt 
provided under an Advance Pricing          reportable in column (a). These               interest income. In addition, FC included 
Agreement or Mutual Agreement              amounts include allocable global              on Part I, line 11, $300 of fee and 
Procedure, then such interbranch           dealing income in Part II, line 16, and       commission income that was 
amounts are treated as amounts subject     other income from non-Schedule L              recognized for U.S. tax purposes in a 
to apportionment between non-ECI and       books reportable in Part II, line 23. Such    prior year.
ECI in columns (d) and (e) and not as      income is apportioned to ECI and              FC reports on Part II, line 4a, column 
permanent differences in column (c).       reported in column (d) as a positive          (a), the $100 of tax-exempt interest 
                                           number. For amounts reportable in Part        income. FC reports ($100) of permanent 
Note. References in Proposed               II, if the apportioned amount is a loss,      book-to-tax difference on line 4a, 
Regulations section 1.863-3(h) to          report such loss as a negative number         column (c), to eliminate the tax-exempt 
Regulations section 1.482-8 should         in column (d). In column (e), combine         interest income. No amount is 
instead refer to Proposed Regulations      the amounts in columns (a), (b), (c), and     reportable on line 4a, column (d), since 
section 1.482-8, which deals with          (d) to determine the amount of each line      all of the income is a permanent 
allocating income earned in a global       item apportioned to ECI. See special          difference under U.S. tax principles 
dealing operation.                         reporting instructions for reporting          without regard to its allocation between 
  Amounts that are apportionable to        amounts in column (d) for substitute          effectively and noneffectively connected 
non-ECI are generally reportable only in   dividends and substitute interest income      income. FC also includes on Part II, 
column (d). However, some amounts          in Part II, lines 3c and 4b, and for the      line 7, column (a), the $300 of fee and 
may be both permanent differences          allocation and apportionment of interest      commission income. Since this amount 

8                                                                          Instructions for Schedule M-3 (Form 1120-F)(2023)

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was already recognized in a prior year otherwise reportable based on Code a U.S. permanent establishment under
for U.S. tax purposes, FC reports on principles, either (1) attach a separate Article 7 (Business Profits) of an
line 7, column (b), a temporary statement identifying each such line applicable income tax treaty, the
difference of ($300). item, or (2) on Part II or III, as applicable, amounts are also includible as a
Example 10. The facts are the include footnotes or similar references book-to-tax difference if they are
same as in Example 9, except the $100 for each such item to indicate that a reported in business profits under an
of tax-exempt interest is not included on treaty-based position was claimed for eligible treaty-based tax return position.
Part I, line 11, and is therefore excluded determining the amount reportable in Such amounts are reported as
from Part II, line 4, column (a). Because column (e). If no amount is reportable in permanent differences in column (c)
the $100 of tax-exempt interest income column (e), see Treaty-based reporting, and included in column (e). Third-party
is allocable to both ECI and non-ECI, it later. amounts included in worldwide income
that are not attributable to the U.S.
has significance in determining the Interbranch reporting. If the permanent establishment should be
allocation of expenses under indirect foreign corporation is a foreign bank reported in the following manner.
methods under Regulations section electing to use an eligible treaty,
1.861-8, and is therefore required to be interbranch income and expense and Columns (b) and (c). Temporary
reported on Part II, line 23, as income noneffectively connected income are and permanent differences are
not included in the Schedule L books not treated as permanent differences to determined in accordance with the
that is allocable and apportionable to the extent such items are attributable to instructions for these columns, earlier,
ECI. Because no amount is includible in the U.S. permanent establishment and except that each line in column (e) is as
column (a), the full $100 of tax-exempt are also included in the net income determined below.
interest is reported in column (d) as a (loss) reported on Part I, line 11. For any
positive number and in column (c) as a item reported on Part I, line 11, that is Column (d). Differences for
negative number. As a result, there is no attributable to the foreign corporation's amounts not attributable to a U.S.
amount reportable in column (e). U.S. permanent establishment, such permanent establishment are reported
Treatment of Items Under an amounts may have temporary as a negative number in column (d).
differences under U.S. tax principles (for Differences for losses not attributable to
Eligible Treaty-Based Return example, depreciation deductions a U.S. permanent establishment are
Position to Attribute Business includible in column (a) may have reported as a positive number in Part II.
Profits to a U.S. Permanent temporary book-to-tax differences Column (e). Combine columns (a),
Establishment reportable in column (b)). For amounts (b), (c), and (d) and report the income or
reported in Part II, column (a), do not
If a foreign corporation elects to use an deduction for each line item that is
report as permanent differences
eligible treaty that provides a includible in business profits attributable
interbranch interest or other interbranch
permissible method other than the rules to the U.S. permanent establishment in
income in column (c) or noneffectively
of section 864(c) and 882 to determine column (e).
connected income including foreign
its business profits attributable to a U.S. Example 11. Treaty-based
related party interest, dividends or
permanent establishment, the foreign reporting of business profits of a
royalties that are not effectively
corporation must report on Form 1120-F, foreign bank. FC is a foreign bank
connected income under section 864(c)
Section II, its business profits that has three sets of books that give
(4)(D) in column (d) to the extent such
attributable to its U.S. permanent rise to U.S. booked liabilities under
amounts are attributable to the U.S.
establishment under such income tax Regulations section 1.882-5(d)(2)(iii)
permanent establishment under the
treaty that applies the OECD Transfer and that are reportable on Form 1120-F,
OECD Transfer Pricing Guidelines,
Pricing Guidelines in lieu of the Schedule L. Two of the books are
applied by analogy. Report on any such
effectively connected income rules of maintained in the United States by its
applicable lines in Part II or III using
sections 864 and 882. In such a case, U.S. branch. The third book is a portfolio
either of the methods of identification
the treatment of items in columns (c) of effectively connected loans that are
specified under Foreign bank
and (d) must be adapted to apply the recorded, managed, and funded in FC's
treaty-based reporting above, indicating
concepts of the applicable treaty. home office in Country X. The three
that the amount reported in column (e)
Foreign bank treaty-based reporting. reflects interbranch income or loss books are consolidated for Form 1120-F,
For foreign banks, if any amounts are attributable to the U.S. permanent Schedule L, reporting purposes. FC files
not reported in Part II, column (a), as establishment. its Form 1120-F and Schedule M-3
part of the set(s) of books that constitute under an eligible treaty to report its
Treaty-based reporting for foreign
the books of the U.S. permanent business profits attributable to its U.S.
corporations other than banks.
establishment, but are attributable to the permanent establishment in lieu of
Foreign corporations other than banks
U.S. permanent establishment under reporting its net effectively connected
must include interbranch income and
application of the OECD Transfer Pricing income under sections 864(c) and 882.
expense as book-to-tax differences to
Guidelines, such amounts are included The two books maintained in the United
the extent such items are not included in
as permanent differences in columns (c) States are primarily attributable to FC's
worldwide income reported on Part I,
and (d). Report in column (e) all U.S. permanent establishment. The
line 11, and such items are attributable
amounts that are business profits third set of books that constitutes a set
to the U.S. permanent establishment.
attributable to the U.S. permanent of books for Regulations section
Interbranch income should have been
establishment. When a treaty-based 1.882-5(d)(2)(iii) purposes is not
eliminated in arriving at the adjusted
position modifies the amount(s) attributable to FC's permanent
non-consolidated income reportable on
reportable for any of the line items establishment in the year FC files its
Part I, line 11. To the extent such
shown in Parts II and/or III of Form 1120-F under the treaty-based
interbranch amounts are attributable to
Schedule M-3 from the amounts method.

Instructions for Schedule M-3 (Form 1120-F)(2023) 9

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On the two books that are attributable interest expense attributable to the corporation's investment in a
to FC's U.S. permanent establishment, business profits of the U.S. permanent partnership or other pass-through entity,
FC records net book income of $175. establishment. A footnote should be and interest equivalents, all interest
(FC has the following income: $500 of included indicating that interbranch income included on Part I, line 11,
interbranch interest income, $200 of income was included in the column (e) whether from unconsolidated affiliated
noneffectively connected interest amount. companies, third parties, banks, or other
income, and $1,200 of effectively In Part III, the $325 of book expenses entities, whether from foreign or
connected income under Code-based attributable to the U.S. permanent domestic sources, whether taxable or
principles. FC has $1,000 of third party establishment are recorded in columns exempt from tax, and whether classified
interest expense and $400 of (a) and (e) in their respective categories. as some other type of income for U.S.
interbranch interest expense on the No adjustments are made in this income tax purposes (such as
books of its U.S. permanent example in column (b) for temporary dividends), must be included on Part II,
establishment that is priced at arm's differences or to business profits that line 4a, column (a). For the exceptions,
length with its home office. Each type of are not attributable to the U.S. look for the specific line in Part II.
interest expense is also attributable to permanent establishment in column (d). Similarly, all fines and penalties
its U.S. permanent establishment. On No additional expenses are attributable included in Part I, line 11, paid to a
the two sets of books maintained in the to the U.S. permanent establishment government or other authority for the
United States, FC has other third party from the home office, which would have violation of any law for which fines or
expenses of $325 attributable to the been reportable in column (d). A penalties are assessed, must be
permanent establishment.) FC also has footnote should be referenced to this included on Part III, line 11, column (a),
$100 of income attributable to its U.S. line indicating that a treaty-based regardless of the authority that imposed
permanent establishment that is position was used in determining the the fines or penalties, regardless of
recorded in its home office on set(s) of interest expense. whether the fines or penalties are civil or
books that are predominantly not criminal, regardless of the classification,
attributable to FC's U.S. permanent Schedule M-3 Reporting
nomenclature, or terminology attached
establishment. FC determines that $75 Requirements for Regulations to the fines or penalties by the imposing
of its book interest expense must be Section 1.6011-4(b) Reportable authority in its actions or documents.
disallowed after equity capital is
allocated to the U.S. permanent Transactions If a foreign corporation would be
establishment under the OECD Transfer If an amount is attributable to a required to report in column (a) of Parts
Pricing Guidelines applicable to Article 7 reportable transaction described in II and III the amount of an item
(Business Profits) of the treaty. Regulations section 1.6011-4(b), the specifically listed on Schedule M-3 in
amount must be reported in columns
FC reports $350 of treaty-based accordance with the preceding
(a), (b), (c), (d), and (e), as applicable,
profits attributable to its U.S. permanent paragraphs, except for the fact that the
of Part II, line 12 (items relating to
establishment as follows. corporation has capitalized the item of
reportable transactions), regardless of income or expense and reports the
On Part II, line 4a, column (a), $1,900 whether the amount would otherwise be amount in its financial statement
of interest income is reported for the reported on another line in Part II or Part balance sheet or in asset and liability
total interest income of the set(s) of III of Schedule M-3. Thus, if a taxpayer accounts maintained in the
books attributable to the U.S. permanent files Form 8886, Reportable Transaction corporation's books and records instead
establishment. In column (c), $100 is Disclosure Statement, the amounts of in its income statement, the foreign
reported as a permanent difference for attributable to that reportable corporation must report the proper tax
the income not included on the set(s) of transaction must be reported on Part II, treatment of the item in columns (b), (c),
books reported on Form 1120-F, line 12. (d), and (e), as applicable.
Schedule L. In column (e), the total
interest of $2,000 is reported as income A corporation is required to report in Furthermore, in applying the
attributable to the U.S. permanent column (a) of Parts II and III the amount preceding paragraphs, a foreign
establishment. of every item specifically listed on corporation is required to report in
Schedule M-3 that is in any manner column (a) of Parts II and III the amount
On Part III, line 26a, the U.S. included in the foreign corporation's of any item specifically listed on
permanent establishment's book current year income statement net Schedule M-3 that is included on Part I,
interest expense of $1,400 is reported in income (loss) or in an income or line 11, regardless of the nomenclature
column (a). The total book amount is expense account maintained in the associated with that item in the income
reversed on line 26a in either column (b) corporation's books and records, even if statements or books and records.
or (c). The $1,400 from column (a) is there is no difference between that Accurate completion of Schedule M-3
reported in columns (b) and/or (c) as a amount and the amount included in requires reporting amounts according to
negative number. This includes the $75 taxable income. However, this reporting the substantive nature of the specific
portion of the $1,400 that constitutes is not required in cases where (a) these line items included in Schedule M-3 and
equity capital allocated to the U.S. instructions provide otherwise, or (b) the consistent reporting of all transactions
permanent establishment. On Part III, amount is attributable to a reportable of like substantive nature that occurred
line 26b, column (d), the $1,325 tax transaction described in Regulations during the tax year.
amount of the interest expense (after section 1.6011-4(b) and is therefore
For example, all expense amounts
the $75 allocation of equity capital is reported on Part II, line 12.
taken into account) is reported. This that are included in the income
$1,325 amount reported in column (d) is For example, with the exception of statements or exist in the books and
carried to column (e) and constitutes the interest income reflected on a records that represent some form of
amount from line 26a that is treated as Schedule K-3 received by a foreign “Bad debt expense” must be reported
corporation as a result of the on Part III, line 24, column (a),

10 Instructions for Schedule M-3 (Form 1120-F)(2023)

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regardless of whether the amounts are clearly identifies the item or transaction Each description should adequately
recorded or stated under different from which the difference arises. For describe all five columns of Part II,
nomenclature in the income statements further guidance about adequate line 24, or Part III, line 32. If additional
or the books and records such as: disclosure, see Regulations section information is required to provide an
“Provision for doubtful accounts,” 1.6662-4(f), Rev. Proc. 2004-45, acceptable description, provide a
“Allowance for uncollectible notes 2004-31 I.R.B. 140, and Rev. Proc. supporting statement.
receivable,” or “Impairment of trade 2005-75, 2005-50 I.R.B. 1137. If a Example 12. Temporary
accounts receivable.” Likewise, as specific item of income, gain, loss, differences. Foreign corporation FC is
stated above, all fines and penalties expense, allocation, or deduction is a calendar year taxpayer that placed in
must be included on Part III, line 11, described on Part II, lines 1 through 24, service ten depreciable, fixed, U.S.
column (a), regardless of the or Part III, lines 1 through 32, and the assets in a previous tax year. FC is
terminology or nomenclature attached line does not indicate to “attach a required to file Schedule M-3 for the
to them by the corporation in its books statement,” and the specific instructions current tax year. FC's total depreciation
and records or income statements. for the line do not call for an attachment expense for its 2023 tax year for five of
Similarly, if the fine and penalty, for of a statement, then the item is the assets is $50,000 for income
example, are ncluded in another item, considered separately stated and statement purposes and $70,000 for
the amount of the fine or penalty should adequately disclosed if the item is U.S. income tax purposes. FC's total
be segregated and included on Part III, reported on the applicable line and the annual depreciation expense for its
line 11. amount(s) of the item(s) are reported in 2023 tax year for the other five assets is
With limited exceptions, Part II the applicable columns of the applicable $40,000 for income statement purposes
includes lines for specific items of line. and $30,000 for U.S. income tax
purposes. In its income statements, FC
income, gain, or loss (“income items”). If Note. A statement or explanation may
an income item is described in Part II, be attached to any line even if none is treats the differences between income
statement and U.S. income tax
lines 1 through 23, report the amount of required.
the item on the applicable line, depreciation expense as giving rise to
regardless of whether or not there is any Except as otherwise provided, temporary differences that will reverse in
difference for the item. If there is a differences for the same item must be future years. FC must combine all of its
difference for the income item, or only a combined or netted together and depreciation adjustments. Accordingly,
portion of the income item has a reported as one amount on the for its 2023 tax year, FC must report on
difference and a portion of the item does applicable line of Schedule M-3. Part III, line 23, depreciation expense as
not have a difference, and the item is not However, differences for separate items shown on its income statement of
described in Part II, lines 1 through 23, must not be combined or netted $90,000 in column (a), a temporary
report and describe the entire amount of together. Each item (and corresponding difference of $10,000 in column (b), and
the item on Part II, line 24. amount attributable to that item) must U.S. income tax depreciation expense
be separately stated and adequately of $100,000 apportionable between
With limited exceptions, Part III disclosed on the applicable line of non-ECI and ECI in column (d) and
includes lines for specific items of Schedule M-3, or any statement column (e).
expense, allocation, or deduction required to be attached, even if the
(“expense items”). If an expense item is amounts are below a certain dollar Example 13. Bad debt and
described on Part III, lines 1 through 31, amount. warranty reserves. Foreign
report the amount of the item on the Corporation D files and completes
applicable line, regardless of whether or Required statements for Part II, Schedule M-3 for its 2023 tax year. The
not there is a difference for the item. If line 24, and Part III, line 32. A income statement year is identical to the
there is a difference for the expense separate statement must be attached to tax year. On the last day of its 2023 tax
item, or only a portion of the expense Schedule M-3 (Form 1120-F) that year, D establishes two reserve
item has a difference and a portion of includes a detailed description of each accounts in the amount of $100,000 for
the item does not have a difference and item and adjustment entered on Part II, each account. One reserve account is
the item is not described in Part III, lines line 24, and Part III, line 32. an allowance for accounts receivable
1 through 31, report and describe the The description for each amount that are estimated to be uncollectible.
entire amount of the item on Part III, entered in column (a) must be readily The second reserve is an estimate of
line 32. identifiable to the name of the account future warranty expenses. Both reserves
If there is no difference between the in the financial statements or books and are only for assets that give rise to
financial accounting amount and the records of the taxpayer, under which the effectively connected income. In its
taxable amount of an entire item of amount in column (a) of the statement income statements, D treats the two
income, loss, expense, or deduction was recorded in the accounting records. reserve accounts as giving rise to
and the item is not described or Also, the description for each amount temporary differences that will reverse in
included in Part II, lines 1 through 24, or entered in column (a) must include future years. The two reserves are
Part III, lines 1 through 32, report the detailed information supporting each expenses for D's 2023 income
entire amount of the item in columns (a) adjustment reported in columns (b), (c), statements but are not deductions for
and (e) of Part II, line 27. and (d), including how the adjustment is U.S. income tax purposes in 2023. D
identified in the accounting records. The must not combine the Schedule M-3
Separately stated and adequately entire description is considered the tax differences for the two reserve
disclosed. Each difference reported in description for the amount reported in accounts. D must report the amounts
Parts II and III must be separately stated column (e) for each item reported on attributable to the allowance for
and adequately disclosed. In general, a Part II, line 24, or Part III, line 32. uncollectible accounts receivable on
difference is adequately disclosed if the Part III, line 24, Bad debt expense, and
difference is labeled in a manner that must separately state and adequately

Instructions for Schedule M-3 (Form 1120-F)(2023) 11

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disclose the amounts attributable to the column (b) without regard to its are amounts attributable to inventory
other reserve, for warranty costs, on a effectively or noneffectively connected valuation, such as amounts attributable
required attached statement that character. The amounts allocable to to cost-flow assumptions, additional
supports the amounts on Part III, line 32. noneffectively connected income are costs required to be capitalized
D must also provide a description for then determined and reported in column (including depreciation) such as section
each reserve that meets the (d). E must report the ($25,000) 263A costs, inventory shrinkage
requirements for Part III, line 32, allocable to noneffectively connected accruals, inventory obsolescence
discussed earlier under Required income in column (d) and U.S. income reserves, and lower of cost or market
statements for Part II, line 24, and Part tax bad debt expense of $50,000 in (LCM) write-downs. Attach a statement
III, line 32. In this example, an column (e). separately stating each item included on
acceptable description would be “Future this line and the amount for each
Warranty Expense Reserve.” Specific Instructions for column.
Part II. Reconciliation of
Note. There is no need to add the title Do not report the following on this
of the reserve account to the description Net Income (Loss) per line 2:
if the account name for the amount in Income Statement of • Amounts reportable on Part II, line 12;
column (a) is already part of the Non-Consolidated Foreign • Any gain or loss from inventory
adjustment description. hedging transactions reportable on Part
Corporations With Taxable II, line 13;
Example 14. Non-ECI and ECI • Mark-to-market income or (loss)
Income per Return
apportionment of temporary under section 475 reportable on Part II,
Note. Foreign corporations report, on
differences. Corporation E files and line 14;
lines 1 through 17, 19 through 21a, 24,
completes Schedule M-3 for its 2023 tax • Global dealing income reportable on
and 27 in column (a), the income (loss)
year. The income statement year is Part II, line 16;
items included in the financial net
identical to the tax year. At the • Section 481(a) adjustments related to
income (loss) reported on Part I, line 11.
beginning of the tax year, E establishes cost of goods sold or inventory valuation
See the instructions for Part I, line 11, for
an allowance for uncollectible accounts reportable on Part II, line 18;
reporting differences between foreign
receivable (bad debt reserve) of • Original issue discount, imputed
banks and foreign corporations other
$100,000, all of which is related to interest, and phantom income
than a bank.
assets that give rise to effectively reportable on Part II, line 20;
connected income. During 2023, E Tiebreaker rules. There are tiebreaker • Fines and penalties reportable on
increased the reserve by $250,000 for rules described in detail below under Part III, line 11;
additional accounts receivable that may each applicable line instruction for Part • Judgments, damages, awards, and
become uncollectible, of which II. For example, for foreign corporations similar costs, reportable on Part III,
$150,000 is related to assets that give that report income from their U.S. trade line 12;
rise to effectively connected income. or business associated with global • Amounts reported on Part II, line 17,
Additionally, during 2023, E decreases dealing activities in securities or Sales versus lease; and
the reserve by $75,000 for accounts financial instruments, global dealing • Amounts reported on Part III, line 25,
receivable that were discharged in income is prioritized on line 16 even Purchase versus lease.
bankruptcy during 2023, of which though some income or loss amounts in
$50,000 is related to assets that give the global dealing book might otherwise Lines 3a and 3b. Dividends
rise to effectively connected income. appear to be reportable on another line Report on lines 3a through 3b, column
The balance in the reserve account on (for example, dividends on line 3a or 3b, (a), the amount of dividends included on
the last day of the 2023 tax year is or hedges on line 13). Part I, line 11, from foreign and U.S.
$275,000, of which $200,000 relates to entities. Report on lines 3a through 3b,
assets that give rise to effectively Line 1. Gross Receipts or Sales
column (e), the amount of any dividends
connected income. The $100,000 Enter total gross receipts or sales net of included in taxable income on Form
amount to establish the reserve account returns and allowances. In column (e), 1120-F, Section II, line 4. Do not include
and the $250,000 to increase the enter the amount from Form 1120-F, on lines 3a through 3b dividends from
reserve account are expenses on E's Section II, line 1c. Do not report gross global securities dealings which are
2023 income statements, but are not receipts resulting from reportable reportable on Part II, line 16b, or
deductible for U.S. income tax purposes transactions (line 12), sale of securities dividends reported elsewhere (for
in 2023. However, of the $75,000 that are marked to market (line 14), example, substitute dividends
decrease to the reserve, only $50,000, currency gains and losses from other reportable on line 3c and reportable
which is attributable to assets that give section 988 transactions (line 15), or transactions reportable on line 12). Any
rise to effectively connected income, is receipts or sales of securities from effectively connected dividends from
deductible for U.S. income tax purposes global securities dealings (line 16). corporations reported by the foreign
in 2023. Line 2. Cost of Goods Sold corporation under the equity method are
reported in columns (c) and (e) of this
In its income statements, E treats the Report on line 2 any amounts treated as
line, as described in the instructions for
reserve account as giving rise to a part of cost of goods sold during the tax
Part II, line 8.
temporary difference that will reverse in year, regardless of whether the amounts
future tax years. For its 2023 tax year, E would otherwise be reported elsewhere Line 3c. Substitute Dividend
must report its income statement bad in Part II or Part III. However, do not Payments Received
debt expense of $350,000 in Part III, report the items mentioned in the next
line 24, column (a). The temporary paragraph on this line 2. Examples of Report on line 3c, the gross substitute
difference of ($275,000) is determined amounts that must be included on line 2 dividend payments received with
under U.S. tax principles and reported in respect to securities loans under section

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1058 or substantially similar             are sourced and characterized as U.S.       eliminate all $100 of the tax-exempt 
transactions, or from sale repurchase     source dividends. Under FC's treaty with    interest income (including the 
transactions, as described in             the United States, the dividends are        noneffectively connected portion) and 
Regulations sections 1.861-3(a)(6),       subject to a 15% gross basis tax.           all $600 of the interbranch interest 
1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do  The substitute payments are not             income. FC must also report ($150) of 
not net substitute dividend payments      reportable on Part I, line 11, or Part II,  noneffectively connected interest 
received against any substitute dividend  line 3c, column (a). FC must report $200    income from its “10% rule securities” in 
payments made by the foreign              of dividends on line 3c, column (c), as a   column (d) as a negative amount. FC 
corporation to another securities lender. positive number. On line 3d, column (d),    combines columns (a), (b), (c), and (d) 
Foreign banks—worldwide report-           the $200 is reported as a negative          and reports $1,150 of effectively 
ing. Foreign banks must also report in    number. FC enters zero in column (e).       connected interest income in column 
column (c) all U.S. source substitute     On Form 1120-F, Section I, FC must          (e).
dividend payments received as             report the substitute dividends received    Line 4b. Substitute Interest 
beneficial owner to the extent they are   that are not properly withheld upon and 
not already included on Part I, line 11,  reported by the withholding agent on        Payments Received
and without regard to whether such        Form 1042-S.                                Report on line 4b the gross substitute 
                                                                                      interest payments received with respect 
payments received are effectively         Line 4a. Interest Income                    to securities loans under section 1058, 
connected income. For example, 
substitute dividends received by a        Excluding Interest Equivalents              sale repurchase transactions, or similar 
foreign bank that are not reported on     Report on Part II, line 4a, column (a), the transactions, as described in 
Form 1120-F, Schedule L, must be          total amount of interest income included    Regulations sections 1.861-2(a)(7), 
reported as U.S. source payments          on Part I, line 11, and report on Part II,  1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do 
received in column (c) and reversed to    line 4a, column (e), the total amount of    not net substitute interest payments 
the extent of the non-ECI portion of the  interest income included on Form            received against substitute interest 
payments in column (c) as a negative      1120-F, Section II, line 5, that is not     payments made by the foreign 
number in column (d). Reporting in        required to be reported elsewhere in        corporation with respect to any section 
columns (c) and (d) for substitute        Part II. In column (b) or (c), as           1058 sale repurchase transactions, 
dividends is required even if no amount   applicable, adjust for amounts treated      including payments made with respect 
would be reported in columns (a) and      for U.S. income tax purposes as interest    to “matched book” transactions, or any 
(e). Any U.S. source substitute           income that are treated as some other       similar transaction.
dividends that are effectively connected  character of income in the income           Foreign banks—worldwide report-
with the foreign corporation’s trade or   statements, or vice versa. All              ing. Foreign banks must report all U.S. 
business within the United States are     interbranch interest income included on     source substitute interest payments 
reportable in column (e). Do not report   Part I, line 11, that is excluded from      received as beneficial owner, whether or 
on any line substitute dividend           taxable income is reported as a             not such payments are included in Part 
payments received in custody for          permanent difference in column (c). For     I, line 11, and are effectively connected 
another owner of the substitute payment   foreign corporations other than banks,      income. All U.S. sourced substitute 
or such payments reportable on            see the instructions for Part I, line 8,    interest received by a foreign bank that 
line 16b.                                 regarding eliminations of interbranch       is not reported on Form 1120-F, 
                                          transactions.
Example 15.  FC, a foreign bank                                                       Schedule L, is reportable in column (c) 
                                                                                      and the non-ECI portion is reversed as a 
resident in Country X, is engaged in a    Do not report on this line 4a, in any       negative amount in column (d). Both 
banking trade or business within the      column, amounts reported in                 U.S. and foreign source substitute 
United States through a U.S. permanent    accordance with instructions for Part II,   interest that is effectively connected with 
establishment. FC has an income tax       lines 4b, 4c, 9 through 13, 16a, 20, and    the foreign corporation's trade or 
treaty with the United States that        23.                                         business within the United States is 
imposes a 15% tax on gross portfolio 
dividends received by the corporation     Example 16.      FC is a foreign bank       reportable in column (e).
that are not attributable to a U.S.       that is required to file Form 1120-F and    Do not report on line 4b substitute 
permanent establishment. FC records       Schedule M-3 for the current tax year.      interest payments received in custody 
securities lending transactions with      FC included on Part I, line 11, the         for another owner of the substitute 
respect to U.S. and foreign stocks on its following interest income items totaling    payment or such payments reportable 
home office set(s) of books. These        $2,000: $600 of interbranch interest        on line 16a.
set(s) of books do not give rise to U.S.  income; $100 of tax-exempt interest, 
booked liabilities under Regulations      $60 of which is effectively connected;      Report all substitute interest 
section 1.882-5(d)(2)(iii) and are not    $300 of interest income with respect to     payments received on line 4b whether 
reportable on Form 1120-F, Schedule L.    securities described in Regulations         or not such amounts are characterized 
FC receives $200 of substitute            section 1.864-4(c)(5)(ii)(b)(3) (“10% rule  as interest or other income under the 
dividends from transactions described     securities”), $150 of which is allocable    Code.
in section 1058, all of which are not     to noneffectively connected income          Example 17.  FC, a foreign bank, 
effectively connected with FC's trade or  under the rule of that paragraph; and       receives $1,000 of gross U.S. source 
business within the United States and     $1,000 of other effectively connected       substitute interest payments with 
are not attributable to FC's U.S.         interest income.                            respect to sale repurchase agreements. 
permanent establishment. Under            FC reports on Part II, line 4a, column      FC also has $200 of gross U.S. source 
Regulations sections 1.861-3(a)(6) and    (a), all $2,000 of this interest income. FC substitute interest with respect to 
1.881-2(b)(2), the substitute dividends   reports ($700) as a permanent               securities loans of municipal bonds in 
                                          difference on line 4a, column (c), to       transactions described in section 1058. 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                           13

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All of the substitute interest received Line 8. Income (Loss) From of certain foreign partnership interests
was included on FC's set(s) of books Equity Method Corporations from line 10,” the sum of all amounts
reported on Form 1120-F, Schedule L, attributable to the corporation's
and is reportable on Part I, line 11. Report on line 8, column (a), the income distributive share of income or loss from
statement income (loss) included in Part all U.S. and foreign partnership interests
FC must report all $1,200 of the I, line 11, for any corporation accounted that are included in taxable income. The
substitute interest in column (e) as for on the equity method. Remove such amount reported in column (e) of lines 9
effectively connected income. The $200 amount in column (b) or (c), as and 10 should reconcile with an amount
of U.S. source ECI substitute interest applicable. Include on Part II, line 3, that is:
received from the municipal bond columns (c) and (e), dividends received The sum of the gross income
•
securities loans is not characterized as from any corporation accounted for on amounts reported on Schedule P (Form
tax-exempt municipal bond interest, but the equity method to the extent the 1120-F), Part II, lines 2 and 3 ("Total"
is U.S. source “other income” consistent dividends constitute effectively column), minus
with the characterization provisions connected income. The sum of the deductions/loss
applicable only to substitute interest •
payments described in Regulations Lines 9 and 10. Net Income amounts reported on Schedule P (Form
section 1.881-2(a)(2). Accordingly, no (Loss) from U.S. and Certain 1120-F), Part II, lines 5 and 6 ("Total"
column), plus
amount of the payment is reportable in Foreign Partnerships • The sum of the amounts reported on
column (c) as a permanent difference. Note. The income (loss) reported in Schedule P (Form 1120-F), Part II, lines
Line 4c. Interest Equivalents column (e) must reconcile with the 7 and 8 ("Total" column).
Other Than Substitute Interest effectively connected income reportable
to the foreign corporation on all Exclusion of certain foreign
Reported on Line 4b Schedules K-3 (Form 1065) and which partnership interests from line 10.
Report on line 4c interest income the foreign corporation is required to Foreign corporations other than banks
equivalents other than substitute report on Schedule P (Form 1120-F), that have foreign partnership interests
interest reportable on line 4b or other Part II. with no effectively connected income for
interest equivalents reportable on other Except as provided below for certain the year need not separately report
lines in Part II. Interest equivalents foreign partnership interests of those interests on this line. If, however,
reportable on line 4c generally consist of corporations other than a bank, report the foreign corporation reports a
fees and commission income with amounts on Part II, line 9 or 10, as partnership interest on the equity
respect to certain financial transactions described below. method in the income statement used
that do not give rise to interest under for Part I, line 4, it may report such
section 163 (for example, financial 1. Report in column (a) the sum of amounts in column (a) of this line. The
guarantee fees, and acceptance the corporation's distributive shares of corporation should report effectively
confirmation and standby letter of credit all items of income, gain, deduction, and connected amounts in column (e)
fees). Do not report periodic income loss from all U.S. and foreign consistent with the reporting equity
with respect to notional principal partnership interests that are included in method amounts in column (a). For
contracts on Part II, line 4c. Schedule M-3, Part I, line 11. example, if the foreign corporation does
2. Report in column (b) or (c), as not report the partnership interest on
Do not report on this line 4c, amounts applicable, the sum of all differences, if Part II, line 10, column (a), it should not
reported in accordance with instructions any, attributable to the U.S. and foreign report any amounts in column (e) for the
for Part II, lines 4a, 4b, 9, 10, 11, 12, 13, partnership interests. The corporation's partnership interest. It would instead
16a, 20, and 23. distributive share of book interest report the income and other items from
Line 5. Gross Rental Income expense from all its U.S. and foreign the partnership interest for column (e)
Report on line 5 gross rental income partnership interests reported in column purposes based on the reporting for
that is treated as rental income for both (a) must be reported as a positive each line included in the income
the taxpayer's financial reporting amount in column (c) as a permanent statement. However, if a foreign
purposes and for U.S. income tax difference. The amount of interest corporation allocates interest expense
purposes. Gross rents that are recorded expense, from all U.S. and foreign under the separate currency pools
as a sale for financial purposes and as partnership interests, allowed as a method in Regulations section
rental income for federal tax purposes or deduction against effectively connected 1.882-5(e) or allocates excess interest
vice versa are reportable on Part II, income is entered on Part III, lines 26b expense under Regulations section
line 17, instead of line 5. and 26c, from Schedule I (Form 1.882-5(d)(5), and interest expense
1120-F), lines 23 and 24g, respectively. included in the foreign corporation's
Line 7. Fee and Commission 3. Report in column (d) the amounts distributive share of a foreign
Income of gross non-effectively connected partnership is included in such
Report on line 7, column (a), any income and expenses that relate to the allocation, see the instructions for Part
amounts included on Part I, line 11, as distributive share of income or loss from III, line 26a, for the required reporting.
gross fee and commission income. all U.S. and foreign partnership Example 18. FC is a calendar year
Such income generally includes income interests. These amounts will have been taxpayer that is required to file
with respect to services performed (for reported to you on columns (e), (f), and Schedule M-3 for the current tax year.
example, fees for brokerage service (g) of Schedule K-3 (Form 1065), Part X, FC, which is not a foreign bank, is a
transactions and negotiation letters of Section 1, line 21, and Section 2, partner in foreign partnership FP. FC
credit). Do not include amounts line 24. prepares income statements in
reportable on Part II, line 4c. 4. Report in column (e), except for accordance with home country GAAP. In
amounts described below in “Exclusion its income statements, FC treats the

14 Instructions for Schedule M-3 (Form 1120-F)(2023)

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difference between income statement         negative number in column (c). The            Line 12. Items Relating to 
net income and taxable income from its      amount of pass-through interest               Reportable Transactions
investment in FP as a permanent             expense allowed as a deduction against 
difference. For its 2023 tax year, FC's     effectively connected income is               Any amounts attributable to any 
income statement includes $10,000 of        included on Part III, lines 26b and 26c,      reportable transactions (as described in 
income attributable to its share of FP's    from Schedule I (Form 1120-F), lines 23       Regulations section 1.6011-4) must be 
net income. FC's Schedule K-3 from FP       and 24g.                                      included on Part II, line 12, regardless of 
                                                                                          whether the difference, or differences, 
reports $5,000 of ordinary income,          3. Report in column (d) the total             would otherwise be reported elsewhere 
$7,000 of long-term capital gains,          amount of noneffectively connected            in Part II or Part III. Thus, if a taxpayer 
$4,000 of charitable contributions, and     income related to the distributive share      files Form 8886, Reportable Transaction 
$200 of section 179 expense. It has         of income or loss from the pass-through       Disclosure Statement, for any reportable 
been determined that all of these           entity.                                       transaction described in Regulations 
amounts are effectively connected to 
FC's trade or business within the United    4. Report in column (e) the sum of            section 1.6011-4, the amounts 
States. Consequently, FC must enter         all taxable amounts of income, gain,          attributable to that reportable 
the following amounts on Part II, line 10:  loss, or deduction reportable on the          transaction must be reported on Part II, 
$10,000 in column (a), a ($200)             corporation's Schedules K-3 received          line 12. In addition, all income and 
temporary difference in column (b) for      from the pass-through entity (if              expense amounts attributable to a 
the section 179 deduction that is           applicable).                                  reportable transaction must be reported 
                                                                                          on Part II, line 12, columns (a) and (e), 
effectively connected with FC's trade or    Foreign corporations other than 
                                                                                          even if there is no difference between 
business, a permanent difference of         banks that have interests in foreign 
                                                                                          the financial amounts and the taxable 
($2,000) in column (c), and $7,800 in       pass-through entities with no effectively 
                                                                                          amounts.
column (e). The ($2,000) permanent          connected income for the year need not 
difference reported in column (c) is        separately report those interests on this     Each difference attributable to a 
determined as the aggregate difference      line. If, however, the foreign corporation    reportable transaction must be 
between column (a) and column (e)           reports a pass-through interest on the        separately stated and adequately 
after temporary differences in column       equity method in the income statement         disclosed. A corporation will be 
(b).                                        used for Part I, line 4, it may report such   considered to have separately stated 
Example 19.  Same facts as                  amounts in column (a) of this line. The       and adequately disclosed a reportable 
Example 18 except that FC's charitable      corporation should report effectively         transaction on line 12 if the corporation 
contribution deduction is wholly            connected amounts in column (e)               sequentially numbers each Form 8886 
attributable to its partnership interest in consistent with the reporting equity          and lists by identifying number on the 
FP and is limited to $90 pursuant to        method amounts in column (a). For             supporting statement for Part II, line 12, 
section 170(b)(2) due to other              example, if the foreign corporation does      each sequentially numbered reportable 
investment losses incurred by FC. In its    not report the pass-through interest in       transaction and the amounts required 
income statements, FC treated this          column (a), it should not report any          for Part II, line 12, columns (a) through 
limitation as a temporary difference. FC    amounts in column (e) for the                 (e).
must not report the charitable              pass-through interest. It would instead       In lieu of the requirements of the 
contribution limitation of $3,910           report the income and other items from        preceding paragraph, a corporation will 
($4,000 - $90) on Part II, line 9. FC must  the pass-through interest for column (e)      be considered to have separately stated 
report the limitation on Part III, line 16, purposes based on the reporting for           and adequately disclosed a reportable 
and report the disallowed charitable        each line included in the income              transaction if the corporation attaches a 
contributions of ($3,910) in columns (b)    statement. However, if a foreign              supporting statement that provides the 
and (e).                                    corporation allocates interest expense        following for each reportable 
                                            under the separate currency pools             transaction.
Line 11. Income (Loss) From                 method in Regulations section 
Other Pass-Through Entities                 1.882-5(e) or allocates excess interest       1. A description of the reportable 
For any interest in a pass-through entity   expense under Regulations section             transaction disclosed on Form 8886 for 
(other than an interest in a partnership    1.882-5(d)(5), and interest expense           which amounts are reported on Part II, 
reportable on Part II, line 9 or 10, as     included in the foreign corporation's         line 12;
applicable) owned by the corporation,       pass-through amount is included in            2. The name and tax shelter 
report the following on line 11.            such allocation, see the instructions for     registration number, if applicable, as 
                                            Part III, line 26a, for the required          reported on lines 1a and 1c, 
1. Report in column (a) the sum of          reporting.                                    respectively, of Form 8886; and
the corporation's distributive share of 
income or loss from the pass-through        For each pass-through entity                  3. The type of reportable transaction 
entity that is included in Part I, line 11. reported on line 11, attach a supporting      (that is, listed transaction, confidential 
2. Report in column (b) or (c), as          statement that provides that entity's         transaction, transaction with contractual 
applicable, the sum of all differences, if  name, EIN (if applicable), the                protection, etc.) as reported on line 2 of 
any, attributable to the pass-through       corporation's end of year profit-sharing      Form 8886.
entity. In column (c), the corporation's    percentage (if applicable), the               If a transaction is a listed transaction 
distributive share of interest expense      corporation's end of year loss-sharing        described in Regulations section 
from all of its pass-through entities       percentage (if applicable), and the           1.6011-4(b)(2), the supporting 
reported in column (a) must be reversed     amounts reported by the corporation in        statement must also include the 
as a permanent difference. Enter the        column (a), (b), (c), (d), or (e) of line 11, information requested on line 3 of Form 
amount of all such interest expense as a    as applicable.                                8886. In addition, if the reportable 
                                                                                          transaction involves an investment in the 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                                     15

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transaction through another entity such     Part II, line 12, the following amounts:      purposes pursuant to section 1221(b)
as a partnership, the supporting            ($7 million) in column (a), zero in           (2), must also be reported here if it is 
statement must include the name and         columns (b) and (c), and ($7 million) in      considered a hedge under the 
EIN (if applicable) of that entity as       column (e). The transaction will be           corporation's method of accounting. 
reported on line 5 of Form 8886.            adequately disclosed if K attaches a          Transactions that are treated as hedging 
Example 20. Corporation J is a              supporting statement for line 12 that (a)     capital assets solely because the 
calendar year taxpayer that is required     sequentially numbers the Form 8886            hedged asset gives rise to 
to file Schedule M-3 for the current tax    and refers to the sequentially numbered       noneffectively connected income and is 
year. J incurred seven different            Form 8886-X1 and (b) reports the              not eligible for ordinary treatment under 
abandonment losses during its 2023 tax      applicable amounts required for line 12,      section 582(c), are also reported on 
year. One loss of $12 million results       columns (a) through (e). Alternatively,       line 13. See Example 22.
from a reportable transaction described     the transaction will be adequately 
in Regulations section 1.6011-4(b)(5),      disclosed if the supporting statement for     Report on Part II, line 16c, hedging 
another loss of $5 million results from a   line 12 includes a description of the         transactions entered into by a global 
reportable transaction described in         transaction, the name and tax shelter         dealing operation including those that 
Regulations section 1.6011-4(b)(4), and     registration number, if any, and the type     are “risk transfer agreements” defined in 
the remaining five abandonment losses       of reportable transaction disclosed on        Proposed Regulations section 
are not reportable transactions. J          Form 8886.                                    1.475(g)-2. However, income with 
                                                                                          respect to a risk transfer agreement that 
discloses the reportable transactions       Line 13. Hedging Transactions                 is held by the foreign corporation's 
giving rise to the $12 million and $5                                                     non-global dealing operations is, unless 
                                            Report on line 13, column (a), the net 
million losses on separate Forms 8886                                                     reported elsewhere in Part II, reported 
                                            gain or loss from hedging transactions 
and sequentially numbers them X1 and                                                      on line 13 to the extent it is reported on 
                                            (including hedges of inventory) included 
X2, respectively. J must separately state                                                 Part I, line 11. If a foreign bank does not 
                                            in the amount reported on Part I, line 11, 
and adequately disclose the $12 million                                                   so report a risk transfer agreement held 
                                            other than:
and $5 million losses on Part II, line 12.                                                by a non-global dealing operation on 
The $12 million loss and the $5 million     • Hedging transactions entered into by 
                                            a global dealing operation (see line 16       Part I, line 11, any ECI from such risk 
loss will be adequately disclosed if J                                                    transfer agreement earned by the 
                                            instructions);
attaches a supporting statement for                                                       non-global dealing operation must be 
line 12 that lists each of the sequentially • Qualified integrated foreign currency 
                                            hedging transactions under Regulations        reported on Part II, line 23, column (d).
numbered forms, Form 8886-X1 and 
                                            section 1.988-5(a) (report these 
Form 8886-X2, and with respect to each                                                    Report on this line 13 hedging gains 
                                            transactions on either Part II, line 4, or in 
reportable transaction reports the                                                        and losses with respect to non-dealer 
                                            Part III, line 26a, column (a), as 
appropriate amounts required for Part II,                                                 transactions that are determined under 
                                            applicable);
line 12, columns (a) through (e).                                                         the mark-to-market method of 
Alternatively, J's disclosures will be      • Hedging transactions of securities          accounting on the income statement 
                                            dealer property (other than a global 
adequate if the description provided for                                                  (other than those that are subject to 
                                            dealing operation) that is 
each loss on the supporting statement                                                     mark-to-market treatment under a valid 
                                            marked-to-market under section 475(a) 
includes the names and tax shelter                                                        election under sections 475(e) or (f)).
                                            (see instructions for line 14a);
registration numbers, if any, disclosed                                                   Example 22.  FC is a foreign bank 
on the applicable Form 8886, identifies     • Hedging transactions entered into by 
                                            a commodities dealer that makes a             that enters into a U.S. dollar interest rate 
the type of reportable transaction for the                                                notional principal contract to hedge a 
                                            mark-to-market election under section 
loss, and reports the appropriate                                                         portfolio of securities held for investment 
                                            475(e) (see instructions for line 14c); 
amounts required for Part II, line 12,                                                    on its U.S. set(s) of books that are 
                                            and
columns (a) through (e). J must report                                                    reportable on Form 1120-F, Schedule L. 
the losses attributable to the other five   • Hedging transactions entered into by 
                                            a securities or commodities trader that       The hedged portfolio consists of four 
abandonment losses on Part II, line 21e,                                                  securities of equal amounts, only two of 
                                            makes a mark-to-market election under 
regardless of whether a difference exists                                                 which give rise to effectively connected 
                                            section 475(f) (see instructions for 
for any or all of those abandonment                                                       income. For financial statement 
                                            line 14d).
losses.                                                                                   purposes, the notional principal contract 
Example 21.  Corporation K is a               Do not report the income from the           is treated as a hedging transaction. For 
calendar year taxpayer that is required     hedged item(s) on line 13. For hedging        U.S. tax purposes, the two securities 
to file Schedule M-3 for the current tax    transactions reportable on line 13,           that give rise to noneffectively 
year. K enters into a transaction with      report in column (e) the amount of            connected income are capital assets 
contractual protection that is a            taxable income from hedging                   that are not eligible for ordinary 
reportable transaction described in         transactions as defined in section            treatment on disposition under section 
Regulations section 1.6011-4(b)(4).         1221(b)(2). Use columns (b) and (c) to        582(c). Consequently, the notional 
This reportable transaction is the only     report all differences caused by treating     principal contract does not constitute a 
reportable transaction for K's 2023 tax     hedging transactions differently for          hedging transaction under section 
year and results in a $7 million capital    financial accounting purposes and for         1221(b)(2). Regardless, the income 
loss for both financial statement           U.S. income tax purposes. For example,        gain or loss with respect to the notional 
purposes and U.S. income tax                if a portion of a hedge is considered         principal contract (including any 
purposes. It was determined that the        ineffective under GAAP but still is a valid   mark-to-market income from the hedge) 
entire amount is attributable to            hedge under section 1221(b)(2), the           is reportable as a hedging transaction 
effectively connected income. Although      difference must be reported on line 13.       on line 13 and is not reported on line 4b 
the transaction does not result in a        The hedge of a capital asset, which is        or 14b.
difference, K is required to report on      not a valid hedge for U.S. income tax 

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Lines 14a Through 14d.                      Example 23.  Foreign corporation           currency denominated instruments that 
Mark-to-Market Income (Loss)                FC, a broker-dealer that is not a foreign  are acquired and normally held for 
                                            bank, is a dealer in securities under      investment or otherwise not held by a 
Except for global dealing operations        section 475(a) and conducts its entire     global securities dealer. Foreign 
reportable on line 16 and for certain       securities dealing operation within the    currency transactions entered into by a 
hedging transactions reported on            United States. All of the income is        global securities dealing operation are 
line 13, report on lines 14a through 14d,   recorded on set(s) of books reported on    reportable exclusively on line 16c. Do 
column (a), any amount that is subject      Form 1120-F, Schedule L; is effectively    not report on line 15 qualified integrated 
to mark-to-market treatment under           connected with FC's trade or business      foreign currency hedging transactions, 
section 475. Report on line 14a income      within the United States; and constitutes  as defined in Regulations section 
or (loss) from securities held by a dealer  income of a securities dealer, as defined  1.988-5(a) (see line 13 instructions).
in securities, in its capacity as a dealer  in Regulations section 1.864-2(c)(2)(iv)   Example 24.  FC is a foreign 
under section 475(a). On line 14b,          only, and not of a global dealing          corporation that is not a dealer or trader 
report the mark-to-market treatment of      operation. The income of this securities   in securities or commodities. FC 
securities held by a dealer other than in   dealing operation is reportable on Part    acquires foreign interest-bearing bonds 
its capacity as a dealer that is subject to II, line 14. If FC engaged in a global     issued by a corporation resident in 
the characterization provisions of          securities dealing operation, however,     Country X. The bonds are denominated 
section 475(d)(3)(B). Report on line 14c    the income generated from that activity    in a currency other than FC's functional 
the mark-to-market income of a dealer       would be reportable on line 16, columns    currency. FC holds the bonds in 
in commodities having made a valid          (d) and (e), as sourced and allocated      connection with its trade or business 
election under section 475(e), and on       under Proposed Regulations section         within the United States and the bonds 
line 14d, report the mark-to-market         1.863-3(h) between non-ECI and ECI         give rise to effectively connected 
income of a trader in securities or         (see “Note” on page 8 for a clarification  income, gain or (loss). FC accrues 
commodities having made a valid             regarding Proposed Regulations section     interest income on its set(s) of books in 
election under section 475(f).              1.863-3(h)). If the global dealing         U.S. dollars and accounts for currency 
“Securities” for these purposes are         operation is of a foreign bank and is not  gains (losses) with respect to each 
securities described in section 475(c)(2)   includible in column (a), the              accrual period. When FC receives 
and commodities described in section        apportionment of the global dealing        coupon interest payments, it records 
475(e)(2). “Securities” do not include      operation's results would be reportable    section 988 transaction foreign currency 
any items specifically excluded from        in column (d) for the amount of income     gains (losses). These gains (losses) are 
sections 475(c)(2) and 475(e)(2), such      or loss that is allocable to ECI. Income   reportable on line 15.
as certain contracts to which section       would be reportable as a positive 
1256(a) applies (which may be               number and losses would be reportable      If FC is a foreign bank and subject to 
reportable on line 13 as hedges).           as a negative number. If the global        section 475, generally, these gains 
Report hedging gains and losses             dealing set(s) of books are reportable in  (losses) are still reportable on line 15 
from transactions held in investment        column (a), either because like FC, it is  and not on line 14 if the bank acquires 
capacity or trader capacity not subject     a broker dealer and not a foreign bank,    and properly identifies the securities as 
to a securities or commodities trading      or it is a foreign bank whose global       held for investment or if the securities 
election, but which are determined          dealing operation is reportable on Form    are held for proprietary trading that is 
under the mark-to-market method of          1120-F, Schedule L, the apportionment      not subject to a section 475 trader 
accounting, on Part II, line 13 (hedging    of the global dealing operation's results  election under section 475(f).
transactions), and not on line 14.          would be reportable in column (d) for      Lines 16a and 16b. Interest 
                                            the portion that needs to be allocated to 
                                                                                       Income and Dividends From 
Traders in securities and commodi-          noneffectively connected income. In 
ties. For a trader in securities or         such instance, the amount of income        Global Securities Dealing
commodities that made a valid election      allocable to non-ECI would be              Report on lines 16a and 16b interest 
under section 475(f) to use the             reportable as a negative amount and the    and dividends (including substitute 
mark-to-market method to account for        amount of loss would be reportable as a    interest defined in Regulations section 
securities or commodities held in           positive number in column (d). For all     1.861-2(a)(7) and substitute dividends 
connection with a trading business that     filers, columns (a), (b), (c), and (d) are defined in Regulations section 
files Form 4797, any Schedule M-3           combined to determine the ECI amount       1.861-3(a)(6)) earned with respect to 
entries required as a result of marking to  reportable in column (e).                  transactions entered into in a global 
market these securities or commodities                                                 securities dealing operation, as defined 
are reported as follows: (a)                Line 15. Gains (Losses) From               in Proposed Regulations section 
mark-to-market gains and losses from        Certain Section 988                        1.482-8.
Form 4797, line 10, are included on Part    Transactions
II, line 14d, of Schedule M-3 (Form                                                    Line 16c. Gains (Losses) and 
1120-F); (b) any other Schedule M-3         Report on line 15 gains or (losses) from 
                                                                                       Other Fixed and Determinable, 
entries required based on other results     certain section 988 transactions. These 
(non-mark-to-market gains and losses)       are only those section 988 transactions    Annual, or Periodic Income 
included in the total reported on Form      that are not reportable with respect to    From Global Securities Dealing
4797, line 17, should be reported on        hedging transactions, mark-to-market       Report on line 16c gains and losses and 
Part II, line 21d, of Schedule M-3 (Form    gains (losses), or global securities       other fixed and determinable, annual, or 
1120-F), unless the instructions for        dealing operations on Part II, lines 13,   other periodic income or expense 
Schedule M-3 require the amounts to be      14, and 16. Section 988 gains (losses)     (FDAP) with respect to notional principal 
reported on another line.                   reportable on line 15 will generally be    contracts from global securities dealing 
                                            those recognized with respect to foreign   operations (as defined in Proposed 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                               17

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Regulations section 1.482-8) that would not a global dealing operation with Asset transfer transactions with
be subject to source and allocation respect to currency option contracts in periodic payments characterized for
under Proposed Regulations section foreign currency X, that is recorded on financial accounting purposes as either
1.863-3(h) (see “Note” on page 8 for a set(s) of books in FC's home office. The a sale or a lease may, under some
clarification regarding Proposed foreign currency X dealing operation is circumstances, be characterized as the
Regulations section 1.863-3(h)). entirely allocable to noneffectively opposite for tax purposes. If the
Foreign currency gains and losses with connected income and is not reportable transaction is treated as a lease, the
respect to securities transactions on Form 1120-F, Schedule L. Because seller/lessor reports the periodic
entered into by a global dealing FC is not a foreign bank described in payments as gross rental income and
operation are also included in global Regulations section 1.882-5(c)(4), FC's also reports depreciation expense or
dealing gains and (losses) on line 16c. income, gains and (losses) with respect deduction. If the transaction is treated
The foreign corporation may be a global to its securities dealing in foreign as a sale, the seller/lessor reports gross
securities dealer with respect to some currency X is reportable on Part I, profit (sale price less cost of goods sold)
but not all of its securities dealing line 11. The income, gains and (losses) from the sale of assets and reports the
activities. Gains and losses from with respect to FC's notional principal periodic payments as payments of
securities dealing activities that would contracts that allocate in part to principal and interest income.
not be subject to source and allocation effectively connected income are On Part II, line 17, column (a), report
under Proposed Regulations section reportable on line 16c. The periodic the gross profit or gross rental income
1.863-3(h) are reportable as income with respect to the notional for financial statement purposes for all
mark-to-market income on line 14, and principal contracts is also reportable on sale or lease transactions that must be
the interest, dividend, and other FDAP line 16c. The foreign currency option given the opposite characterization for
income earned in such non-global contracts in foreign currency X are tax purposes. On Part II, line 17, column
dealer activities is reportable on Part II, reportable on line 14a, column (a), as (e), report the gross profit or gross rental
lines 3 and 4. Reporting on line 16 is mark-to-market gains (losses) of a income for federal income tax purposes.
determined by whether the income, securities dealer and not on line 16. The Interest income amounts for such
gains and (losses) would be subject to amount reported on line 14a, column transactions must be reported on Part II,
allocation under Proposed Regulations (a), is reversed on line 14a, column (d), line 4a (interest income excluding
section 1.863-3(h) and not by whether as an apportionment allocable to interest equivalents), in columns (a) and
all or none of the amount would be noneffectively connected income. (e), as applicable. Depreciation expense
allocable to ECI. If income of a global Example 26. The facts are the same for such transactions must be reported
dealing operation would be entirely as in Example 25 except that FC is a on Part III, line 23 (depreciation), in
allocable to ECI or non-ECI under foreign bank. Because the securities columns (a) and (e), as applicable. Use
Proposed Regulations section options denominated in foreign currency columns (b), (c), and (d) of Part II, lines
1.863-3(h), the amount is reportable on X is not included in a set(s) of books 4a and 17, and Part III, line 23, as
line 16 and not on line 14. reported on Form 1120-F, Schedule L, applicable, to report the differences
If the income or losses from global the amounts are not reported on Part I, between columns (a) and (e).
dealing operations of foreign banks line 11, or Part II, line 14a. If the notional Example 27. Corporation M sells
reportable on any of lines 16a through principal contract book was not and leases property to customers. M is
16c are allocable in whole or in part to reportable on a set of books reportable a calendar year taxpayer that files and
effectively connected income but not in column (a), such operation would not entirely completes Schedule M-3 for its
reportable in column (a), apportion the be included on line 16c, column (a). As 2023 tax year. For financial accounting
ECI amounts of the global dealing a result, the amount allocable to purposes, M accounts for each
operation in columns (d) and (e). If the effectively connected income from this transaction as a sale. For U.S. income
foreign bank does include a global operation is reported in column (d) and tax purposes, each of M's transactions
dealing operation in column (a), then in column (e). If the set of books must be treated as a lease. In its income
report the apportionment of such reported on Form 1120-F, Schedule L, statements, M treats the difference in
operation to non-ECI in column (d) and had included the notional principal the financial accounting and the U.S.
the residual ECI amount in column (e). contract operation, FC would have income tax treatment of these
Attach a statement providing a brief reported such amount in column (a), transactions as temporary. During 2023,
description of each global dealing and the apportionment in column (d) M reports on its income statements
operation (for example, interest rate would have included a negative number $1,000 of sales and $700 of cost of
notional principal contracts, equity for the amount of income and gains goods sold with respect to 2023 lease
notional principal contracts, foreign allocable to noneffectively connected transactions. M receives periodic
currency options (list each foreign income. Losses allocable to non-ECI payments of $500 in 2023 with respect
currency separately for each foreign would be reported as a positive number. to these 2023 transactions and similar
currency that constitutes a separate In column (e), FC combines columns transactions from prior years and treats
global dealing operation)). (a), (b), (c), and (d) to report the amount $400 as principal and $100 as interest
Example 25. FC, a securities allocable to effectively connected income. For financial income purposes,
broker-dealer, is engaged in trade or income. M reports gross profit of $300 ($1,000 -
business within the United States. FC is Line 17. Sale Versus Lease (for $700) and interest income of $100 from
engaged in a global securities dealing Sellers and/or Lessors) these transactions. For U.S. income tax
operation in notional principal contracts purposes, M reports $500 of gross
that allocates a portion of the income, Note. See the instructions for Part III, rental income (the periodic payments)
gains and (losses) to effectively line 25, later, for purchasers and/or and (based on other facts) $200 of
connected income. FC is also engaged lessees. depreciation deduction on the property.
in a securities dealing operation that is It was determined that the entire amount

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of these items is effectively connected so reportable if the section 481(a) accrued for either financial or U.S. tax
income/expense. On its 2023 adjustment was with respect to purposes, FC would include $750 on
Schedule M-3, M must report on Part II, transactions recorded on set(s) of books Part II, line 19, column (a), the amount
line 4a (interest income), $100 in reportable on Form 1120-F, Schedule L. recognized currently for financial
column (a), ($100) in column (b), and purposes. FC would then reverse the
zero in column (e). In addition, M must Line 19. Unearned/Deferred $750 in column (b) as a temporary
report on Part II, line 17, $300 of gross Revenue difference since this amount was
profit in column (a), $200 in column (b), Report on line 19, column (a), amounts previously recognized for U.S. tax
and $500 of gross rental income in of revenues included in Part I, line 11, purposes.
column (e). Lastly, M must enter $200 in which were deferred from a prior
each of columns (b) and (e) on Part III, financial accounting year. Report on Line 20. Original Issue
line 23. line 19, column (e), revenues Discount, Imputed Interest, and
recognizable for federal income tax Phantom Income
Line 18. Section 481(a) purposes that are recognized for Report on line 20 any amounts of
Adjustments financial accounting purposes in a original issue discount (OID), other
With the exception of a section 481(a) different year. Also, report on line 19, imputed interest, phantom income, or
adjustment that is required to be column (e), any amount of revenues OID includible on line 16a. The term
reported on Part II, line 12, for reported on line 19, column (a), that are “original issue discount and other
reportable transactions, any difference recognizable for U.S. income tax imputed interest” includes, but is not
between an income or expense item purposes in the current tax year. Use limited to:
attributable to an authorized (or columns (b), (c), and (d) of line 19, as
1. The excess of a debt instrument's
unauthorized) change in method of applicable, to report the differences
stated redemption price at maturity over
accounting made for U.S. income tax between column (a) and column (e). If
its issue price, as determined under
purposes that results in a section 481(a) the amounts are not includible on set(s)
section 1273;
adjustment must be reported on Part II, of books reportable on Form 1120-F,
line 18, regardless of whether a Schedule L, but are reportable in Part I, 2. Amounts that are imputed interest
separate line for that income or expense line 11, for a foreign corporation other on a deferred sales contract under
item exists in Part II or Part III. than a bank, then report the entire section 483;
Example 28. Corporation N is a difference as temporary in column (b). 3. Amounts treated as interest or
calendar year taxpayer that files and Any amount allocable to noneffectively OID under the stripped bond rules under
entirely completes Schedule M-3 for its connected income should, to that section 1286;
2023 tax year. N was depreciating extent, be included in column (d) to 4. Amounts treated as OID under
certain fixed assets over an erroneous reverse some or all of the amount the below-market interest rate rules
recovery period and, effective for its included in column (b). under section 7872; and
2023 tax year, N receives IRS consent 5. Amounts recognized as phantom
Line 19 must not be used to report
to change its method of accounting for income with respect to a noneconomic
income recognized from long-term
the depreciable fixed assets and begins residual interest in a Real Estate
contracts. Instead, use line 24 (other
using the proper recovery period. The Mortgage Investment Conduit (REMIC),
income (loss) items with differences).
change in method of accounting results including inducement fees recognized
in a positive section 481(a) adjustment Example 29. FC, a foreign with respect to such interests.
of $100,000 that is required to be corporation other than a bank, has
spread over 4 tax years, beginning with prepaid commission income of $1,000 Note. Phantom income is a term used
the 2023 tax year. It has been recognizable for U.S. income tax to describe taxable income that may be
determined that the entire amount is purposes in the current tax year that is derived from the holding of ownership
attributable to effectively connected recognized for financial accounting interests in an asset securitization
income. In its income statements, N purposes in a different year. FC treats vehicle. The income is "phantom"
treats the section 481(a) adjustment as this difference as a temporary difference because it is not economic income (that
a temporary difference. N must report on its income statements. Of this is, there is no cash or other property
on Part II, line 18, $25,000 in columns amount, $600 is allocable to effectively actually received or available for
(b) and (e) for its 2023 tax year and connected income. The amount distribution to the equity holder). Income
each of the subsequent 3 tax years recognized for income statement with respect to a residual interest in
(unless N is otherwise required to purposes in 2023 is $250. FC reports REMICs is referred to as excess
recognize the remainder of the section this amount on Part II, line 19, column inclusion income and is subject to
481(a) adjustment earlier). N must not (a). In column (b), FC reports $750 as a special rules in the Code and
report the section 481(a) adjustment on temporary book-to-tax difference to regulations. In a non-REMIC vehicle, it
Part III, line 23. adjust to the amount recognized by the may take the form of OID derived from
If the section 481(a) adjustment was foreign corporation in 2023 under U.S. deep-discount debt held as collateral in
not effectively connected to N's trade or tax principles. In column (d), FC the asset securitization entity.
business within the United States and is reverses $400 as income allocable to
Foreign corporations that accrue
not includible in column (a), the amount noneffectively connected income.
phantom income with respect to
would be reportable for each year in Finally, in column (e), FC reports $600,
residual interests in REMICs that are not
column (b) as a temporary difference the amount includible on FC's Form
recognized under the foreign
(for U.S. tax principles) and then 1120-F as effectively connected income
corporation's accounting regime must
reversed as an apportionment to in 2023.
show all book-to-tax gross phantom
non-ECI in column (d). If N were a In 2023, assuming no other income differences as permanent
foreign bank, the amount would only be commission income is earned or differences in column (c), whether or not

Instructions for Schedule M-3 (Form 1120-F)(2023) 19

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it is effectively connected with a trade or Line 21a. Income Statement Line 21d. Net Gain/Loss
business and whether or not the REMIC Gain/Loss on Sale, Exchange, Reported on Form 4797,
interests are recorded on set(s) of
books that are reportable on Form Abandonment, Worthlessness, Line 17, Excluding Amounts
1120-F, Schedule L. Amounts that are or Other Disposition of Assets From Pass-Through Entities,
not effectively connected with the Other Than Inventory and Abandonment Losses, and
foreign corporation's trade or business Pass-Through Entities Worthless Stock Losses
must be reversed and shown as a
Report on line 21a, column (a), all gains Report on line 21d the net gain or loss
negative number in column (d).
and losses on the disposition of assets reported on line 17 of Form 4797, Sales
Example 30. FC is a foreign bank except for (a) gains and losses on the of Business Property, excluding
that acquires and holds noneconomic disposition of inventory, and (b) gains amounts from (a) pass-through entities
residual interests in a REMIC on set(s) and losses allocated to the corporation included on line 9, 10, or 11, as
of books that are reportable on Form from pass-through entities (for example, applicable; (b) abandonment losses,
1120-F, Schedule L. Under the foreign on Schedule K-3) that are included on which must be reported on Part II,
corporation's accounting system, the line 9, 10, or 11. Reverse the amount line 21e; and (c) worthless stock losses,
amounts are not recognized for financial reported in column (a) in column (b) or which must be reported on Part II,
income reporting purposes and are (c), as applicable. The corresponding line 21f.
treated as permanent differences. FC gains and losses for U.S. income tax
reports no amounts on Part II, line 20, purposes are reported on Part II, lines Note. Traders in securities or
column (a), for each year that phantom 21b through 21g, columns (b), (c), and commodities that have made a valid
income/deduction is recorded under (e), as applicable. Reverse any election under section 475(f) to use the
U.S. tax principles. In column (c), FC additional amounts recognizable under mark-to-market method to account for
records phantom income as a U.S. tax principles that are allocable to securities or commodities, see the
permanent difference because such noneffectively connected income on instructions for Part II, lines 14a through
amounts are not recognizable under the Part II, lines 21b through 21g, column 14d, earlier.
foreign corporation's accounting regime. (d). Line 21f. Worthless Stock
The amounts are effectively connected
with FC's trade or business and, Line 21b. Gross Capital Gains Losses
therefore, are also reported in column From Schedule D, Excluding Report on line 21f any worthless stock
(e). Amounts From Pass-Through loss, regardless of whether the loss is
Example 31. The facts are the Entities characterized as an ordinary loss or a
capital loss. See Regulations section
same as in Example 30, except that the Report on line 21b gross capital gains 1.864-4(c)(2)(iii)(a) for limitations on
phantom income is treated as reported on Schedule D (Form 1120), effectively connected treatment under
noneffectively connected income by FC Capital Gains and Losses, excluding the asset use test and Regulations
and subject to tax under section 881(a). capital gains from pass-through entities section 1.864-4(c)(5)(ii)(a) for limited
FC must report the phantom income as that are included on line 9, 10, or 11, as effectively connected eligibility of stock
a permanent difference on Part II, applicable. to foreign corporations engaged in a
line 20, column (c), and then reverse the
amount in column (d) as noneffectively Line 21c. Gross Capital Losses banking, financing, or similar business.
connected income. No amount is From Schedule D, Excluding Attach a statement that separately
states and adequately discloses each
reported in column (e). The full amount Amounts From Pass-Through transaction that gives rise to a worthless
of phantom income recognized in
Entities, Abandonment Losses,
column (c) is reportable on Form stock loss that is treated as allocable to
1120-F, Section I, line 10, as other fixed and Worthless Stock Losses effectively connected income and the
or determinable, annual, or other Report on line 21c gross capital losses amount of each loss. Do not include on
periodic income and subject to tax at reported on Schedule D (Form 1120), the statement any worthless stock loss
30%. excluding capital losses from (a) that is wholly allocable to noneffectively
Example 32. The facts are the pass-through entities that are included connected income. Do not include
same as in Example 30, except FC on line 9, 10, or 11, as applicable; (b) worthless stock losses that are incurred
recognizes $100 of residual excess abandonment losses, which must be as part of a securities dealing or global
inclusion income on its set(s) of books reported on Part II, line 21e; and (c) securities dealing operation. Report
and records reportable on Form 1120-F, worthless stock losses, which must be these securities losses as
Schedule L, for cash received, and an reported on Part II, line 21f. Do not mark-to-market loss on line 14a, 14c, or
additional $1,000 of phantom income report on line 21c capital losses carried 16c.
not recognized for financial accounting over from a prior tax year and utilized in Line 21g. Other Gain/Loss on
purposes. FC treats $100 as effectively the current tax year. See the instructions
connected income. FC reports on Part for Part II, line 22, regarding the Disposition of Assets Other
II, line 20, $100 in column (a), $1,000 in reporting requirements for capital loss Than Inventory
column (c), ($1,000) in column (d), and carryovers utilized in the current tax Report on line 21g any gains or losses
$100 in column (e). The $1,000 year. from the sale or exchange of property
reversed in column (d) is reportable on other than inventory and that are not
Form 1120-F, Section I, line 10, as in reported on lines 21b through 21f.
Example 31.

20 Instructions for Schedule M-3 (Form 1120-F)(2023)

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Line 22. Capital Loss Limitation          FC also enters into a number of forward    reported in the total amount shown in 
and Carryforward Used                     contracts for customers through its U.S.   column (d).
                                          trade or business. These contracts are 
Report as a positive amount on line 22,   not entered into in connection with a      Line 24. Other Income (Loss) 
column (b) or (c), as applicable, and     global securities dealing operation. The   Items With Differences
column (e) the excess of the net capital  transactions are initially recorded on     Separately state and adequately 
losses over the net capital gains         FC's set(s) of books that are reported on  disclose on Part II, line 24, all items of 
reported on Schedule D (Form 1120) by     Form 1120-F, Schedule L. In a later        income (loss) with differences that are 
the corporation.                          year, FC transfers several of the loans,   not otherwise listed on Part II, lines 1 
If the corporation utilizes a capital     the forward contracts, and the municipal   through 23. Attach a statement that 
loss carryforward on Schedule D (Form     bonds to its home office in Country X to   describes and itemizes the type of 
1120) in the current tax year, report the be held other than in connection with a    income (loss) and the amount of each 
carryforward utilized as a negative       global securities dealing operation.       item and provides a description that 
amount on Part II, line 22, columns (b)   These assets are recorded in FC's          states the income (loss) name for book 
or (c), as applicable, and column (e).    home office on set(s) of books that do     purposes for the amount recorded in 
                                          not give rise to U.S. booked liabilities   column (a) and describes the 
Line 23. Gross Effectively                under Regulations section 1.882-5(d)(2)    adjustment being recorded in column 
Connected Income of Foreign               (iii). As a result, the transferred assets (b), (c), or (d). The entire description 
Banks From Books That Do Not              are no longer reportable on Form           completes the tax description for the 
Give Rise to U.S. Booked                  1120-F, Schedule L.                        amount included in column (e) for each 
Liabilities                               Report on Part II, line 23, column (c),    item separately stated on this line.
                                          as a negative number, the amount of the    The attached statement should have 
Line 23 applies only to foreign banks (as effectively connected municipal bond       six columns. The first column has the 
described in Regulations section          interest. The municipal bond interest is   description for the next five columns. 
1.882-5(c)(4)). Foreign banks report in   a permanent difference that must be        The second column is column (a), 
columns (d) and (e) the gross effectively reversed in column (d) since it is no      income (loss) per income statement. 
connected income or loss (other than      longer taken into account in column (a)    The third column is column (b), 
income or loss from a global dealing      on FC's set(s) of books reportable on      temporary differences. The fourth 
operation) that is excluded from the      Schedule L.                                column is column (c), permanent 
set(s) of books reportable on Form 
1120-F, Schedule L, and excluded from     Report on Part II, line 23, column (d),    differences. The fifth column is column 
the net income shown on Part I, line 11.  the gross income, gains and (losses)       (d), other permanent differences for 
Gross effectively connected income or     from the transferred loans and municipal   allocations to non-ECI and ECI. The 
loss of this type is that which is        bond securities and forward contracts      sixth column is column (e), income 
ordinarily recorded on books of           that is effectively connected with the     (loss) per tax return. For each item listed 
non-U.S. branches or locations that do    foreign bank's trade or business within    on the attached statement for line 24, 
not ordinarily engage in effectively      the United States. Report the income       columns (a) through (d) when combined 
connected income producing activities,    and gains as positive numbers and          must equal column (e). The amounts in 
such as income from securities            losses as negative amounts.                columns (a) through (e) for all items 
recorded in a home office that are        Report on Part II, line 23, column (e),    must be totaled on the attached 
attributable to a U.S. office under       the combined column (b), (c), and (d)      statement and the total amounts must 
Regulations section 1.864-4(c)(5)(iii).   amounts to determine the aggregate         be included on Part II, line 24.
Gross effectively connected income or     amount of effectively connected gross      If any “comprehensive income” as 
loss reportable on line 23 is also income income, gains and (losses) from the        defined by Statement of Financial 
of a type that is recognized under        transferred loan securities and forward    Accounting Standards (SFAS) No. 130 
sections 864(c)(6) and 864(c)(7) with     contracts. The tax-exempt municipal        is reported on this line, describe the 
respect to property that ceases to be     bond interest is netted to zero in column  item(s) in detail. Foreign corporations 
held in connection with a trade or        (e).                                       may report on line 24 net income (loss) 
                                                                                     from their distributive share of foreign 
business within the United States (for    Treaty-based reporting. If a               partnership interests that do not have 
example, transferred securities of a      corporation excludes any amounts from      any U.S. source or effectively connected 
non-banking, financing or similar         column (a) on the grounds that it is       income, that the foreign corporation 
business or of a former banking,          reporting the books of a U.S. permanent    does not report on line 10. The 
financing or similar business) or that is establishment (see Adaptation of Form      aggregate income from such 
recognized under the Code at a time       1120-F, Schedule L for treaty-based        partnerships should be reported on 
subsequent to cessation of the trade or   reporting, earlier, in these instructions  line 24, column (d), as a negative 
business within the United States.        for such reporting) and further excludes   number.
Amounts from a global dealing             from the same line any amounts from 
operation that are apportionable in       column (e) that would otherwise be         Line 26. Total Expense/ 
whole or in part to effectively connected reportable under Code principles, the      Deduction Items
income are reported on line 16 and not    corporation should report the 
                                                                                     Report on Part II, line 26, columns (a) 
on this line 23.                          Code-based amount in column (c) and 
                                                                                     through (e), as applicable, the inverse of 
Example 33.      FC, a foreign bank,      reverse the amount in column (d), with a 
                                                                                     the amounts reported on Part III, line 33, 
negotiates and solicits a portfolio of    footnote reference explaining that 
                                                                                     columns (a) through (e). For example, if 
loans and municipal bonds that are        column (d) reports a treaty-based 
                                                                                     Part III, line 33, column (a), reflects an 
attributable to its U.S. office under     exclusion, or attach a statement which 
                                                                                     amount of $1 million, then report on Part 
Regulations section 1.864-4(c)(5)(iii).   identifies the portion of such exclusion 
                                                                                     II, line 26, column (a), ($1 million). 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                             21

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Similarly, if Part III, line 33, column (b), Line 5. Non-U.S. Withholding expense in the financial statements
reflects an amount of ($50,000), then Taxes (column (a)) or deducted in the U.S.
report on Part II, line 26, column (b), income tax return (column (e)) other
$50,000. Report on line 5, column (a), the amount than amounts reportable elsewhere on
of non-U.S. (foreign) withholding taxes Schedule M-3, Parts II and III (for
Line 27. Other Items With No included in determining adjusted example, on Part III, line 8, for stock
Differences financial net income on Part I, line 11. If options expense). Examples of amounts
If there is no difference between the the corporation is deducting any foreign reportable on line 9 include payments
financial accounting amount and the withholding tax, use column (b), (c), or attributable to employee stock purchase
taxable amount of an entire item of (d), as applicable, to report any plans (ESPPs), phantom stock options,
income, gain, loss, expense, or difference between foreign withholding phantom stock units, stock warrants,
deduction and the item is not described tax included in financial accounting net stock appreciation rights, qualified
or included in Part II, lines 1 through 24, income and the amount of any foreign equity grants, and restricted stock,
or Part III, lines 1 through 32, report the withholding tax deduction reported in regardless of whether such payments
entire amount of the item in columns (a) column (e). If the corporation is crediting are made to employees or
and (e) of line 27. If a portion of an item foreign withholding taxes against its U.S. non-employees, or as payment for
of income, loss, expense, or deduction income tax liability, no amount is property or compensation for services.
has a difference and a portion of the reported in column (e).
Line 10. Meals and
item does not have a difference, do not Line 6. Corporate Officer's
Entertainment
report any portion of the item on line 27. Compensation With Section
Instead, report the entire amount of the Report on line 10, column (a), any
item (that is, both the portion with a 162(m) Limitation amounts paid or accrued by the
difference and the portion without a Report on line 6, column (a), the total corporation during the tax year for
difference) on the applicable line of Part amount of non-performance-based meals, beverages, and entertainment
II, lines 1 through 24, or Part III, lines 1 current compensation expense that are accounted for in financial
through 32. See Example 12. (“applicable employee remuneration”) accounting income, regardless of the
for corporate officers that are “covered classification, nomenclature, or
Specific Instructions for employees” under section 162(m)(3). terminology used for such amounts, and
Report in column (b) or (c), as regardless of how or where such
Part III. Reconciliation of applicable, the nondeductible amount of amounts are classified in the
Net Income (Loss) per current compensation in excess of $1 corporation's financial income statement
Income Statement of million ($500,000 if the corporation or the income and expense accounts
receives or has received financial maintained in the corporation's books
Non-Consolidated Foreign assistance under the Treasury Troubled and records. Report only amounts not
Corporations With Taxable Asset Relief Program (TARP)). Report otherwise reportable elsewhere on
Income per the noneffectively connected portion of Schedule M-3, Parts II and III (for
the deductible compensation in column
Return—Expense/ example, Part II, line 2).
(d), and the deductible portion of the
Deduction Items compensation allocable to effectively Line 11. Fines and Penalties
For column (a), report the expenses connected income in column (e). Do not Report on line 11 any fines or similar
included on the applicable income report the “applicable employee penalties paid to a government or other
statement as adjusted and reported in remuneration” for “covered employees” authority for the violation of any law for
Part I, line 11. defined under section 162(m) on line 8, which fines or penalties are assessed.
9, or 15. All fines and penalties expensed in
Lines 1 Through 4. Income Tax
financial accounting income (paid or
Expense Line 7. Salaries and Other Base accrued) must be included on this
If the corporation does not distinguish Compensation line 11, column (a), regardless of the
between current and deferred income Report salary and bonus compensation government or other authority that
tax expense in its applicable financial of the type reported on Form 1120-F, imposed the fines or penalties,
statement described in Part I, report Section II, line 13, other than stock regardless of whether the fines and
income tax expense as current income option expense and other equity-based penalties are civil or criminal, regardless
tax expense using lines 1 and 3, as compensation reported on lines 8 and 9. of the classification, nomenclature, or
applicable. U.S. current and deferred terminology used for the fines or
income taxes and non-U.S. deferred Line 8. Stock Option Expense penalties by the imposing authority in its
income taxes are not deductible and Report on line 8, column (a), amounts actions or documents, and regardless of
column (e) is inapplicable for lines 1, 2, expensed on Part I, line 11, net income how or where the fines or penalties are
and 4. Column (e) of line 3 is used to per the income statement, that are classified in the corporation's financial
report only foreign income tax the attributable to all stock options. Report income statement or the income and
corporation is deducting, other than the on line 8, column (e), deduction expense accounts maintained in the
withholding taxes reported on line 5 amounts attributable to all stock options. corporation's books and records. In
below. If the corporation is crediting addition, report on line 11, column (a),
foreign income tax against the U.S. Line 9. Other Equity-Based
the reversal of any overaccrual of any
income tax liability, no amount is Compensation amount described in this paragraph.
reported on line 3, column (e). Report on line 9 any amounts for See section 162(f) for additional
equity-based compensation or guidance.
consideration that are reflected as

22 Instructions for Schedule M-3 (Form 1120-F)(2023)

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Report on line 11, column (e), any includible on Part III, line 13 (for Line 17. Section 162(r)—FDIC
such amounts as are described in the example, retiree health and life Premiums Paid by Certain
preceding paragraph that are includible insurance coverage, dental coverage,
in effectively connected taxable income, etc.). Complete columns (b), (c), and Large Financial Institutions
regardless of the financial accounting (d), as appropriate. Report on line 17, column (a), the total
period in which such amounts were or amount paid or accrued as FDIC
are included in financial accounting net Line 15. Deferred premiums included on Part I, line 11.
income. Complete columns (b), (c), and Compensation Report on line 17, column (c), any
(d), as appropriate. Report on line 15, column (a), any disallowed amounts, subject to the
compensation expense included in the applicable percentage, of any FDIC
Do not report on this line 11 amounts premiums paid or included by the large
net income (loss) amount reported in
required to be reported in accordance financial institution. For this purpose, the
Part I, line 11, that is not deductible for
with instructions for Part III, line 12. large financial institution includes
U.S. income tax purposes in the current
Do not report on this line 11 amounts tax year and that was not reported members of its expanded affiliated
recovered from insurers or any other elsewhere on Schedule M-3, column group, as defined in section 162(r)(6)
indemnitors for any fines and penalties (a). Report on line 15, columns (d) and (B). This disallowance does not apply if
described above. (e), the noneffectively connected and the institution’s (including members of
effectively connected portions of any its expanded affiliated group’s) total
Line 12. Judgments, Damages, compensation deductible in the current consolidated assets (determined as of
Awards, and Similar Costs tax year that was not included in the net the close of the tax year) do not exceed
Report on line 12, column (a), the income (loss) amount reported in Part I, $10 billion.
amount of any estimated or actual line 11, for the current tax year and that
judgments, damages, awards, is not reportable elsewhere on The applicable percentage is the
settlements, and similar costs, however Schedule M-3. For example, report excess of the corporation’s total
named or classified, included in originations and reversals of deferred consolidated assets over $10 billion,
financial accounting income, regardless compensation subject to section 409A divided by $40 billion. For taxpayers
of whether the amount deducted was on line 15. with total consolidated assets of $50
attributable to an estimate of future billion or more, the applicable
anticipated payments or actual Line 16. Charitable percentage is 100%. See section 162(r).
payments. Also report on line 12, Contributions Example 34. Corporation X has total
column (a), the reversal of any Report on line 16 any charitable consolidated assets of $20 billion.
overaccrual of any amount described in contribution of tangible or intangible Under section 162(r), no deduction is
this paragraph. property to a U.S. or foreign charity. For allowed for 25% ((20,000,000,000 –
example, include contributions of: 10,000,000,000) / 40,000,000,000) of
Report on line 12, column (e), any FDIC premiums.
such amounts as are described in the • Cash;
preceding paragraph that are includible • Buildings;
in taxable income, regardless of the • Intellectual property, patents Line 18. Current Year
(including any amounts of additional Acquisition or Reorganization
financial accounting period in which Investment Banking Fees, Legal
contributions allowable by virtue of
such amounts were or are included in
income earned by donees subsequent
financial accounting net income. and Accounting Fees
to the year of donation), copyrights,
Complete columns (b), (c), and (d), as Report on line 18 any investment
trademarks;
appropriate. banking fees and any legal and
• Securities (including stocks and their accounting fees paid or incurred in
Do not report on this line 12 amounts derivatives, stock options, and bonds); connection with a taxable or tax-free
required to be reported in accordance • Conservation easements (including acquisition of property (for example,
with instructions for Part III, line 11. scenic easements or air rights); stock or assets) or a tax-free
• Railroad rights of way; reorganization. Report on this line any
•
Do not report on this line 12 amounts Mineral rights; and investment banking fees incurred at any
•
recovered from insurers or any other Other tangible or intangible property. stage of the acquisition or
indemnitors for any judgments,
damages, awards, or similar costs Include any temporary differences for reorganization process including, for
described above. the charitable contribution carryforward example, fees paid or incurred to
limitation in column (b). Report any net evaluate whether to investigate an
Line 13. Pension and limitation carryforward for the current acquisition, fees to conduct an actual
Profit-Sharing year as a net negative number. Report investigation, and fees to consummate
Report on line 13 the expenses and any utilization of a prior year limitation the acquisition. Also, include on line 18
deductions attributable to the carryforward net of the current year investment banking fees incurred in
corporation's pension plans, limitation as a positive number in connection with the liquidation of a
profit-sharing plans, and any other column (b). Report any amounts from subsidiary, a spin-off of a subsidiary, or
retirement plans. Complete columns (b), column (b) that are allocable to an initial public stock offering.
(c), and (d), as applicable. noneffectively connected income in
Line 19. Current Year
column (d) and the effectively
Line 14. Other Post-Retirement connected portion of the utilization of Acquisition/Reorganization
Benefits charitable contribution carryforward in Other Costs
Report on line 14 the expenses and column (e). Report on line 19 any other fees paid or
deductions attributable to other incurred in connection with a taxable or
post-retirement benefits not otherwise tax-free acquisition of property (for

Instructions for Schedule M-3 (Form 1120-F)(2023) 23

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example, stock or assets) or a tax-free treatment. If there is no temporary expense included in Part I, line 11.
reorganization not otherwise reportable difference between the foreign bank's Report amounts in column (b) or (c), as
on Schedule M-3 (for example, Part III, books and tax treatment, then such ECI applicable. The corresponding interest
line 18). Report on this line any fees amount that is not included in column expense for U.S. income tax purposes is
paid or incurred at any stage of the (a) is apportioned in column (d), and its reported on Part III, lines 26b through
acquisition or reorganization process total is reflected in column (e). 26e, column (e). Do not report on this
including, for example, fees paid or line 26a, column (a), amounts
incurred to evaluate whether to Line 25. Purchase versus Lease reportable on:
investigate an acquisition, fees to (for Purchasers and/or 1. Part II, lines 9, 10, and 11
conduct an actual investigation, and Lessees) (income (loss) from U.S. partnerships,
fees to consummate the acquisition. Note. See the instructions for Part II, foreign partnerships, and other
Also, include on line 19 other line 17, earlier, for sellers and/or lessors. pass-through entities);
acquisition/reorganization costs Note. Interest expense from
incurred in connection with the Asset transfer transactions with partnerships and pass-through entities
liquidation of a subsidiary, a spin-off of a periodic payments characterized for is adjusted as a permanent difference in
subsidiary, or an initial public stock financial accounting purposes as either column (c) of Part II, lines 9, 10, and 11.
offering. a purchase or a lease may, under some The deductible portion of such interest
Line 20. Amortization/ circumstances, be characterized as the expense reported on Part II, lines 9, 10,
opposite for tax purposes.
Impairment of Goodwill and 11 is included in the interest
Report on line 20 amortization of If a transaction is treated as a lease, expense allocation under Regulations
goodwill or amounts attributable to the the purchaser/lessee reports the section 1.882-5 as reported on
impairment of goodwill. periodic payments as gross rental Schedule I and is also included on
expense. If the transaction is treated as Schedule M-3, Part III, lines 26b and
Line 21. Amortization of a purchase, the purchaser/lessee 26c.
Acquisition, Reorganization, reports the periodic payments as 2. Part II, line 12 (items relating to
and Start-Up Costs payments of principal and interest and reportable transactions); and
also reports depreciation expense or 3. Part III, lines 26b through 26e.
Report on line 21 amortization of deduction with respect to the purchased
acquisition, reorganization, and start-up asset. Line 26b. Interest Expense
costs. For purposes of columns (b), (c),
(d), and (e), include amounts Report on line 25, column (a), gross Allocable Under Regulations
amortizable under section 167, 195, or rent expense for a transaction treated as Section 1.882-5
248. a lease for income statement purposes The interest expense deduction under
but as a sale for U.S. income tax Regulations section 1.882-5 is based on
Line 22. Other Amortization or purposes. Report on line 25, column (e), a three-step formula required to be
Impairment Write-Offs gross rental deductions for a transaction reported on Schedule I (Form 1120-F).
Report on line 22 any amortization or treated as a lease for U.S. income tax Report the allocable amount of interest
impairment write-offs not otherwise purposes but as a purchase for income expense from Schedule I, line 23, in
includible on Schedule M-3. statement purposes. Report interest column (d) and in column (e) of line 26b.
expense for such transactions on Part
Line 23. Depreciation III, lines 26a through 26e, columns (a) Line 26c. Regulations Section
Report on line 23 any depreciation and (e), as applicable. Report 1.882-5 Allocation Amount
expense that is not required to be depreciation expense or deductions for Subject to Deferral or
reported elsewhere on Schedule M-3 such transactions on Part III, line 23
Disallowance
(for example, on Part II, line 2, 9, 10, or (depreciation), columns (a) and (e), as
11). applicable. Use columns (b), (c), and (d) Enter in column (e) the amount reported
of Part III, lines 23, 25, and 26a through on Schedule I (Form 1120-F), line 24g.
Line 24. Bad Debt Expense 26e, as applicable, to report the
Enter in column (b) the combined
Report on line 24, column (a), any differences between columns (a) and (e)
amounts from Schedule I, lines 24b,
amounts attributable to an allowance for for such recharacterized transactions.
uncollectible accounts receivable or 24c, 24e, and 24f, as a positive or
actual write-offs of accounts receivable Line 26a. Interest Expense Per negative number as the case may be for
included in determining net income per Books the current year. In column (c), enter the
combined amounts from Schedule I,
the income statement. Report in The detail for the foreign corporation's lines 24a and 24d as a negative
columns (d) and (e) the respective interest expense is reported on number.
noneffectively connected and the Schedule I (Form 1120-F). The scope of
effectively connected portions of the the interest expense lines on Part III, Line 26d. Substitute Interest
deductible amount of bad debt expense line 26, is limited to a summarization of Payments
determined under section 166 for the results from Schedule I that
All foreign corporations, report on
federal income tax purposes that is also reconcile the foreign corporation's book
line 26d all U.S. source substitute
included in column (a). If a foreign bank interest expense to effectively
interest payments (as to the recipient)
has an effectively connected bad debt connected taxable income.
expense that is not reportable in column with respect to securities lending
(a), the ECI amount is included in On line 26a, no amount is allocated transactions described in Regulations
column (b) if it is a temporary difference and apportioned to effectively or sections 1.861-2(a)(7) and 1.881-2(b)
and in column (e) to report the ECI noneffectively connected income. (2). Foreign banks that record substitute
Report in line 26a, column (a), interest interest payments on set(s) of books

24 Instructions for Schedule M-3 (Form 1120-F)(2023)

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that are not reported on Form 1120-F,     Country Y, that guarantees the              commission expense generally includes 
Schedule L, might also report foreign     transactions in FC's global dealing         amounts paid or accrued for services 
source substitute interest payments       operation. The set(s) of books in FC's      rendered to the foreign corporation 
whether or not they are allocable in      global dealing operation are booked in      including expenses paid for brokerage 
whole or in part to ECI. Foreign banks    FC's home office and are not reportable     commissions. Fees and commissions 
report in column (c) all U.S. source and  on Form 1120-F, Schedule L. FC              reportable on line 28 do not include 
allocable foreign source substitute       allocates and apportions 40% of the         amounts that are interest equivalents 
interest payments not already reflected   income and applicable expenses from         reportable on line 26e.
in column (a). The amounts reported in    its global dealing operation to effectively 
column (c) are apportioned to             connected taxable income. FC's              Line 29. Rental Expense
noneffectively connected income of the    guarantee fee expense paid to its           Report on line 29, column (a), the 
foreign corporation in column (d) and     foreign-related party is allocated directly amount of rental expense included on 
reported as a negative number.            to the income of the global dealing         Part I, line 11. Rental expense is the 
Amounts included in column (a) that are   operation and apportioned 40% to FC's       amount classifiable as rent under U.S. 
also apportioned to non-ECI are also      effectively connected income from such      tax principles.
reported in column (d) as a negative      operation. FC must report the guarantee     Line 30. Royalty Expense
number. The combined amounts of           fee expense paid to FC2 in column (c). 
columns (a), (b), (c), and (d) are        The amount of expense reported in           Report on line 30, column (a), the 
apportioned to effectively connected      column (c) is apportioned 60% to            amount of royalty expense included on 
income in column (e) as the case may      noneffectively connected income in          Part I, line 11. Include in columns (b) 
be.                                       column (d) and 40% to effectively           through (e) amounts that are allocable 
                                          connected income in column (e).             as imputed royalties under U.S. tax 
Note.  In using column (d) to apportion                                               principles that are not included in 
amounts to non-ECI that are not           Line 27. Substitute Dividend                financial income reported on Part I, 
included in column (a), line 26d contains Payments                                    line 11.
an exception to the general instructions  All foreign corporations report on line 27  Line 31. Expenses Allocable 
for Schedule M-3 reporting by foreign     the amount of U.S. source substitute        Under Regulations Section 
banks.                                    dividend payments with respect to 
Line 26e. Interest Equivalents            securities lending transactions             1.861-8
                                          described in Regulations sections           Line 31 applies only to foreign banks. 
(Guarantee Fees)                          1.861-3(a)(6) and 1.881-2(b)(2). Foreign    For purposes of Schedule M-3, all of the 
All foreign corporations, report on       banks that record substitute dividend       home office and other allocations to 
line 26e the foreign corporation's        payments on set(s) of books that are not    U.S. effectively connected income that 
amounts with respect to deductions that   reported on Form 1120-F, Schedule L,        are reportable on Schedule H (Form 
are not interest payments but are         might also report foreign source            1120-F) under Regulations section 
sourced to the recipient in the manner of substitute dividend payments whether        1.861-8 (including amounts that are 
interest (“interest equivalents”). These  or not they are allocable in whole or in    subject to timing differences under U.S. 
amounts include fees expensed for         part to ECI. Foreign banks report in        tax principles, such as home office 
financial guarantee and confirmation,     column (c) U.S. source and allocable        depreciation) are reportable as 
acceptance, and standby letter of credit  foreign source substitute dividends not     apportionments to ECI in column (d). 
transactions. Foreign banks that record   already reflected in column (a). The        Report in columns (d) and (e) the 
U.S. source guarantee fees on set(s) of   amounts reported in column (c) are          amount from Schedule H, line 20.
books not reported on Form 1120-F,        apportioned to noneffectively connected 
Schedule L, and not reported in column    income of the foreign corporation in        Note.   Foreign corporations other than 
(a), must report the U.S. source fees as  column (d) and reported as a negative       banks that are required to file Form 
a permanent difference on line 26e,       number. Amounts included in column          1120-F to report effectively connected 
column (c), and allocate and apportion    (a) that are also apportioned to non-ECI    income in Section II of that form are still 
the relevant amounts to noneffectively    are also reported in column (d) as a        required to complete and attach 
connected income in column (d) even if    negative number. The combined               Schedule H to their U.S. income tax 
there is no amount to allocate to         amounts of columns (a), (b), (c), and (d)   return. The amounts from Schedule H, 
effectively connected amounts in          are apportioned to effectively connected    line 20, are not reportable by a foreign 
column (e). Foreign corporations other    income in column (e) as the case may        corporation other than a bank on this 
than banks must record all interest       be.                                         line of Schedule M-3 because 
equivalent payments in column (a).                                                    worldwide expenses are already 
                                          Note. In using column (d) to apportion      includible in Schedule M-3, Part I, 
Note.  In using column (d) to apportion   amounts to non-ECI that are not             line 11, and in each expense line item in 
amounts to non-ECI that are not           included in column (a), line 27 contains    Schedule M-3, Part III. Such amounts 
included in column (a), line 26e contains an exception to the general instructions    are subject to individual line-item 
an exception to the general instructions  for Schedule M-3 reporting by foreign       apportionment to non-ECI in column (d).
for Schedule M-3 reporting by foreign     banks.
banks.
                                          Line 28. Fee and Commission 
Example 35.  FC is a foreign bank, 
resident in Country X, that files Form    Expense
1120-F and Schedule M-3. FC enters        Enter on Part III, line 28, column (a), the 
into a guarantee arrangement with FC2,    amounts of fees and commissions 
a wholly owned subsidiary, resident in    included on Part I, line 11. Fee and 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                             25

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Line 32. Other Expense/ lease cancellation costs, loss on sale of related to reserves and contingent
Deduction Items With equipment, etc., a supporting statement liabilities. Report on line 32, column (e),
that lists those categories of expenses amounts related to liabilities for reserves
Differences and Reconciliation and their details will satisfy the and contingent liabilities that are
to Eliminate Duplicate Amounts requirement to separately state and deductible in the current tax year for
on Line 31 adequately disclose. In order to U.S. income tax purposes. Examples of
Separately state and adequately separately state and adequately reserves that are allowed for book
disclose on line 32 all items of expense/ disclose the employee termination purposes, but not for tax purposes,
deduction that are not otherwise listed costs, it is not required that an include warranty reserves, restructuring
on Part III, lines 1 through 31. Amounts anticipated termination cost amount be reserves, reserves for discontinued
included on line 31, column (e), from listed for each employee, or that each operations, and reserves for
Schedule H (Form 1120-F), line 20, that asset (or category of asset) be listed acquisitions and dispositions. Only
are also included in this Schedule M-3, along with the anticipated loss on report on line 32 items that are not
Part III, lines 3, 5 through 23, 25, 26d, disposition. required to be reported elsewhere on
Schedule M-3, Parts II and III.
26e, and 27, need to be reversed to The attached statement should have
avoid duplicate allocation. The six columns. The first column has the Amounts incurred as fixed or
combined amounts for these lines description for the next five columns. determinable or other periodic interest
reported in column (e) that is duplicative The second column is column (a), rate or equity notional principal contract
of any amount included in line 31, expense per income statement. The expense that is not incurred in a
column (e), is reported and reversed on third column is column (b), temporary hedging transaction, securities dealing
line 32. Report such duplicative amount differences. The fourth column is or global securities dealing operation,
as a negative amount includible in column (c), permanent differences. The each of which is reportable on Part II,
line 32, column (c) and column (e). fifth column is column (d), other are reportable on Part III, line 32.
Such negative amount will need to be permanent differences for allocations to Example 36. Corporation Q is a
combined with other expense/deduction non-ECI and ECI. The sixth column is calendar year taxpayer that is required
items that have differences. Attach a column (e), deduction per tax return. For to file Schedule M-3 for the current tax
statement to show the duplicative items each item listed on the attached year. On July 1 of each year, Q has a
that are being reversed. statement for line 32, columns (a) fixed liability for its annual insurance
Attach a statement that describes through (d) when combined must equal premiums on its home office building
and itemizes the type of expense/ column (e). The amounts in columns (a) that provides a 12-month coverage
deduction and the amount of each item, through (e) for all items must be totaled period beginning July 1 through June
and provides a description that states on the attached statement and the total 30. In addition, Q historically prepays 12
the expense/deduction name for book amounts must be included on line 32 of months of advertising expense on July
purposes for the amount recorded in the face of the statement. 1. On July 1, Q prepays its insurance
column (a) and describes the Comprehensive income. If any premium of $500,000 and advertising
adjustment being recorded in column “comprehensive income” as defined by expenses of $800,000. For statutory
(b), (c), or (d). The entire description SFAS No. 130 is reported on this line, accounting purposes, Q capitalizes and
completes the tax description for the describe the item(s) in detail. amortizes the prepaid insurance and
amount included in column (e) for each advertising over 12 months. For U.S.
item separately stated on this line. Reserves and contingent liabilities. income tax purposes, Q deducts the
Report on line 32 amounts related to the insurance premium when paid and
The statement attached to the change in each reserve or contingent amortizes the advertising over the
Schedule M-3 for line 32 must liability that is not required to be 12-month period. In its annual
separately state and adequately reported elsewhere on Schedule M-3. statement, Q treats the differences
disclose the nature and amount of the For example: (1) amounts relating to attributable to the annual statement
expense related to each reserve and/or changes in reserves for litigation must treatment and U.S. income tax
contingent liability. The appropriate level be reported on Part III, line 12 treatment of the prepaid insurance and
of disclosure depends upon each (judgments, damages, awards, and advertising as temporary differences.
taxpayer’s operational activity and the similar costs); and (2) amounts relating Q also has a legal reserve where
nature of its accounting records. For to changes in reserves for uncollectible $300,000 was expensed for financial
example, if a corporation’s net income accounts receivable must be reported accounting purposes and a ($100,000)
amount reported in the income on Part III, line 24 (bad debt expense). temporary difference was calculated to
statement includes anticipated
expenses for a discontinued operation Report on line 32 the amortization of arrive at the income tax deduction of
as a single amount, and its general various items of prepaid expense, such $200,000. The statement attached to
ledger or other books, records, and as prepaid subscriptions and license Q’s return for Part III, line 32, must be
workpapers provide details for the fees, prepaid insurance, etc. separately stated and adequately
anticipated expenses under more Report on line 32, column (a), disclosed, as indicated in the table
explanatory and defined categories expenses included in net income below.
such as employee termination costs, reported on Part I, line 11, that are

26 Instructions for Schedule M-3 (Form 1120-F)(2023)

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Line 32—Example 36
Statement Concerning Other Expense/Deduction Items With Differences

                                                                                      Column (d) 
                                                                                      Other 
                                                                                      Permanent 
                      Column (a)           Column (b) Column (c)                      Differences for Column (e) 
                      Expense per          Temporary  Permanent                       Allocations to  Deduction per Tax 
Description           Income Statement     Difference Difference                      non-ECI and ECI Return
Prepaid insurance 
premium expensed not 
capitalized             $250,000           $250,000   -0-                             -0-             $500,000
Legal expense reserve   $300,000           ($100,000) -0-                             -0-             $200,000
Total Line 32           $550,000           $150,000   -0-                             -0-             $700,000

                                           the amounts reported on Part III, line 33, (a), ($1 million). Similarly, if Part III, 
Line 33. Total Expense/                    column (a) through (e), as applicable.     line 33, column (b), reflects an amount 
Deduction Items                            For example, if Part III, line 33, column  of ($50,000), then report on Part II, 
Report on Part II, line 26, columns (a)    (a), reflects an amount of $1 million,     line 26, column (b), $50,000.
through (e), as applicable, the inverse of then report on Part II, line 26, column 

Instructions for Schedule M-3 (Form 1120-F)(2023)                                                                                27

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