PDF document

- 1 -

                              Userid: CPM                       Schema: instrx Leadpct: 100% Pt. size: 9          Draft           Ok to Print
AH XSL/XML                    Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                     (Init. & Date) _______

Page 1 of 26                                                                                                     9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

                                                                                                                 Department of the Treasury
                                                                                                                 Internal Revenue Service
2023

Instructions for Schedules 

K-2 and K-3 (Form 8865)

Partners’ Distributive Share Items—International and Partner’s Share of Income, 
Deductions, Credits, etc.—International

Section references are to the Internal Revenue Code unless                     Schedule K-2. The information reported on Schedule K-3 is used 
otherwise noted.                                                               to report information on a partner’s tax or information returns.

Contents                                                                  Page Who Must File
What’s New    . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1  Any person that is required to file Form 8865, Schedule K, for a 
General Instructions      . . . . . . . . . . . . . . . . . . . . . . . . . 1  partnership that has items relevant to the determination of U.S. 
Specific Instructions     . . . . . . . . . . . . . . . . . . . . . . . . . 2  tax under the international provisions of the Internal Revenue 
Schedule K-2, Identifying Information . . . . . . . . . . . . .             2  Code (the Code) must complete the relevant parts of Schedules 
                                                                               K-2 and K-3. See each part and section for a more detailed 
Schedule K-3, Identifying Information . . . . . . . . . . . . .             3  description of who must file each part and section. Penalties may 
Part I. Partnership's Other Current Year                                       apply for filing Form 8865 without all required information. The 
  International Information           . . . . . . . . . . . . . . . . . . . 3  penalties that apply to the Form 8865 and the Schedule K-1 
Schedules K-2 and K-3, Parts II and III             . . . . . . . . . . . . 6  apply to the Schedules K-2 and K-3, respectively. See Penalties 
                                                                               in the Instructions for Form 8865.
Part ll. Foreign Tax Credit Limitations           . . . . . . . . . . . . . 7
Part III. Other Information for Preparation of Form                            Category 1 and Category 2 filers must complete 
  1116 or 1118        . . . . . . . . . . . . . . . . . . . . . . . . . . . 9  Schedule K-1 for any direct interest they hold in the partnership. 
                                                                               Category 1 filers are also required to complete Schedule K-1 for 
Part IV. Information on Partners' Section 250                                  each U.S. person that directly owns a 10% or greater direct 
  Deduction With Respect to Foreign-Derived                                    interest in the partnership. These partners that are required to 
  Intangible Income (FDII)            . . . . . . . . . . . . . . . . . .   14 complete a Schedule K-1 must also complete a Schedule K-3 if 
Part V. Distributions From Foreign Corporations to                             the partnership has items relevant to the determination of U.S. 
  Partnership       . . . . . . . . . . . . . . . . . . . . . . . . . . .   16 tax under the international provisions. Partners may also receive 
Part VI. Information on Partner's Section 951(a)(1)                            Schedule K-3 from Category 1 filers who complete a 
  and Section 951A Inclusions               . . . . . . . . . . . . . . .   18 Schedule K-3 on their behalf. Partners should review the 
                                                                               Partner’s Instructions for Schedule K-3 (Form 1065) for how to 
Part VII. Information To Complete Form 8621                   . . . . . .   19 complete partner tax forms for items reported on Schedule K-3 
Part VIII. Partners' Information for Base Erosion and                          (Form 8865).
  Anti-Abuse Tax (Section 59A)                . . . . . . . . . . . . . .   22
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Note.     Except as otherwise required by statute, regulations, or 
                                                                               other IRS guidance, a U.S. person isn’t required to obtain 
Future Developments                                                            information from direct or indirect partners of the partnership to 
                                                                               determine if it needs to file each of these parts.
For the latest information about developments related to 
Schedule K-2 (Form 8865) and Schedule K-3 (Form 8865), and                     Note.     A U.S. person is only required to complete the relevant 
their instructions, such as legislation enacted after they were                portions of the Schedules K-2 and K-3, as applicable. For 
published, go to IRS.gov/Form8865.                                             example, if the partnership doesn’t own an interest in a foreign 
                                                                               corporation, the following parts are not required: Schedules K-2 
What’s New                                                                     and K-3, Part V and Part VI.
• Part I, box 7, (formerly required attachment of Form 8858) has 
been reserved for future use.                                                  Note.     Schedules K-2 and K-3 consist of the most common 
• Part II: Amounts may now be entered in lines 41–43, columns                  international tax provisions of the Code. However, not all 
(a)–(e), for interest expense.                                                 provisions are specifically identified on these schedules. To the 
                                                                               extent that an international provision is impacted and isn’t 
                                                                               otherwise specifically identified, check box 12 on Schedule K-2, 
General Instructions                                                           Part I, and Schedule K-3, Part I, and attach a statement to both 
See the Instructions for Form 8865, as they generally apply to                 Schedules K-2 and K-3 (for distributive share).
the Schedules K-2 and K-3. This document provides additional 
instructions for the Schedules K-2 and K-3 for tax years                       When and Where To File
beginning in 2023.                                                             Attach Schedule K-2, and Schedule K-3, if applicable, to Form 
                                                                               8865 with your income tax return and file by the due date 
Purpose of Schedules K-2 and K-3                                               (including extensions) for that return. See the Instructions for 
Schedule K-2 is an extension of Schedule K of the Form 8865                    Form 8865 for further information.
and is used to report items of international tax relevance from the            See the Instructions for Form 8865 for instructions concerning 
operation of a partnership.                                                    amendments or adjustments to Schedules K-2 and K-3.
  Schedule K-3 is an extension of Schedule K-1 (Form 8865) 
and is generally used to report the share of the items reported on 

Jan 4, 2024                                                               Cat. No. 35339Y

- 2 -

Page 2 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

report income adjustments under section 743(b) by source and
Computer-Generated Schedules K-2 separate category. Partners use the information to figure and
and K-3 claim a foreign tax credit on Form 1116 or 1118.
Generally, all computer-generated forms must receive prior Part IV of Schedules K-2 and K-3. Used to report the
approval from the IRS and are subject to an annual review. information necessary for the partner to determine its section
However, see the Exception below. 250 deduction for FDII. Partners use the information to claim and
figure a section 250 deduction for FDII on Form 8993, Section
Requests for approval may be submitted electronically to 250 Deduction for Foreign-Derived Intangible Income (FDII) and
substituteforms@irs.gov or requests may be mailed to: Global Intangible Low-Taxed Income (GILTI).
Part V of Schedules K-2 and K-3. Used to report
Internal Revenue Service information the partner needs, in combination with other
Attention: Substitute Forms Program information known to the partner, to determine the amount of
SE:W:CAR:MP:P:TP each distribution from a foreign corporation that is treated as a
1111 Constitution Ave. NW dividend or excluded from gross income because the distribution
Room 6554 is attributable to previously taxed earnings and profits (PTEP) in
Washington, DC 20224 the partner’s annual PTEP accounts for the foreign corporation,
and the amount of foreign currency gain or loss on the PTEP that
Exception. If computer-generated Schedules K-2 and K-3 the partner is required to recognize under section 986(c).
conform to and do not deviate from the official form and Partners report the dividends and foreign currency gain or
schedules, they may be filed without prior approval from the IRS. loss on Form 1040 or Form 1120. If eligible, partners also use
this information to figure and claim a dividends received
Important. Be sure to attach the approval letter to deduction under section 245A on Form 1120.
computer-generated Schedule K-2 or K-3. However, if the Part VI of Schedules K-2 and K-3. Used to provide
computer-generated form is identical to the IRS-prescribed form, information the partner needs to determine any inclusions under
it doesn’t need to go through the approval process, and an sections 951(a)(1) and 951A. Partners use the information to
attachment isn’t necessary. complete Form 8992, U.S. Shareholder Calculation of Global
Every year, the IRS issues a revenue procedure to provide Intangible Low-Taxed Income (GILTI), and Forms 1040 and 1120
guidance for filers of computer-generated forms. In addition, for subpart F income inclusions, section 951(a)(1)(B) inclusions,
every year, the IRS issues Pub. 1167, General Rules and and section 951A inclusions.
Specifications for Substitute Forms and Schedules, which Part VII of Schedules K-2 and K-3. Used to provide
reprints the most recent applicable revenue procedure. Pub. information needed by partners to complete Form 8621,
1167 is available at IRS.gov/irb/2020-53_IRB#REV- Information Return by a Shareholder of a Passive Foreign
PROC-2020-55. The procedures relevant to Form 8865 and Investment Company or Qualified Electing Fund, and to provide
Schedule K-1 (Form 8865) apply for purposes of Schedules K-2 partners with information to determine income inclusions for the
and K-3. passive foreign investment company (PFIC).
Part VIII of Schedules K-2 and K-3. Used to provide
How To Complete Schedules K-2 and K-3 information for the partner to figure its base erosion and
Reporting currency. Report all amounts in U.S. dollars except anti-abuse tax (BEAT). Partners will use the information to
where specified otherwise. complete Form 8991, Tax on Base Erosion Payments of
Taxpayers With Substantial Gross Receipts.
Form references. These instructions refer to other forms. If the
referenced form has been succeeded by another form, the
references to those prior forms encompass any successor forms. Specific Instructions
References to Form 1040, U.S. Individual Income Tax Return,
also include Form 1040-SR, U.S. Tax Return for Seniors. Also, If the information required in a given section exceeds the
when Form 1040 is referenced, the part may be relevant for other ! space provided within that section, do not enter “See
tax returns for noncorporate partners such as Form 1041, U.S. CAUTION attached” in the section or leave the section blank.
Income Tax Return for Estates and Trusts. Instead, complete all entry spaces in the section and attach the
remaining information on additional sheets. For all attachments,
When Form 1120, U.S. Corporation Income Tax Return, is include the part, section, line number, and column of the relevant
referenced, the part may be relevant for other tax returns for portion of Schedule K-2 and Schedule K-3. The additional
corporate partners such as Form 1120-L, U.S. Life Insurance sheets must conform to the IRS version of that section.
Company Income Tax Return.
Uses of the parts of Schedules K-2 and K-3, in general.
Schedule K-2, Identifying Information
Part I of Schedules K-2 and K-3. Used to report
international tax items not reported elsewhere on Schedule K-2 At the top of each new page, enter the name of the partnership
or K-3. as it appears on Form 8865.
Part II of Schedules K-2 and K-3. Used to figure the If the foreign partnership has an employer identification
partnership’s income or loss by source and separate category of number (EIN), enter the EIN as it appears on Form 8865 at the
income and to report the partner’s distributive share of such top of each new page. Do not enter “FOREIGNUS” or “APPLIED
income or loss. Partners use the information to figure and claim a FOR.” Enter the reference ID number used on Form 8865, item
foreign tax credit on Form 1116 or 1118. G2(b). For details, see the instructions for Form 8865, item
Part III of Schedules K-2 and K-3. Used to report G2(b). Do not enter “FOREIGNUS” or “APPLIED FOR” for the
information necessary for the partner to determine the allocation reference ID number.
and apportionment of research and experimental (R&E)
expense, interest expense, and the foreign-derived intangible Item A—Part applicability. Check the “Yes” box to indicate the
income (FDII) deduction for the foreign tax credit limitation. Also applicable parts of Schedules K-2 and K-3. Complete and attach
used to report foreign taxes paid or accrued by the partnership each applicable part to the Form 8865 and the Schedule K-1
and the partner's distributive share of such taxes. Also used to (Form 8865), respectively.

2 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 3 -

Page 3 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Check the “No” box to indicate the inapplicable parts of shown in Table 1. If the gain is capital, enter “long-term” or
Schedules K-2 and K-3. Do not complete and attach the “short-term” in column (b). Enter the two-letter code from the list
inapplicable parts to the Form 8865 and the Schedule K-1 (Form at IRS.gov/CountryCodes in column (f). Don’t enter “various” or
8865), respectively. “OC” for the country code. If the property sale is taxed by more
than one country, complete a separate line for that country, but
Schedule K-3, Identifying Information indicate in some manner (for example, a footnote) that the
property entered on both lines is the same property.
Items A and B. Items A and B should be the same as reported
on Schedule K-1, Part I, items A1 or A2 and B. Enter the Box 2. Foreign oil and gas taxes. A separate foreign tax
information reported on Schedule K-1, Part I, item A1. If there is credit limitation is applied for foreign oil and gas taxes. See
no entry in item A1, then enter the information in item A2. section 907(a) and Regulations section 1.907(a)-1 for details. If
the partnership has such taxes, check box 2 and attach a
Items C and D. Items C and D should be the same as reported completed Schedule I (Form 1118) to the Schedules K-2 and
on Schedule K-1, Part II, items C and D1. K-3 (with the partner’s distributive share). Do not complete
Item E. Item E should correspond to Schedule K-2, Identifying Schedule I (Form 1118), Part I, column 12; Part II, lines 2 through
Information, item A. 4; or Part III, lines 1 and 3. Attach Schedule I (Form 1118) even if
there are no corporate partners because the limitation applies to
Schedule K-2, Part I (Partnership's Other individuals eligible to claim a foreign tax credit.
Current Year International Information), and Box 3. Splitter arrangements. Foreign taxes for a foreign tax
Schedule K-3, Part I (Partner's Share of credit splitting event are suspended until the related income is
Partnership’s Other Current Year International taken into account by the taxpayer. See section 909. There is a
foreign tax credit splitting event for foreign taxes of a payor if in
Information) connection with a splitter arrangement, as defined in Regulations
This part is used to report information for international tax items section 1.909-2(b), the related income was, is, or will be taken
not reported elsewhere on the Schedule K-2. Check the box to into account by a covered person. See Regulations section
indicate whether any of the following international tax items are 1.909-2(a). A covered person, as defined in Regulations section
applicable in the tax year. If applicable, attach statements, as 1.909-1(a)(4), includes, for example, any entity in which the
described below, to the Schedule K-2. payor holds, directly or indirectly, at least a 10% ownership
interest (determined by vote or value). A payor, as defined in
If applicable, also complete Schedule K-3, Part I, and include
Regulations section 1.909-1(a)(3), includes, for example, a
with the Schedule K-3 the attachment(s) as described below
with the partner's distributive share of the amounts. person that takes foreign income taxes paid or accrued by a
partnership into account pursuant to section 702(a)(6).
Box 1. Gain on personal property sale. In general, income Report foreign taxes that are potentially suspended on
from the sale of personal property is sourced according to the Schedule K-2, Part III, Section 4, line 2E, and each partner's
residence of the seller. See section 865. For sourcing purposes, share of such taxes on Schedule K-3, Part III, Section 4, line 2E.
personal property sold by the partnership is treated as sold by It may not be possible to determine whether taxes are
the partners. See section 865(i)(5). A U.S. citizen or resident suspended and whether related income is taken into account.
alien individual with a tax home (as defined in section 911(d)(3)) However, where it is possible to determine that taxes are
in a foreign country is treated as a nonresident for the sale of potentially suspended, or potentially unsuspended, it must report
personal property only if an income tax of at least 10% of the such taxes and the information requested in these instructions
gain derived from the sale is actually paid to a foreign country for for box 3.
that gain. See section 865(g). In addition, if a U.S. resident
maintains an office or other fixed place of business in a foreign For example, where a partnership owns a reverse hybrid and
country, income from the sale of personal property attributable to the foreign country assesses tax on the partnership for income
such office or other fixed place of business is foreign source only earned by the reverse hybrid, such taxes are potentially
if an income tax of at least 10% of the income from the sale is suspended taxes.
actually paid to a foreign country for such income. Check box 3 and attach a statement to Schedules K-2 and
If the partnership has income from the sale of personal K-3 that includes the following for each splitter arrangement in
property (other than inventory, depreciable personal property, which the partnership participates that would qualify as a splitter
and certain intangible property excepted from the general rule of arrangement under section 909 if one or more partners are
section 865(a)), and the partnership pays income tax to a foreign covered persons for an entity that took into account related
country for income from the sale or the income is eligible for income from the arrangement.
resourcing under an applicable treaty, check box 1 and attach a Section 1 of attached statement—Potentially suspended
statement to Schedules K-2 and K-3 (for distributive share) with taxes.
Table 1. 1. Explanation of the splitter arrangement (for example,
The partnership may combine sales of stock property by reverse hybrid owned by partnership).
country. Otherwise, don’t combine sales of property. Each item 2. Amount of taxes paid or accrued by the partnership in
of property sold must be listed separately with the information connection with the splitter arrangement.

Table 1. Information on Personal Property Sold (For use with Sch. K-2 (Form 8865), Part I, box 1) (Also
for use with Sch. K-3 (Form 8865), Part I, box 1)

(a) Property description (b) Long-term/short-term (c) Gains (d) Amount of tax paid (e) Amount of tax paid in U.S. (f) Taxing country
in local currancy dollars (enter two-letter
country code)

Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 3

- 4 -

Page 4 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Attachment 1

Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of Allocable Expenses II. Taxes
A Passive income subject to withholding tax of
15% or more
B Passive income subject to withholding tax of
less than 15% but greater than zero
C Passive income not subject to any foreign tax
D Passive income subject to no withholding tax,
but subject to other foreign tax

Attachment 2

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU
(Complete a separate Attachment 2 for each I. Passive Income Net of Allocable Expenses II. Taxes
foreign QBU)
B Passive income subject to withholding tax of
15% or more
C Passive income subject to withholding tax of
less than 15% but greater than zero
D Passive income not subject to any foreign tax
E Passive income subject to no withholding tax,
but subject to other foreign tax

3. Amount of related income on which such taxes were paid Box 5. High-taxed income. If the partnership has passive
or accrued. income, check the box for item 5 and attach a statement to
4. The two-letter code for the country to which the taxes Schedules K-2 and K-3 with Attachment 1 or 2, or both,
were paid or accrued from the list at IRS.gov/CountryCodes. Do completed. This information helps to determine whether a
not enter “various” or “OC” for the country code. partner’s passive income is high-taxed passive income.
5. The separate category and source of income to which the Income received or accrued by a U.S. person that would
taxes are assigned. otherwise be passive income isn’t treated as passive income if
the income is determined to be high-taxed income. See section
Section 2 of attached statement—Potentially 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
unsuspended taxes. Include a separate section that reports a partner must group its shares of items of passive income from
the following for each splitter arrangement for which the a partnership according to the rules in Regulations sections
partnership has taken into account any related income. 1.904-4(c)(3) and (4).The grouping rules of paragraph (c)(3)
1. Origin year of the splitter arrangement. apply separately to income attributable to each foreign qualified
2. Explanation of the splitter arrangement (for example, business unit (QBU) as defined in section 989(a) of a foreign
reverse hybrid owned by partnership). partnership.
3. Amount of taxes paid or accrued by the partnership in Note. Passive income isn’t treated as subject to a withholding
connection with the splitter arrangement in the origin year of the tax or other foreign tax when a credit is disallowed in full for such
splitter arrangement. foreign tax, for example, under section 901(k).
4. Amount of related income on which such taxes were paid Example 1. Part I, box 5: high-taxed income. In Year 1, FP,
or accrued in the origin year of the splitter arrangement. a foreign partnership, has two domestic corporate partners with
5. The two-letter code for the country to which the taxes equal interests in the partnership. In Year 1, FP receives $100 of
were paid or accrued from the list at IRS.gov/CountryCodes. passive dividend income from a noncontrolled 10%-owned
Don’t enter “various” or “OC” for the country code. foreign corporation subject to a 15% withholding tax. FP also
6. The separate category and source of income to which the receives $150 of passive interest income from an unrelated
taxes are assigned. person subject to a 30% withholding tax. FP incurs $80 of
expenses that are allocable to the interest income. FP also
7. Amount of related income taken into account in the receives $50 of passive dividend income from a controlled
current tax year and the amount of taxes originally paid that foreign corporation (CFC) which isn’t subject to tax. No
relate to that portion of the related income. expenses are allocable to the dividend income. FP's branch
operation in Country X that is treated as a QBU under section
Box 4. Foreign tax translation. If any foreign taxes are 989(a) receives $100 of passive dividend income subject to a
reported on Schedules K-2 and K-3, Part III, Section 4, check the 15% withholding tax. Finally, FP earns $400 of passive income
box for item 4 and attach to Schedules K-2 and K-3 the for its branch operation in Country X that is treated as a QBU
statement described in the instructions for those sections. under section 989(a). Such income is subject to foreign tax (but
not withholding tax) of $40. Expenses of $120 are allocable to

4 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 5 -

Page 5 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Attachment 1 for Example 1

Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of Allocable II. Taxes
Expenses
A Passive income subject to $170 $60
withholding tax of 15% or more
B Passive income subject to 0 0
withholding tax of less than 15%
but greater than zero
C Passive income not subject to 50 0
any foreign tax
D Passive income subject to no 0 0
withholding tax, but subject to
other foreign tax

Attachment 2 for Example 1

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU: Country X QBU
(Complete a separate Attachment 2 for each I. Passive Income Net of Allocable Expenses II. Taxes
foreign QBU)
B Passive income subject to withholding tax of 100 15
15%
C Passive income subject to withholding tax of 0 0
less than 15% but greater than zero
D Passive income not subject to any foreign tax 0 0
E Passive income subject to no withholding tax, 280 40
but subject to other foreign tax

the distributive share of branch income. No expenses are Note for boxes 8 and 9. If the Form 8865 filer meets an
allocable to the dividend income. exception, such as the multiple filer exception, to filing Form
For Year 1, the U.S. person filing Form 8865 checks box 5 on 5471, Information Return of U.S. Persons With Respect to
Part I of Schedule K-2 (Form 8865) and attaches Attachments 1 Certain Foreign Corporations, the filer isn’t required to complete
and 2 to Schedule K-2. and attach that form. However, the filer must still attach to the tax
FP’s owner completes the same attachments with the return of the U.S. person filing Form 8865 any required
distributive shares and attaches those attachments to each statements to qualify for the exception to filing the Form 5471.
Schedule K-3. Box 8. Form 5471 information. If applicable, check box 9 and
Box 6. Section 267A disallowed deduction. Check box 6 if attach to Form 8865 and Schedule K-3 any Forms 5471. See the
the partnership paid or accrued any interest or royalty for which Partnership Instructions for Schedules K-2 and K-3 (Form 1065)
the U.S. person filing the Form 8865 knows, or has reason to for applicability.
know, that one or more of the partnership’s partners isn’t allowed Box 9. Other forms. If any other international tax forms are
a deduction under section 267A. In addition, on Schedule K-3 applicable, check box 9 and attach the form(s) to Form 8865 and
filed for such partners, the U.S. person filing Form 8865 should Schedule K-3. See the Partnership Instructions for Schedules
check box 6 in Part I and attach to the Schedule K-3 a statement K-2 and K-3 (Form 1065) for applicability.
titled "Section 267A Disallowed Deduction" that separately lists
the following information. Box 10. Partner loan transactions. Check this box and
append the completed attachment to Schedules K-2 and K-3 if
A. The amount of interest paid or accrued by the partnership either the partnership (a) received a loan from its partner (or a
for which the partner isn’t allowed a deduction under section member of the partner’s affiliated group) (“downstream loan”), as
267A. described in Regulations section 1.861-9(e)(8); or (b) loaned an
B. The amount of royalty paid or accrued by the partnership amount to its partner (or a member of the partner’s affiliated
for which the partner isn’t allowed a deduction under section group) (“upstream loan”), as described in Regulations section
267A. 1.861-9(e)(9).
C. The extent to which information reported on other parts of
Downstream loans. On an attached statement, provide the
the Schedule K-3 (for example, a line in Part II, Section 2)
details of any downstream loans from a partner or a member of
reflects interest or royalty for which the partner isn’t allowed
the partner’s affiliated group, including the amount of interest
a deduction under section 267A.
expense paid or accrued by the partnership. Report the
When completing other parts of Schedules K-2 and K-3 information separately for each separate loan. The reporting
! (for example, a line in Part II, Section 2), list an amount should be as follows in Table 2.
CAUTION without regard to whether the partner is disallowed a
deduction under section 267A for the amount.

Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 5

- 6 -

Page 6 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Table 2. Downstream Loans and K-3, Parts II and III, must be completed unless the
partnership doesn’t have a direct or indirect partner eligible to
Name of Lender’s Date Amount Interest claim a foreign tax credit or the direct or indirect partner wouldn’t
Lender TIN of of Expense have to file a Form 1116 or Form 1118 to claim a credit. See
Loan Loan for the section 904(j) and further discussion in the next paragraphs. This
Year requirement applies regardless of whether the partnership pays
or accrues foreign taxes because other information, such as the
source of the partnership’s income and the value of its assets, is
relevant in determining the partner’s foreign tax credit. A partner
If there are any partners in the same affiliated group as the that is eligible to claim a foreign tax credit includes a domestic
lender, attach a statement to each of the Schedules K-2 and K-3 corporation, a U.S. citizen or resident, U.S. citizen or resident
to expand the columns in the table to include the information beneficiaries of domestic trusts and estates, certain foreign
requested in the first two columns for each such partner. corporations, and certain nonresident individuals. See sections
Upstream loans. On the attached statement, provide the 901 and 906. An indirect partner includes a partner that owns the
details for any upstream loans to its partner or a member of the partnership through a pass-through entity (for example, a
partner’s affiliated group, including the amount of interest income partnership, an S corporation, or a trust (see Regulations section
received or accrued by the partnership. Report the information 1.904-5(a)(4)(iv) for the definition of pass-through entity)). An
separately for each separate loan. The reporting should be as indirect partner also includes a partner that owns the partnership
follows in Table 3. through a foreign corporation. See sections 960 and 1293(f). If
there is insufficient information, a direct or indirect partner must
presume such partner is eligible to claim a foreign tax credit and
Table 3. Upstream Loans such partner would have to file a Form 1116 or 1118 to claim a
credit. Accordingly, the Schedules K-2 and K-3 must be
Name of Borrower’s Date Amount Interest completed.
Borrower TIN of of Income
Loan Loan for the On Schedule K-2, Parts II and III, report the partnership’s
Year gross income, gross receipts, cost of goods sold, certain
deductions, and taxes by source and separate category. Also
report information that the partner uses to allocate and apportion
expenses and determine the source of certain items of gross
If there are any partners in the same affiliated group as the income and gross receipts. Unless specifically noted below,
borrower, attach a statement to each of the Schedules K-2 and report on Schedule K-3, Parts II and III, the partner's share of the
K-3 to expand the columns in the table to include the information partnership's gross receipts, gross income, cost of goods sold,
requested in the first two columns for each such partner. certain deductions, and taxes by source and separate category.
The partner adds its share of the partnership's foreign source
Box 11. Dual consolidated loss. Check box 11 if either (a) gross receipts, gross income, cost of goods sold, certain
the partnership directly or indirectly owns a foreign branch (as deductions, and taxes by separate category to its other foreign
defined in Regulations section 1.367(a)-6T(g)) or an interest in a source gross receipts, gross income, cost of goods sold, certain
hybrid entity (as defined in Regulations section 1.1503(d)-1(b) deductions, and taxes in that separate category to figure its
(3)), or (b) the partnership is a hybrid entity (as defined in foreign tax credit. Also report on the Schedule K-3 the
Regulations section 1.1503(d)-1(b)(3)). However, box 11 should distributive share of expenses and the allocation and
not be checked if neither the U.S. person filing Form 8865 nor apportionment factors the partner uses to determine expenses
any partner for which a Schedule K-3 is filed is a domestic allocated and apportioned to foreign source income.
corporation (other than a regulated investment company (RIC), a
real estate investment trust (REIT), or an S corporation). A Partnership determination. The source and separate
domestic corporate partner’s interest in the partnership or its category of certain gross income, gross receipts, and cost of
indirect interest in a foreign branch or hybrid entity may be goods sold, as well as the allocation and apportionment of
treated as a separate unit and subject to the dual consolidated certain deductions, can be determined for the partnership. This
loss (DCL) rules pursuant to Regulations sections 1.1503(d)-1 includes deductions that are definitely related to certain gross
through 1.1503(d)-8. income of the partnership. See Regulations section 1.861-8(b)
(1). See Schedule K-2, Part II, columns (a) through (e); Part III,
Box 12. Other international items. If the partnership has Section 1, columns (a) through (e); Part III, Section 3, columns
transactions, income, deductions, payments, or anything else (a) through (d); and Part III, Section 5, columns (a) through (f). In
that is impacted by the international tax provisions of the Code Part III, Section 2, columns (a) through (e), some partnership
and such events aren’t otherwise reported on this part or other assets may be characterized by source and separate category
parts of Schedules K-2 and K-3, report that information on a according to the partnership. This includes certain assets that
statement attached to Schedules K-2 and K-3 and check box 12. attract directly allocated interest expense under Temporary
• For box 12, file Form 926, Return by a U.S. Transferor of Regulations sections 1.861-10T(b) and (c). See Temporary
Property to a Foreign Corporation. Regulations section 1.861-10T(d)(2).
Don’t report for box 12: In Part III, Section 4, in the U.S. and Foreign columns, assign
• Form 8804, Annual Return for Partnership Withholding Tax; foreign taxes paid or accrued to a separate category and source.
and The partner's distributive share of the amounts reported on
• Form 8805, Foreign Partner’s Information Statement of Schedule K-2 is reported on equivalent columns in
Section 1446 Withholding Tax. Schedule K-3, Parts II and III.
These forms are separately filed. Certain gross receipts, gross income, cost of goods sold,
assets, deductions, and taxes are not assigned to a source or
Schedules K-2 and K-3, Parts II and III separate category for the partnership. See Partner
determination, later.
Note. This information is relevant to partners computing a
foreign tax credit on Form 1116 or Form 1118. Schedules K-2

6 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 7 -

Page 7 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Foreign branch category income. Report all gross receipts, Partner determination. In Schedule K-2, Part II, column (f);
gross income, cost of goods sold, and deductions that are Part III, Section 1, column (f); Part III, Section 3, lines 1 and 2,
foreign branch category income. See Regulations section column (e); and Part III, Section 5, column (g), enter the gross
1.904-4(f). Report all income that would be foreign branch income, income adjustments, and gross receipts of the
category income of its partners as if all partners were U.S. partnership that are required to be sourced by the partner. This
persons that are not pass-through entities. See Schedule K-2, includes income from the sale of most personal property other
Part II, column (b); Part III, Sections 1 and 2, column (b); and than inventory, depreciable property, and certain intangible
Part III, Sections 4 and 5, column (c). The partner's distributive property sourced under section 865. This also includes certain
share of the amounts reported on the Schedule K-2 are reported foreign currency gain on section 988 transactions. See the
on equivalent columns in Schedule K-3, Parts II and III. instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax
Schedule K-3. Any amounts reported on Schedule K-2 as Credit for Individuals, for additional details. In Schedule K-2, Part
foreign branch category income should be reported as general II, column (f); and Part III, Section 3, lines 3 and 4, column (e),
category income on the Schedule K-3, Parts II and III, provided include deductions that are allocated and apportioned by the
to foreign individuals and foreign corporations. partner. This includes most interest expense and R&E expense.
See Regulations sections 1.861-9(e) and 1.861-17(f). In
Section 901(j) income. Income derived from each sanctioned Schedule K-2, Part III, Section 2, column (f), enter the assets that
country is subject to a separate foreign tax credit limitation. If the are assigned to a source and separate category by the partner.
partnership derives such income, enter code "901j" on the line In Schedule K-2, Part III, Section 4, in the Partner column, enter
after “category code.” See Schedule K-2, Part II, Sections 1 and the foreign taxes that are assigned to a source of income by the
2, column (e); Part III, Sections 1 and 2, column (e); Part III, partner. This includes taxes imposed on certain sales income.
Section 3, column (d); and Part III, Sections 4 and 5, column (f). The partner's distributive share of the amounts reported on
The partner's distributive share of the amounts reported on Schedule K-2 are reported in equivalent columns on
Schedule K-2 are reported in equivalent columns on Schedule K-3, Parts II and III.
Schedule K-3, Parts II and III. See the Instructions for Form 1118
for the potential countries to be listed with the section 901(j) Schedule K-2, Part II, and Schedule K-3, Part II
category of income.
(Foreign Tax Credit Limitation)
Note. As of the date of these instructions, section 901(j) is the Section 1. Lines 1 Through 24. Total Gross Income
only category reported on Part II, Sections 1 and 2, column (e);
Part III, Sections 1 and 2, column (e); and Part III, Section 5,
column (f). Form 1118, Schedule A, requires a corporation to separately
report certain types of gross income and gross receipts by
Section 951A category income. Section 951A category source and separate category. Separate reporting is required
income is any amount of global intangible low-taxed income because each type of gross income and gross receipts has a
(GILTI) includible in gross income under section 951A (other different sourcing rule. See sections 861 through 865 (and
than passive category income). (Section 951A category income section 904(h) and, in some cases, U.S. income tax treaties).
doesn’t include passive category income.) If the partnership Schedules K-2 and K-3, Part II, Section 1, generally follow the
pays or accrues tax on the receipt of a distribution of PTEP separately reported types of gross income and gross receipts on
assigned to the reclassified section 951A PTEP group or section Schedule A. Individuals must follow the same sourcing rules, but
951A PTEP group, these taxes must be assigned to section Form 1116 only requires reporting of total gross income from
951A category income. foreign sources by separate category.
The U.S. person completing Form 8865 will enter code
"951A" on Part III, Section 4, column (b). This code isn’t utilized So, those required to file Form 1116 will report line 24 by
in other portions of Parts II and III. country on their Form 1116, Part I, line 1a. Section 1 also
generally follows the types of gross income and gross receipts
Income resourced by treaty. If a sourcing rule in an separately reported on Form 8865, Schedule K.
applicable income tax treaty characterizes any U.S. source
income as foreign source, and there is an election to apply the For each line, report the total for each country in column (g).
treaty, the income will be treated as foreign source. This
category applies if the partnership pays or accrues foreign taxes Country code. Forms 1116 and 1118 require the taxpayer to
on receipt of a distribution of PTEP that is sourced from an report the foreign country or U.S. territory for which the gross
annual PTEP account that corresponds to the separate category income and gross receipts are sourced. On lines 1 through 24,
relating to U.S. source income included under section 951(a)(1) for each gross income and gross receipts item, enter on a
and resourced as foreign source income under a treaty. separate line (A, B, or C) the two-letter code from the list at
The designations below are only relevant for Part III, Section IRS.gov/CountryCodes for the foreign country or U.S. territory
4, column (f). within which the gross income and gross receipts are sourced. If
a type of income is sourced from more than three countries,
Code “RBT PAS.” If an applicable income tax treaty attach a schedule with the information required on Schedules
characterizes any U.S. source passive category income as K-2, Part II, and Schedule K-3, Part II, for that type of income.
foreign source passive category income, and there is an election If income is U.S. source, enter “US.” Do not enter “various” or
to apply the treaty, enter code “RBT PAS.” “OC” for the country code.
Code “RBT GEN.” If an applicable income tax treaty
characterizes any U.S. source general category income as Note. In Part II, column (f), enter the code “XX” if the country or
foreign source general category income, and there is an election U.S. territory for which the gross income and gross receipts are
to apply the treaty, enter code “RBT GEN.” sourced by the ultimate non-pass-through entity partner and the
filer can’t determine the source. However, don’t enter the code
Code “RBT 951A.” If an applicable income tax treaty “XX” in Part II, column (f), if an income tax of at least 10% of the
characterizes any U.S. source section 951A category income as gain derived from the sale is actually paid to a foreign country for
foreign source section 951A category income, and there is an that gain. See sections 865(e) and 865(g). Instead, enter in Part
election to apply the treaty, enter code “RBT 951A.” II, column (f), the foreign country to which the partnership paid
the income tax equal to at least 10% of the gain.
Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 7

- 8 -

Page 8 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Each gross income and gross receipts item (for example, Example 3. Table 1
sales vs. interest income) may have different countries listed on
A, B, C, etc., given that the partnership might not have sales Short- term capital
income and interest income, for example, from the same country. gains/losses
Line 24 should sum each country’s total income reported on Part
II, regardless of the line on which such income is reported, Total $900
whether A, B, C, etc. U.S. source $1,000
Exceptions. The instructions for Forms 1116 and 1118 Passive category $400
specify exceptions from the requirement to report gross income (France)
and gross receipts by foreign country or U.S. territory regarding
RICs and section 863(b). See the instructions for Forms 1116 Passive category ($300)
and 1118 for these exceptions that apply in completing the (Canada)
Schedules K-2 and K-3, Parts II and III. Don’t enter a foreign Passive category ($200)
country or U.S. territory (to report on a country-by-country basis) (Halti)
for lines 16 through 18.
These amounts are reported on Schedule K-2, Part II, Section
Note. Schedules K-2 and K-3 request that gross income and 11, as follows.
gross receipts be reported by country or U.S. territory because
such information is requested on Forms 1116 and 1118. Income Example 3. Table 2
and taxes are reported by country on the Forms 1116 and 1118
so that the IRS may initially evaluate whether taxpayers are (a) U.S. (b) Foreign
claiming credits for compulsory payments to foreign source source
governments. passive
Example 2. In Year 1, FP, a foreign partnership, has Line 11
employees who perform services in Country X and Country Y. FP
earns $25,000 of general category services income, $10,000 for A US $1,000
Country X and $15,000 for Country Y. The two-letter code for B FR $400
Country X is XX and the two-letter country code for Country Y is
YY. The U.S. person filing Form 8865 makes the following entries C CA ($300)
on the first two lines of Schedule K-2, Part II, line 2. D HA ($200)
Example 2 Table
Line 12. Net long-term capital gain. Don’t include gains
Description (d) reported on lines 13, 14, and 15 on line 12.
A XX $10,000 Line 13. Collectibles (28%) gain. Report collectibles gain on
B YY $15,000 line 13 and not line 12.
Line 14. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 14 and not on line 12. If
Lines 3 and 4. Rental income. These lines are reported gain is both unrecaptured section 1250 gain and net section
separately because they are reported separately on Form 8865, 1231 gain, report the gain on line 14 and not on line 15, but
Schedule K. The sourcing rule may be the same for both types of include an attachment indicating the amount of unrecaptured
rental income. section 1250 gain that is also net section 1231 gain.
Lines 7 and 8. Ordinary dividends and qualified dividends. Line 15. Net section 1231 gain. Report net section 1231 gain
Enter only ordinary dividends on line 7 and only qualified on line 15 and not on line 12 unless such amount is also
dividends on line 8. unrecaptured section 1250 gain. See the instructions for line 14.
Lines 16 and 46. Section 986(c) gain and loss. Report the
Note. The amount of distributions which are attributable to partnership’s share of a lower-tier pass-through entity’s section
PTEP in annual PTEP accounts of a direct or indirect partner 986(c) gain or loss. This isn’t reported as a net amount but rather
isn’t determined by the partnership and so isn’t taken into total section 986(c) gains for the year are reported on line 16.
account for purposes of determining the ordinary dividends to be Total section 986(c) losses for the year are reported on line 46.
entered on line 7 or the qualified dividends to be entered on
line 8. Note. Don’t figure or report foreign currency gain or loss under
Lines 11 through 15 and 27 through 30. Capital gains and section 986(c) for distributed PTEP sourced from an annual
losses. These lines generally match the types of gains and PTEP account of a person other than the partnership (for
losses reported separately on Form 8865, Schedule K. Further, example, a partner).
section 904(b)(2)(B) contains rules regarding adjustments to Lines 17 and 47. Section 987 gain and loss. The source of
account for capital gain rate differentials (as defined in section section 987 gain or loss is generally determined by reference to
904(b)(3)(D)) for any tax year. the source of the income or asset giving rise to such gain or loss.
Example 3. Part II and III: capital gains and losses. It’s also possible to obtain section 987 gain or loss information
Partnership has the following amounts for the tax year 2023. from Form 8858. This isn’t reported as a net amount but rather
total section 987 gains for the year are reported on line 17. Total
section 987 losses for the year are reported on line 47.
Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
generally determined by reference to the residence of the
taxpayer or QBU on whose books the asset, liability, or item of
income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer

8 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 9 -

Page 9 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

partner, the section 988 gain and loss would be reported in certain exceptions, and included in column (f). See Temporary
column (f). Regulations section 1.861-9T(e)(1).
Line 20. Other income. Attach a statement to both Schedules Interest expense incurred by certain individuals, estates, and
K-2 and K-3 describing the amount and type of other income. trusts is characterized based on the categories of interest
The statement must conform to the format of Part II. expense in sections 163 and 469: active trade or business
interest, investment interest, or passive activity interest, adjusted
Line 24. Total gross income. Enter the total gross income for any interest expense directly allocated under Temporary
received from all sources on line 24. Then, add the gross income Regulations section 1.861-10T. See Regulations section
on lines 1 through 23 by country or U.S. territory and enter the 1.861-9T(d). The amounts in each category of interest expense
total by country in rows A, B, and C (and additional rows if more are reported on lines 41 through 43. See the Partnership
than three countries). The sum of the amounts in rows A, B, C, Instructions for Schedules K-2 and K-3 (Form 1065) for an
etc., doesn’t need to equal the amount on line 24 given that not example. Also see the Partnership Instructions for Schedules
every gross income amount is required to be reported by K-2 and K-3 (Form 1065) for instances when interest expense
country. may reduce passive category income or income in other
Line 28. Net long-term capital loss. Don’t include losses categories and an attachment may be necessary. If the
reported on line 29. partnership's only partners are corporate partners, do not report
the partnership’s interest expense by the categories of interest
Line 29. Collectibles loss. Report collectibles loss on line 29 expense in sections 163 and 469. All such interest expense may
and not on line 28. be reported as business interest expense on line 41.
Exception. See Regulations sections 1.861-9(e)(8) and (9)
Section 2. Lines 25 Through 54. Total Deductions for a special rule for partnership loans. See also the instructions
for box 10 of Part I.
Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and Note. Interest expense is always included on lines 39 through
separate category. Separate reporting is required because each 43 and not on other lines.
type of deduction may be allocated and apportioned according Line 45. Foreign taxes not creditable but deductible. See
to a different methodology. See, for example, Regulations the instructions for Forms 1116 and 1118 for examples of foreign
sections 1.861-8 through -20 and Temporary Regulations taxes that are not creditable but deductible.
sections 1.861-8T and -9T. For purposes of allocating and
apportioning expenses, in general, a partner adds the Note. Foreign taxes that are creditable (even if a partner
distributive share of the partnership's deductions to its other chooses to deduct such taxes) are not reported as expenses on
deductions incurred directly by the partner. See Regulations Part II. Creditable taxes are reported on Part III, Section 4.
section 1.861-8(e)(15). Generally, Section 2 follows the
separately reported types of deductions and losses on Form Lines 49 and 50. Other deductions. Attach to the Schedules
1118, Schedule A. Individuals must generally follow the same K-2 and K-3 a statement describing the amount and type of
expense allocation and apportionment rules, but Form 1116 only other deductions. The statement must conform to the format of
requires separate reporting of certain deductions by separate Part II.
category. See Form 1116, Part I, lines 2 through 5. Generally,
Section 2 also corresponds to the deductions separately Schedule K-2, Part III, and Schedule K-3, Part III
reported on Form 8865, Schedule K. (Other Information for Preparation of Form 1116
Line 32. R&E expenses. In general, R&E expenses are or 1118)
allocated and apportioned by the partner and reported in column
(f). See Regulations section 1.861-17(f). R&E expenses, as Section 1. R&E Expenses Apportionment Factors
described in section 174, are ordinarily definitely related to gross
intangible income reasonably connected with relevant broad
product categories of the taxpayer and are allocable to gross This information is relevant to partners to allocate and apportion
intangible income as a class related to such product categories. its R&E expense for foreign tax credit limitation purposes.
The product categories are determined by reference to the
three-digit classification of the Standard Industrial Classification A Form 8865 filer isn’t required to complete Section 1 of Part
Manual (SIC code). III unless either (a) the partnership incurs R&E expense; or (b)
the partner is expected to license, sell, or transfer its intangible
Line 38. Charitable contributions. Charitable contribution property to the partnership (as provided in Regulations section
deductions are apportioned solely to U.S. source gross income. 1.861-17(f)(3)).
See Regulations section 1.861-8(e)(12). So, this deduction
should be reported in column (a). Deductible R&E expenses, as described in section 174, are
Lines 39 and 40. Interest expense specifically allocable un- ordinarily definitely related to gross intangible income
der Regulations sections 1.861-10 and -10T. Apart from reasonably connected with relevant broad product categories of
interest expense entered on line 39, enter on line 40 interest the taxpayer and are allocable to gross intangible income as a
expense that is directly allocable under Temporary Regulations class related to such product categories. The product categories
section 1.861-10T to income from specific partnership property. are determined by reference to the three-digit classification of
Such interest expense is treated as directly allocable to income the SIC code. In general, R&E expenses are apportioned based
generated by such partnership property. See Temporary on gross receipts.
Regulations section 1.861-9T(e)(1).
Lines 41 through 43. Other interest expense. A partner's R&E expenses are allocated and apportioned by the partner.
distributive share of a partnership's interest expense that isn’t See Regulations section 1.861-17(f)(1). This requires that Form
directly allocable to income from specific partnership property is 8865 reports to its partners the gross receipts by SIC code
generally allocated and apportioned by the partner, subject to according to source and separate category of income. This also
requires that the Form 8865 reports the amount of R&E expense
performed in the United States and outside the United States to

Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 9

- 10 -

Page 10 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

apply exclusive apportionment. See Regulations section Note. Attach to Form 1065 a second Part III, Section 2, if the
1.861-17(f)(2). filer reports both the tax book value and the alternative tax book
value of its assets.
Column (e). As of the date of these instructions, the only
separate category that could be included in column (e) is the Column (b). Characterize the pro rata share of the partnership
section 901(j) category of income. See the Instructions for Form assets that give rise to foreign branch category income as assets
1118 for the potential countries to be listed with the section in the foreign branch category. See Regulations section
901(j) category of income. 1.861-9(e)(10).
Line 1. Enter the gross receipts by SIC code for each grouping. Column (e). As of the date of these instructions, the only
Such gross receipts include both the partnership's gross receipts separate category that could be included in column (e) is the
and certain other parties' gross receipts. See Regulations section 901(j) category of income. See the Instructions for Form
sections 1.861-17(d)(3) and (4). Sales of parties controlled by 1118 for the potential countries to be listed with the section
the partnership should be included on line 1 if such controlled 901(j) category of income.
parties can reasonably be expected to benefit from the R&E
Line 1. On Schedule K-2, report the average of the
expense connected with the product categories. This includes
beginning-of-year and end-of-year inside bases in the
sales that benefit from the partner's R&E expenses if licensed
partnership’s total assets. See Regulations section 1.861-9(g)(2)
through the partnership. Sales of uncontrolled parties are also
(i)(A). On Schedule K-3, report the partner’s distributive share of
taken into account if such sales involve intangible property that
the assets reported on Schedule K-2.
was licensed or sold to the uncontrolled party if the uncontrolled
party can reasonably be expected to benefit from the R&E Line 2. On Schedule K-2, report the partnership’s average of
expense. the beginning-of-year and end-of-year inside bases adjustments
under sections 734(b) and 743(b). On Schedule K-3, report the
Line 2. Report the amount of R&E expense related to activity
partner’s distributive share of the adjustments reported on
performed in the United States and the amount of R&E expense
Schedule K-2.
related to activity performed outside the United States by SIC
code. The total of the amounts on Schedule K-2, Part III, Section Lines 3 and 4. On Schedule K-2, report reductions in the
1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the partnership's asset values to reflect the partnership's directly
total of the amounts on Schedule K-3, Part III, Section 1, line 2, allocable interest under Regulations section 1.861-10(e) and
must equal Schedule K-3, Part II, line 32. Temporary Regulations section 1.861-10T. See also Temporary
Regulations section 1.861-9T(e)(1). On Schedule K-3, report the
Note. Line 2 isn’t reported according to source or separate partner’s distributive share of the reduction in asset values
category. reported on Schedule K-2.
Note. The SIC code for line 2B(i) doesn’t need to be the same Line 5. On Schedule K-2, report the average value of
SIC code for line 2A(i). partnership assets excluded from the apportionment formula.
See section 864(e)(3). On Schedule K-3, report the partner’s
distributive share of the excluded assets reported on
Section 2. Interest Expense Apportionment Schedule K-2.
Factors
Line 6. Individual partners who are general partners or who are
This information is relevant to a partner to allocate and apportion limited partners with an interest in the partnership of 10% or
interest expense for foreign tax credit limitation purposes. more follow the same rules as corporate partners whose interest
in the partnership is 10% or more except that their interest
Complete this Section 2 only if the partnership or the partners expense must be apportioned according to the interest expense
have interest expense or stewardship expense. classifications under sections 163 and 469. See Regulations
section 1.961-9T(d). This includes reporting the assets
Stewardship expenses. In the case of the partner’s according to such classifications. If the partnership has no such
stewardship expenses incurred to oversee the partnership, the partners, don’t complete Schedule K-2, Part III, Section 2, lines
partnership's value is determined and characterized under the 6b through d; or Schedule K-3, Part III, Section 2, lines 6b
asset method in Regulations section 1.861-9 (taking into through d. Include the total amount on line 6a.
account any adjustments under sections 734(b) and 743(b)).
See Regulations section 1.861-8(e)(4)(ii)(C). So, the reporting Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
below for Part III, Section 2, for interest expense apportionment and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
factors generally applies to the partner’s stewardship expense and 6d if the partnership has partners other than corporate
apportionment. partners. See the Partnership Instructions Schedules K-2 and
K-3 (Form 1065) for an example.
For corporate partners with an interest in the partnership of Schedule K-3. If the partnership's partners aren’t limited to
10% or more, interest expense, including the partner's corporate partners, when completing Schedule K-3, Part III,
distributive share of partnership interest expense, is apportioned Section 2, for the corporate partners with an interest of 10% or
by reference to the partner's assets, including the partner's pro more in the partnership, don’t complete lines 6b through d.
rata share of partnership assets. See Regulations section Include the total distributive share on line 6a.
1.861-9(e)(2). Interest expense is apportioned based on the Lines 7 and 8. The amounts reported on lines 7 and 8 are
average value of assets. See Regulations section 1.861-9(g)(2) subsets of the amounts reported on line 6 representing the value
(i)(A). A taxpayer can use either the tax book value or the of stock held by the partnership in certain foreign corporations. In
alternative book value of its assets. See Regulations section determining its foreign tax credit limitation, a partner should
1.861-9(i). Under both methods, the partner uses the disregard interest expense that is “properly allocable'' to stock of
partnership's inside basis in its assets, including adjustments a 10%-owned foreign corporation that has been characterized as
required under sections 734(b) and 743(b). See Regulations a section 245A asset. See section 904(b)(4) and Regulations
sections 1.861-9(e)(2) and (3). When reporting the basis in an section 1.904(b)-3(a)(1)(ii). The amount of properly allocable
asset which is stock in nonaffiliated 10%-owned corporations, deductions is determined by treating the section 245A subgroup
adjust such amount for earnings and profits (E&P). See for each separate category as a statutory grouping for purposes
Regulations section 1.861-12(c)(2)(i)(A).

10 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 11 -

Page 11 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

of allocating and apportioning interest deductions on the basis of This information is relevant to partners to allocate and
assets. Assets in a section 245A subgroup only include stock of apportion their FDII deduction under section 250(a)(1)(A) for
a specified 10%-owned foreign corporation that has been foreign tax credit limitation purposes. The deduction is definitely
characterized as a section 245A asset. related and allocable to the class of gross income included in the
The stock is characterized as a section 245A asset to the partner’s foreign-derived deduction eligible income (FDDEI) (as
extent it generates income that would generate a dividends defined in section 250(b)(4)) and is apportioned within the class,
received deduction under section 245A if distributed. This if necessary, ratably between the statutory grouping (or among
doesn’t include income that is included as GILTI, subpart F the statutory groupings) of gross income and the residual
income, or a section 951(a)(1)(B) inclusion or income described grouping of gross income based on the relative amounts of
in section 245(a)(5) (which gives rise to a dividends received FDDEI in each grouping. See Regulations section 1.861-8(e)
deduction under section 245 instead of section 245A). (13). If the partner is a member of a consolidated group, see
Regulations section 1.861-14(e)(4). Accordingly, this section
In the case of a specified 10%-owned foreign corporation that requires information that its partners use to determine the source
isn’t a CFC, all of the value of its stock is potentially in a section and separate category of its income such that partners may
245A subgroup because the stock generally generates allocate and apportion the FDII deduction under section 250(a)
dividends eligible for the section 245A deduction (and cannot (1)(A) for purposes of the foreign tax credit limitation.
generate an inclusion under section 951(a)(1) or 951A(a)) if the
partner meets the requirements for eligibility. See Regulations Lines 1 and 2. Report the partnership’s foreign-derived gross
section 1.904(b)-3(c)(2). However, because there may not be receipts and cost of goods sold, respectively, by source and
information to determine if a partner is eligible for a section 245A separate category.
deduction (for example, due to tiered ownership), the partner Lines 3 and 4. Report the partnership’s deductions allocable
must determine to what extent the stock is treated as an asset in to foreign-derived gross receipts and other partnership
a section 245A subgroup. deductions apportioned to foreign-derived gross receipts,
For a partnership-owned specified 10% foreign corporation respectively. See Part IV, Section 2, lines 11 and 12. Although
that isn’t a CFC, report on line 7, columns (a) through (e), the these deduction amounts are necessary to figure the partner’s
total value of the stock in all such foreign corporations. The value FDII deduction, once this amount is determined, the actual FDII
of the stock is the partnership's basis in the stock adjusted to deduction itself is allocated and apportioned as described in
take into account the E&P of the foreign corporations as Regulations section 1.861-8(e)(13).
explained in Regulations section 1.861-12(c)(2). Attach to the
Schedules K-2 and K-3 a statement with the following Column (d). As of the date of these instructions, the only
information for each foreign corporation for which adjusted basis separate category that could be included in column (d) is the
is reported on line 7. section 901(j) category of income. See the Instructions for Form
• Name of foreign corporation. 1118 for the potential countries to be listed with the section
• EIN or reference ID number. Do not enter “FOREIGNUS” or 901(j) category of income.
“APPLIED FOR.”
• Percentage of voting and value of stock owned by the Section 4. Foreign Taxes
partnership in such foreign corporation. Note. Don’t complete this Section 4 if the partnership doesn’t
• Value of the stock in such corporation included in each of the pay or accrue foreign taxes.
groupings on lines 6b through 6d (identify separately each of
those groupings). In Part III, Section 4, assign foreign taxes paid or accrued
If the specified 10%-owned foreign corporation is a CFC, a (including on U.S. source income) to a separate category and
portion of the value of stock in each separate category and in the source. Include taxes paid or accrued to foreign countries or to
residual grouping for U.S. source income is subdivided between U.S. territories.
a section 245A and non-section 245A subgroup under the rules Attachment. As previously mentioned in the instructions for
described in Regulations section 1.861-13(a)(5). However, Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for
because there will generally not be information to apply the stock distributive share), for each of the amounts listed in lines 1
characterization rules described in Regulations section through 3, attach to the Schedules K-2 and K-3 a statement
1.861-13(a)(5), the partner must apply those rules to reporting the following information.
characterize the stock. The dates on which the taxes were paid or accrued.
•
For partnership-owned CFCs, report on line 8, column (f), the • The exchange rates used.
total value of its stock in all such foreign corporations. The value • The amounts in both foreign currency and U.S. dollars. See
of the stock is the partnership's inside basis in the stock adjusted section 986(a).
to take into account the E&P of the foreign corporations as
explained in Regulations section 1.861-12(c)(2). Attach to the Column (a). Enter the code for the type of tax.
Schedules K-2 and K-3 a statement with the following
information for each foreign corporation for which basis is
reported on line 8.
• Name of foreign corporation.
• EIN or reference ID number. Do not enter “FOREIGNUS” or
“APPLIED FOR.”
• Percentage of voting and value of stock owned by the
partnership in such foreign corporation.
• Value of the stock in such corporation.

Section 3. Foreign-Derived Intangible Income
(FDII) Deduction Apportionment Factors
Note. Don’t complete this Section 3 if there are no domestic
corporate partners (whether direct or indirect).
Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 11

- 12 -

Page 12 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Codes for Types of Tax Line 1. Enter in U.S. dollars the total foreign taxes (described in
section 901 or section 903) that were paid or accrued by the
Code Type of Tax partnership (according to its method of accounting for such
taxes). Don’t reduce the amount that you report on line 1 by the
WHTD Withholding tax on dividends reductions reported on line 2. Don’t report redetermined taxes on
WHTP Withholding tax on distributions of line 1. Report such taxes on line 3.
PTEP
Note. Don’t include on line 1 any foreign taxes not creditable but
WHTB Withholding tax on branch
remittances deductible as reported on Part II, Section 2, line 45.
WHTR Withholding tax on rents, royalties, If the partnership uses the cash method of accounting, check
and license fees the "Paid" box and enter foreign taxes paid during the tax year on
line 1. Report each partner's share on Schedule K-3, Part III,
WHTI Withholding tax on interest Section 3, line 1.
ECI Taxes paid or accrued to foreign If the partnership uses the accrual method of accounting,
countries or U.S. territories on certain check the "Accrued" box and enter foreign taxes accrued on
effectively connected income line 1. Report each partner's share on Schedule K-3, Part III,
OTHS Other foreign taxes paid or accrued Section 4, line 1.
on sales income
OTHR Other foreign taxes paid or accrued Note. Check only one box “Paid” or “Accrued” depending on the
on services income method of accounting the partnership has to take into account
foreign taxes.
OTH Other foreign taxes paid or accrued
Enter on a separate line (that is, after A, B, and C), taxes paid
If there are multiple types of tax for the same country, or accrued to each country. Enter the two-letter code from the list
generate multiple alpha rows for the same country, one row for at IRS.gov/CountryCodes. Don’t enter “various” or “OC” for
each type of tax. For example, see below. country code.
Exceptions The instructions for Forms 1116 and 1118
Codes for Multiple Types of Tax specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. territory regarding
RICs and section 863(b). These exceptions apply as well to
Description (a) reporting of taxes in this section.
Type of tax
Example 4. Part III, Section 4: multiple country sources:
A AA WHTD foreign taxes The facts are the same as in Example 2, earlier.
B BB OTH FP uses the cash method of accounting and pays taxes of
$1,000 and $3,000 to Countries XX and YY, respectively. The
Column (b). Taxes assigned to section 951A category. U.S. person completes Part III, Section 4, line 1, as follows.
Taxes assigned to section 951A category income are taxes paid
or accrued on distributions of PTEP assigned to the reclassified Example 4 Table
section 951A PTEP and section 951A PTEP groups. This might
not be able to be completed due to lack of information regarding (a) (e)
the treatment of the current year distributions.
Column (f). Other category. 901/903) Paid Type of tax Foreign
Direct (section
Foreign taxes paid or accrued to sanctioned countries. foreign taxes
No credit is allowed for foreign taxes paid or accrued to certain
sanctioned countries. A XX OTHR 1,000
Foreign taxes related to PTEP resourced by treaty. If the B YY OTHR 3,000
partnership pays or accrues foreign taxes on receipt of a
distribution of PTEP that is sourced from an annual PTEP Line 2. Enter on line 2 a negative number for the sum of the
account that corresponds to the separate category relating to taxes in the following categories.
U.S. source income included under section 951(a)(1) and A. Taxes on foreign mineral income (section 901(e)).
resourced as foreign source income under a treaty, such taxes B. Reserved.
are included in column (f). C. Taxes attributable to boycott operations (section 908).
On the line after "category code," enter one of the following D. Reduction in taxes for failure to timely file (or furnish all of
codes. the information required on) Form 8865 (section 6038(c)).
Code “RBT PAS.” If an applicable income tax treaty treats any E. Foreign income taxes paid or accrued during the current
tax year for splitter arrangements under section 909.
U.S. source passive category income as foreign source passive
category income, and the partner elected to apply the treaty, F. Foreign taxes on foreign corporate distributions. For
example, report taxes on dividends eligible for a deduction
enter code “RBT PAS.”
under section 245A and ineligible for credit under section
Code “RBT GEN.” If an applicable income tax treaty treats any 245A(d). Also, include taxes on a distribution of PTEP
U.S. source general category income as foreign source general assigned to the following PTEP groups: reclassified section
category income, and the partner elected to apply the treaty, 965(a) PTEP, reclassified section 965(b) PTEP, section
enter code “RBT GEN.” 965(a), and section 965(b) PTEP, a portion of which isn’t
Code “RBT 951A.” If an applicable income tax treaty treats any creditable. It may not be possible to determine the amount of
U.S. source section 951A category income as foreign source a distribution that is attributable to non-previously taxed E&P
section 951A category income, and the partner elected to apply or PTEP for which a foreign tax credit may be partially or
the treaty, enter code “RBT 951A.” entirely disallowed. However, it’s important to track this
amount as a tax on a distribution.

12 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 13 -

Page 13 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

G. Other. Attach a statement to the Schedules K-2 and K-3 contested foreign income tax. If it’s unknown whether the
indicating the reason for the reduction. partners are corporations, individuals, estates, or trusts, provide
There is no need to report the amounts on line 2 by country. the information necessary for the partners to complete both
Schedule L (Form 1118), Parts I and II (as applicable); and
Line 3. Enter in U.S. dollars the change in foreign tax as a Schedule C (Form 1116) Parts I and II (as applicable).
result of a foreign tax redetermination. See section 905(c) and
Partnerships must also file a statement each year for which
Regulations sections 1.905-3 through -5. If the amount is less
there are one or more contested liabilities outstanding or in
than the original foreign tax, report the change as a negative
which a contested tax is resolved that includes information
amount. If the amount is more than the original foreign tax, report
necessary for partners to complete both Schedule L (Form
the change as a positive amount.
1118), Part V, and Schedule C (Form 1116), Part V.
Note. Payment of additional foreign taxes that relate to an
earlier tax year by a partnership that uses the cash method of Section 5. Other Tax Information
accounting doesn’t result in a foreign tax redetermination. See
Regulations section 1.905-3(a). Such amounts should be This information is relevant to partners computing a foreign tax
reported on line 1 as foreign taxes paid by the partnership in the credit.
current year. Report the U.S. tax year to which the foreign tax Column (b). Don’t report any amounts in this column.
relates. This would be the U.S. tax year that includes the close of
the foreign tax year to which the tax relates. Report the date on Column (f). As of the date of these instructions, this column
which the tax was paid. If there is more than one date tax is paid, will only include the section 901(j) category and the countries
enter one of the dates paid on the schedule itself and then attach relevant to that category. See the Instructions for Form 1118 for
to the Schedules K-2 and K-3 a statement including all of the the potential countries to be listed with the section 901(j)
information reported on the schedule with the other dates paid. category of income. No credit is allowed for taxes paid or
If there is more than one redetermination in a year for different accrued to a country described in section 901(j). However, a
countries, report such redeterminations on separate lines. Enter deduction is generally allowed for a tax described in section
the two-letter code from the list at IRS.gov/CountryCodes. 901(j).
Similarly, if there is more than one redetermination in a year for Line 1. For partnerships other than publicly traded partnerships
the same country, but the redeterminations are related to (PTPs), report the total of all partners’ shares of the net positive
different years, report such redeterminations on separate lines. income adjustments resulting from all section 743(b) basis
Exceptions. The instructions for Forms 1116 and 1118 adjustments. Net positive income adjustments from all section
specify exceptions from the requirement to report gross income 743(b) basis adjustments means the excess of all section 743(b)
and gross receipts by foreign country or U.S. territory for RICs adjustments allocated to the partner that increase the partner's
and section 863(b). Don’t enter “various” or “OC” for the country taxable income over all section 743(b) adjustments that
code. decrease the partner's taxable income. Attach to the Schedules
In addition, if the direct or indirect partners are corporations, K-2 and K-3 a statement showing each section 743(b) basis
attach a statement that includes the information on Schedule L adjustment making up the total and identify the assets to which it
(Form 1118), Parts I and II, as applicable, for each foreign tax relates and the separate category and source of the income
redetermination. If the direct or indirect partners are individuals, generated by the assets. Make sure to include the class of gross
estates, or trusts, attach a statement that includes the income or deduction, for example, sales income, interest
information on Schedule C (Form 1116), Parts I and II, as income, or depreciation deduction. You may group these section
applicable, for each foreign tax redetermination. If the indirect 743(b) basis adjustments by asset category or description in
partners are unknown, attach a statement that includes both the cases where multiple assets are affected if the assets generate
information on Schedule L (Form 1118), Parts I and II, as the same separate category and source of income. The section
applicable; and Schedule C (Form 1116), Parts I and II, as 743(b) positive income adjustments should be included as
applicable. relevant in other parts of the Schedule K-2. For example, the
Contested taxes. In general, a contested foreign income tax section 743(b) income adjustments should be reflected as part
liability doesn’t accrue until the contest is resolved and the of the total depreciation reported on Part II, Section 2.
amount of the liability has been finally determined. In addition, a Line 2. For partnerships other than PTPs, report the total of all
contested foreign income tax liability isn’t a reasonable partners' shares of the net negative income adjustment resulting
approximation of the final foreign income tax liability and so isn’t from all section 743(b) basis adjustments. Net negative income
considered an amount of tax paid for purposes of section 901 adjustments from all section 743(b) basis adjustments means
until the contest is resolved. So, a partnership generally doesn’t the excess sum of all section 743(b) adjustments allocated to the
take into account a contested liability as a creditable foreign tax partner that decrease the partner’s taxable income over all
expenditure until the contest is resolved and the liability has section 743(b) adjustments that increase the partner’s taxable
been paid. See Regulations section 1.905-1(f)(1). However, to income. Attach to the Schedules K-2 and K-3 a statement
the extent that a partnership has remitted a contested foreign showing each section 743(b) basis adjustment making up the
income tax liability to a foreign country, partners may elect to total and identify the assets to which it relates and the separate
claim a provisional foreign tax credit for its distributive share of category and source of the income generated by the assets.
such contested foreign income tax liability. See Regulations Make sure to include the class of gross income or deduction, for
section 1.905-1(f)(2). example, sales income, interest income, or depreciation
For partnerships that are contesting a foreign income tax deduction. You may group these section 743(b) basis
liability with a foreign country, but have remitted all or a portion of adjustments by asset category or description in cases where
such contested liability, report information about the contested multiple assets are affected if the assets generate the same
tax on line 3, and check the “Contested tax” box. In addition, separate category and source of income. The section 743(b)
attach a statement and include information necessary for negative income adjustments should be included as relevant in
partners to complete Form 7204 and Schedule L (Form 1118) other parts of the Schedule K-2. For example, the section 743(b)
(for direct or indirect corporate partners), or Schedule C (Form income adjustments should be reflected as part of the total
1116) (for direct or indirect individual, trust, or estate partners), depreciation reported on Part II, Section 2.
including a description of the contest and a description of the

Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 13

- 14 -

Page 14 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Schedules K-2 and K-3, Part IV (Information on the underlying item of income, gain, deduction, and loss of the
partnership.
Partners’ Section 250 Deduction With Respect
to Foreign-Derived Intangible Income (FDII))
Section 1. Information To Determine Deduction
Note. This information is relevant to partners that figure a Eligible Income (DEI) and Qualified Business
section 250 deduction for FDII on Form 8993. This part is Asset Investment (QBAI) on Form 8993
relevant for a direct domestic corporate partner (other than
REITs, RICs, and S corporations) or a partner which is a Line 1. Net income (loss). This amount may equal Form 8865,
partnership that has a direct or indirect domestic corporate Schedule M-1, line 9, Income (loss).
partner (other than REITs, RICs, and S corporations) that Line 2a. DEI gross receipts. Enter all gross receipts from
determines the domestic corporate partner's FDII. If there is whatever source derived except for amounts included on lines 3
insufficient information, a partner must presume the indirect through 7.
partner is a domestic corporate partner or a partnership that has
a direct or indirect domestic corporate partner and the partner Line 2b. DEI cost of goods sold. Enter the amount of cost of
must complete the Schedules K-2 and K-3, Part IV, accordingly. goods sold attributable to the amount on line 2a.
These schedules are required to be completed if the foreign Line 2c. DEI properly allocated and apportioned deduc-
partnership has direct or indirect domestic corporate partners, tions. Enter the amount of deductions (including taxes) properly
though the partnership doesn’t have foreign-derived gross allocable to the amount on line 2a. See Regulations section
receipts. Even if a partnership has no foreign activities, and so 1.250(b)-1(d)(2) for more details. Deductions properly allocable
has no FDDEI as reported in Section 2 of this part, still report the to gross DEI are determined without regard to sections 163(j),
information required by Sections 1 and 3 of this part so that any 170(b)(2), 172, 246(b), and 250.
domestic corporate partner can correctly determine its section
250 deduction. For example, a domestic corporate partner would Lines 3 through 7 are exclusions from DEI used to determine
still need information about the partnership’s qualified business the partner’s DEI.
asset investment (see the instructions for Section I, line 8, of this Line 4. CFC dividends. Enter the amount of any dividend
part) in such a case to determine its deemed tangible income received from a CFC for which the partner is a U.S. shareholder
return and deemed intangible income. See section 250(b)(2). as defined under section 951(b).
Section 250 allows a domestic corporation a deduction for its
FDII, and a direct or indirect domestic corporate partner must Note. The amount by which distributions are attributable to
take into account certain activities of a partnership in computing PTEP in annual PTEP accounts of a direct or indirect partner
the domestic corporation's FDII. For the treatment of a domestic isn’t taken into account for purposes of determining the CFC
corporation that is a partner in a partnership, see Regulations dividends to be entered on line 4.
sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These Line 5. Financial services income. Enter the amount of net
instructions generally indicate how to complete Part IV (of both financial services income (as defined in section 904(d)(2)(D))
Schedules K-2 and K-3). However, Schedule K-2 includes the before interest and R&E deductions.
total of all partners’ amounts and Schedule K-3 includes each
partner’s share. Line 6. Domestic oil and gas extraction income. Enter the
amount of net domestic oil and gas extraction income before
Enter each amount and total amounts in U.S. dollars. interest and R&E deductions. The term “domestic oil and gas
Determine and report the partner's share of each item of the extraction income” means income described in section 907(c)(1)
partnership contained on this form in accordance with the determined by substituting “within the United States” for “outside
partner's distributive share of the underlying item of income, the United States.”
gain, deduction, and loss of the partnership. Report these
amounts based on the best information available about how its Line 7. Foreign branch income. Enter the amount of net
partners might use this information to determine their FDII foreign branch income before interest and R&E deductions (as
deduction. Certain information may be reported differently to defined in section 904(d)(2)(J)). Report all income that would be
each partner depending on federal income tax determinations foreign branch income of its partners as if all partners were U.S.
that the partner makes. Each partner must then calculate its FDII persons.
deduction using Form 8993 including the information reported on Line 8. Partnership QBAI. Enter the amount, if any, of the
Schedule K-3, Part IV. A partner must obtain any further partnership QBAI.
necessary information from the partnership to correctly
determine its FDII deduction. A domestic corporation’s QBAI is its share of the average of
the aggregate adjusted bases, determined as of the close of
Special rules for determining foreign use apply to transactions each quarter of the tax year, in certain specified tangible
that involve property or services provided to related parties (see property. See Regulations section 1.250(b)-2(b). The adjusted
section 250(b)(5)(C) and Regulations section 1.250(b)-6). basis is determined by using the alternative depreciation system
For special substantiation requirements under the under section 168(g) and allocating depreciation deductions for
regulations, see sections 1.250(b)-3(f), 1.250(b)-4(d)(3), and such property ratably to each day during the period in the tax
1.250(b)-5(e)(4). In all other cases, a taxpayer claiming a year to which such depreciation relates. See Regulations section
deduction under section 250 will still be required to substantiate 1.250(b)-2(e). The specified tangible property is that which is
that it is entitled to the deduction even if it isn’t subject to the used in the trade or business of the corporation in the production
specific substantiation requirements contained in the of gross income included in the domestic corporation’s gross
regulations. See section 6001 and Regulations section DEI and is of a type for which a deduction is allowable under
1.6001-1(a). So, the partner must be able to satisfy the general section 167. See Regulations section 1.250(b)-2(b). If a
or special substantiation requirements to be eligible for the domestic corporation holds an interest in one or more
deduction. partnerships during a tax year (including indirectly through one
As described above, determine the partner's share of each or more partnerships that are partners in a lower-tier
item below in accordance with the partner's distributive share of partnership), the QBAI of the domestic corporation for the tax
year is increased by the sum of the domestic corporation’s
partnership QBAI for each partnership for the tax year. See

14 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 15 -

Page 15 of 26      Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                       9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Regulations section 1.250(b)-2(g)(1). Partnership QBAI is the        used to figure the amount of gross FDDEI as defined in 
sum of the domestic corporation’s proportionate share of the         Regulations section 1.250(b)-1(c)(16) for gross FDDEI.
partnership’s adjusted basis in the property and the domestic 
corporation’s partner specific QBAI basis in the property for the 
partnership tax year that ends with or within the tax year. See 
Regulations section 1.250(b)-2(g)(2). Partnership specified 
tangible property means, for a domestic corporation, tangible        Each place where general property is listed refers to amounts 
property that is used in the trade or business of the partnership,   connected to the sale, lease, exchange, or other disposition of 
of a type for which a deduction is allowable under section 167       general property to a foreign person and is for a foreign use as 
and used in the production of gross income included in the           defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d). 
domestic corporation’s gross DEI. See Regulations section            The term “general property” means any property other than 
1.250(b)-2(g)(5).                                                    intangible property; a security (as defined in section 475(c)(2)); 
                                                                     an interest in a partnership, trust, or estate; or a commodity 
If the portion of partnership specified tangible property cannot     described in section 475(e)(2)(A) that isn’t a physical commodity 
be determined (for example, if it isn’t known if property gives rise or a commodity described in sections 475(e)(2)(B) through (D). 
to the production of gross income in one of the excluded             See Regulations section 1.250(b)-3(b)(10).
categories from DEI that is determined by the partner, which 
would cause such property to not be classified as partnership        Each place where intangible property is listed refers to 
specified tangible property), then in reporting the amount of a      amounts connected to the sale, license, exchange, or other 
partner's share of the partnership QBAI, separately state any        disposition of intangible property to a foreign person and is for a 
information so a direct or indirect domestic corporate partner can   foreign use as defined in Regulations sections 1.250(b)-3 and 
distinguish between the amount of the adjusted bases in a            1.250(b)-4(d)(2).
partnership's tangible property that the domestic corporation 
would include in its adjusted bases in the partnership specified 
tangible property and the amount of the adjusted bases in the        Each place where services are listed refers to amounts 
partnership's tangible property that the domestic corporation        connected to services that, as established to the satisfaction of 
would not include in its adjusted bases in the partnership           the Secretary, are provided to any person, or for property, 
specified tangible property.                                         located outside the United States as defined in Regulations 
                                                                     section 1.250(b)-5.
If tangible property was used in the production of DEI and in 
the production of income that is non-DEI, then it is considered      If a transaction includes both a sales component and a 
dual-use property and treated as specified tangible property in      service component, the transaction is classified as either a sale 
the same proportion that the amount of the gross income              or as a service according to the overall predominant character of 
included in DEI produced for the property bears to the total         the transaction. See Regulations section 1.250(b)-3(d).
amount of gross income produced for the property. See 
Example 2 of Regulations section 1.250(b)-2(g)(8) for guidance 
on how to calculate the partner adjusted basis. If specified         For purposes of determining a domestic corporation’s 
tangible property is only partially depreciable, then only the       deductions that are properly allocable to gross FDDEI, the 
depreciable portion is QBAI. See Regulations section                 corporation’s deductions are allocated and apportioned to gross 
1.250(b)-2(b).                                                       FDDEI under the rules of Regulations sections 1.861-8 through 
Example 5. Specified tangible property. X and Y are both             1.861-14T and 1.861-17 by treating section 250(b) as an 
domestic corporations which are partners in FP, a partnership        operative section described in Regulations section 1.861-8(f). 
that holds three types of assets—A, B, and C. All types of assets    See Regulations section 1.250(b)-1(d)(2).
are tangible property used in the trade or business of FP and for    Line 9. Gross receipts. Enter the amount, if any, of the 
which a deduction is allowable under section 167. The                partnership's foreign-derived gross receipts separately for 
production of income from A assets is DEI for X and Y. Thus, the     aggregate sales of general property, aggregate sales of 
A assets are partnership specified tangible property for X and Y,    intangible property, and aggregate services. Foreign-derived 
and FP includes a proportionate amount of the adjusted bases of      gross receipts mean gross receipts that are used to figure gross 
all A assets in calculating each partner’s partnership QBAI. The     FDDEI as defined in Regulations section 1.250(b)-1(c)(16).
production of income from B assets is DEI for X. However, for Y, 
the production of income from B assets is non-DEI. Thus, the B       Line 10. COGS.   Enter the amount of cost of goods sold 
assets are partnership specified tangible property for X only, and   attributable to the amount(s) on line 9.
FP includes a proportionate amount of the adjusted bases of all      For purposes of this form, when figuring FDDEI, cost of goods 
B assets only in calculating X’s partnership QBAI. The C assets      sold includes the cost of goods sold to customers, and the 
are dual-use property because the production of only part of the     adjusted basis of non-inventory property sold or otherwise 
income from the C assets is DEI for X and Y. Thus, the C assets      disposed of in a trade or business.
are partnership specified tangible property for both X and Y, but    In making that determination, attribute costs of goods sold to 
FP includes a proportionate amount of the adjusted bases of all      gross receipts using a reasonable method in accordance with 
C assets in calculating each partner’s partnership QBAI only in      Regulations section 1.250(b)-1(d)(1).
the proportion that the amount of the gross income included in       Cost of goods sold must be attributed to gross receipts for 
DEI produced for the C assets bears to the total amount of gross     gross DEI or gross FDDEI regardless of whether certain costs 
income produced for the C assets.                                    included in cost of goods sold can be associated with activities 
                                                                     undertaken in an earlier tax year (including a year before the 
Section 2. Information To Determine                                  effective date of section 250).
Foreign-Derived Deduction Eligible Income                            Line 11. Allocable deductions. Enter the amount of the 
(FDDEI) on Form 8993                                                 allocable deductions. See Regulations section 1.250(b)-1(d)(2) 
                                                                     for more details. Enter the amounts of interest and R&E 
Foreign-derived gross receipts means, for a partnership, gross       expenses on lines 13 and 16, respectively. Deductions are 
receipts of the partnership for the partnership's tax year that are  determined without regard to sections 163(j),170(b)(2), 172, 
                                                                     246(b), and 250.

Inst. for Schedules K-2 and K-3 (Form 8865) (2023)                                                                                  15

- 16 -

Page 16 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Column (a). General property. Enter the amount of the Line 14A. Enter the amount of the average of the
deductions that are allocated and apportioned to gross FDDEI beginning-of-year and end-of-year inside bases in the
from all sales of general property. partnership's total assets. See Regulations section 1.861-9(g)(2)
(i)(A).
Column (b). Intangible property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI Line 14B. Enter the amount of the average of the
from all sales of intangible property. beginning-of-year and end-of-year inside bases adjustments
under sections 734(b) and 743(b).
Column (c). Services. Enter the amount of the deductions that
are allocated and apportioned to gross FDDEI from all services. Lines 14C and 14D. Enter the amount of the reductions in the
partnership's asset values to reflect the partnership's directly
Line 12. Other apportioned deductions. Enter all other
allocable interest under Regulations section 1.861-10(e) and
apportioned deductions that relate to gross FDDEI that are not
Temporary Regulations section 1.861-10T. See also Temporary
otherwise included on lines 11, 13, and 16. If a deduction
Regulations section 1.861-9T(e)(1).
doesn’t bear a definite relationship to a class of gross income
constituting less than all of gross income, it shall ordinarily be Line 14E. Enter the amount of the average value of assets
treated as definitely related and allocable to all of the taxpayer's excluded from the apportionment formula. See section 864(e)
gross income, including gross DEI and gross FDDEI, except (3).
where otherwise directed in the regulations.
Lines 15 and 16. R&E expenses apportionment factors.
These lines require information that a partner will use to allocate
Section 3. Other Information for Preparation of and apportion its R&E expense for FDII purposes. Lines 15 and
Form 8993 16 aren’t required to be completed unless either (a) the
partnership incurs R&E expense; or (b) the partner is expected
Line 13. Interest deduction. The term “interest” refers to the to license, sell, or transfer its intangible property to the
gross amount of interest expense incurred by a partnership in a partnership (as provided in Regulations section 1.861-17(f)(3)).
given year. Generally, interest expense includes any expense R&E expenses deducted, or amortized and deducted, under
that is currently deductible under section 163 (including original section 174 are definitely related to all gross intangible income
issue discount), and interest equivalents. See Regulations reasonably connected with relevant broad product categories of
section 1.861-9(b) for the definition of interest equivalents and the taxpayer and are allocable to all items of gross intangible
Temporary Regulations section 1.861-9T(c) for section that income as a class related to such product categories. The
disallow, suspend, or require the capitalization of interest product categories are generally determined by reference to the
deductions. Include excess business interest expense three-digit SIC code. R&E expenses are apportioned between
determined under section 163(j)(4) on this line. Under the statutory and residual groupings based on an analysis of the
Regulations section 1.250(b)-1(d)(2)(ii), deductions are taxpayer’s gross receipts from certain sales, leases, licenses,
determined without regard to section 163(j). and services. See Regulations section 1.861-17. The exclusive
Lines 13A and 13B. Interest expense specifically allocable apportionment rule in Regulations section 1.861-17(c) doesn’t
under Regulations sections 1.861-10(e) and -10T. Apart apply for purposes of apportioning R&E to gross DEI and gross
from interest expense entered on line 13A, enter on line 13B FDDEI.
interest expense that is directly allocable under Temporary R&E expenses are allocated and apportioned by the partner.
Regulations section 1.861-10T to income from specific This requires the reporting to the partners of the gross receipts
partnership property. Such interest expense is treated as directly related to certain income within the statutory and residual
allocable to income generated by such partnership property. See groupings within a SIC code and the partner’s distributive share
Temporary Regulations section 1.861-9T(e)(1). of the partnership’s R&E deductions, if any, connected with the
Line 13C. Enter all interest deductions not otherwise included SIC codes.
on lines 13A and 13B. Line 15. R&E gross receipts by SIC code. Enter the gross
Line 14. Interest expense apportionment factors. Report receipts that resulted in gross income for each category, DEI,
information that a partner will use to allocate and apportion its FDDEI, and then total gross receipts. Note that the Total column
interest expense for FDII purposes. isn’t a sum of DEI and FDDEI but rather refers to all the
partnership’s gross receipts. Such gross receipts include both
Interest deductions are apportioned to gross DEI and FDDEI the partnership's sales and certain other parties' sales. See
based ordinarily on the tax book value of the taxpayer’s assets. Regulations section 1.861-17(d). Gross receipts from certain
See Regulations section 1.861-9T(g)(1)(i). A taxpayer can use transactions of parties both controlled or uncontrolled by the
either the tax book value or the alternative tax book value of its partnership may be included on line 15. See, generally,
assets. See Regulations section 1.861-9(i). Under both Regulations section 1.861-17(d).
methods, the partner uses the partnership's inside basis in its
assets, including adjustments required under sections 734(b) Line 16. Enter the amount of R&E expense by SIC code.
and 743(b). See Regulations sections 1.861-9(e)(2) and -9(e)
(3). When reporting the asset that is the basis of stock in Schedules K-2 and K-3, Part V (Distributions From
nonaffiliated 10%-owned corporations, adjust such amount for
E&P. See Regulations section 1.861-12(c)(2)(i)(A). Foreign Corporations to Partnership)
The total interest deductions for the members of the Note. The following information, in combination with other
corporation's affiliated group are allocated and apportioned to information known to the partners, including Schedule P (Form
the statutory and residual groupings under proposed, final, and 5471), is relevant for certain partners to exclude from gross
Temporary Regulations sections 1.861-8 through 1.861-14. income distributions to the extent that they are attributable to
PTEP in their annual PTEP accounts and report foreign currency
Note. The Total column isn’t a sum of DEI and FDDEI but rather gain or loss for the PTEP on Forms 1040 and 1120. If eligible,
refers to the partnership’s specific line totals (that is, that would partners use this information for purposes of a dividends
also include non-DEI). received deduction under section 245A on Form 1120.

16 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 17 -

Page 17 of 26              Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                   9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

  Use Part V of the Schedule K-2 to report the distributions                   Each row should relate to the partnership’s direct ownership 
made by foreign corporations to the partnership.                      of stock in the foreign corporation or direct ownership of the 
                                                                      ownership interests in a pass-through entity that (directly or 
  Use Part V of the Schedule K-3 to report the partner's share        through other pass-through entities) owns (within the meaning of 
of the amounts reported on Part V of the Schedule K-2.                section 958) stock in the foreign corporation other than solely by 
  Exception. Part V of the Schedule K-2 isn’t required to be          reason of applying section 318(a)(3) (providing for downward 
completed for distributions by a foreign corporation if the U.S.      attribution) as provided in section 958(b). For example, if a 
person filing Form 8865 knows that (a) none of the distributions      partnership (upper-tier partnership) directly owns 50% of the 
by the foreign corporation are attributable to PTEP in annual         foreign corporation's stock and owns 50% of the foreign 
PTEP accounts of any direct or indirect partner, and (b) none of      corporation's stock through another partnership (lower-tier 
the partnership’s direct or indirect partners are eligible to claim a partnership), then distributions by the foreign corporation to each 
deduction under section 245A for any distribution by the foreign      of the upper-tier partnership and the lower-tier partnership are to 
corporation. Nevertheless, the filer may be required to append        be reported on separate rows on the upper-tier partnership's Part 
Attachment 3 to the Schedule K-2 (discussed below).                   V (Form 8865). If the partnership owns stock of a foreign 
  Exception. Part V of the Schedule K-3 for a partner doesn’t         corporation through another partnership (lower-tier partnership) 
need to be completed for distributions by a foreign corporation if    from which it receives a Part V of Schedule K-3 (Form 1065 or 
the filer of Form 8865 knows that (a) none of the distributions by    8865), the partnership must replicate each line of the Part V of 
the foreign corporation are attributable to PTEP in annual PTEP       Schedule K-3 (Form 1065 or 8865) on its Part V (Form 8865). 
accounts of the partner or any U.S. person that is treated as         Rows for distributions for a partnership's direct ownership of 
indirectly owning stock of the foreign corporation through the        foreign corporation stock should be listed before rows for 
partner (“relevant indirect partners”), and (b) the partner and       distributions for a partnership’s ownership of foreign corporation 
relevant indirect partners aren’t eligible to claim a deduction       stock through a pass-through entity.
under section 245A for any distributions by the foreign                        If the partnership received a Schedule K-3 from another 
corporation. Nevertheless, the filer may be required to append        partnership with an attachment related to net investment income 
Attachment 4 to the Schedule K-3 for the partner (discussed           PTEP (NII PTEP), append Attachment 3 to Schedule K-2 and 
below). If this exception is applicable for a foreign corporation,    Attachment 4 to each Schedule K-3 in the following format, 
the sum of the amounts reported on Part V of the Schedules K-3        adding additional rows as necessary for each distribution by a 
for the foreign corporation may not equal the amounts reported        foreign corporation. For more information about net investment 
on Part V of the Schedule K-2 for the foreign corporation.            income and net investment income tax relating to CFCs and 
Rows A–O. Use rows A–O to report information for each                 qualified electing funds (QEFs), see Regulations section 
distribution by a foreign corporation for its stock that the          1.1411-10.
partnership (directly or through pass-through entities) owns 
(within the meaning of section 958) other than solely by reason 
of applying section 318(a)(3) (providing for downward attribution) 
as provided in section 958(b).

Attachment 3 (Schedule K-2)

  (a) Name of          (b) EIN or reference (c) Date of         (d) Functional    (e) Amount of NII      (f) Spot rate        (g) Amount of NII 
  distributing foreign    ID number         distribution           currency of    PTEP in functional     (functional currency PTEP in U.S. dollars
  corporation                                                distributing foreign    currency            to U.S. dollars)
                                                                   corporation

Attachment 4 (Schedule K-3)

  (a) Name of          (b) EIN or reference (c) Date of         (d) Functional    (e) Partner’s share of (f) Spot rate        (g) Partner’s share of 
  distributing foreign    ID number         distribution           currency of       NII PTEP in         (functional currency NII PTEP in U.S. 
  corporation                                                distributing foreign functional currency    to U.S. dollars)        dollars
                                                                   corporation

Note. If additional rows are required, attach statements to           ISO 4217 standard. These codes are available at iso.org/
Schedules K-2 and K-3 that look like the current version of Part      iso-4217-currency-codes.html.
V.
                                                                      Note.       Columns (e) and (f) are reported in functional currency.
Column (b).  Enter the EIN or reference ID number of the 
distributing foreign corporation. Do not enter “FOREIGNUS” or         Column (e).    This represents the partnership's share of the 
“APPLIED FOR.” For basic information about reference ID               amount distributed in functional currency. See Schedule R (Form 
numbers (including the requirements as to the characters              5471), column (c).
permitted), see the Instructions for Form 1118.                       Column (f).    This represents the partnership's share of the 
Column (c).  Enter the year, month, and day on which the              amount of E&P distributed in functional currency. See 
distribution was made using the format YYYYMMDD.                      Schedule R (Form 5471), column (d). The total of the amounts 
                                                                      reported in column (f) for a distributing foreign corporation 
Column (d).  Enter the applicable three-character alphabet            should equal the partnership’s share of the total of the amounts 
code for the foreign corporation’s functional currency using the      reported on line 9, column (f), of Schedules J (Form 5471) on a 

Inst. for Schedules K-2 and K-3 (Form 8865) (2023)                                                                                              17

- 18 -

Page 18 of 26  Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                       9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

separate category of income basis filed for the distributing           section 951(a)(1)(B) inclusion for the CFC, or figure section 
foreign corporation, as reported on line 9, column (f), of the         951A inclusions by taking into account GILTI items (defined 
Schedule J (Form 5471) with code “TOTAL” entered on line a that        below) of the CFC. If the filer doesn’t complete Part VI of 
is filed for the distributing foreign corporation. If a Schedule J     Schedule K-3 for a partner for a CFC, the sum of each partner’s 
(Form 5471) with code “TOTAL” entered on line a isn’t filed for        share of the CFC’s subpart F income, section 951(a)(1)(B) 
the distributing foreign corporation, then the total of the amounts    inclusion for the CFC, and share of the CFC’s GILTI items 
reported in column (f) for a distributing foreign corporation          (defined below) reported on all Schedules K-3 may not equal the 
should equal the partnership's share of the amount reported on         aggregate share of subpart F income of the CFC, the aggregate 
line 9, column (f), of the Schedule J (Form 5471) filed for the        section 951(a)(1)(B) inclusion for the CFC, and the aggregate 
distributing foreign corporation.                                      share of the CFC’s GILTI items (defined below), respectively, 
                                                                       reported on the Schedule K-2.
Column (g).  Enter the exchange rate on the date of distribution 
used to translate the amount of the distribution in functional         Use Schedule K-2, Part VI, to report the information on the 
currency to U.S. dollars. See section 989(b)(1). Report the            partnership’s share of the amounts its partners will need to figure 
exchange rate using the "divide-by convention" specified under         their subpart F income inclusions, section 951(a)(1)(B) 
Reporting exchange rates on Form 5471 in the Instructions for          inclusions, and GILTI inclusions, for CFCs owned (within the 
Form 5471.                                                             meaning of section 958) by the partnership. Use Schedule K-3, 
Column (h).  Enter the amount of the distribution in U.S. dollars.     Part VI, to report the partner’s share of the amounts needed to 
Translate column (e) using the spot rate reported in column (g).       determine its subpart F income inclusions, section 951(a)(1)(B) 
                                                                       inclusions, and GILTI inclusion, for CFCs owned (within the 
Column (i). Enter the amount of E&P distributed in U.S. dollars.       meaning of section 958) by the partnership.
Translate column (f) using the spot rate reported in column (g).
Column (j).  If the distributing foreign corporation is a qualified    The U.S. person completing Form 8865 must complete Part 
foreign corporation, determined without regard to section 1(h)         VI of Schedules K-2 and K-3 by assuming that each partner in 
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).               the partnership is a U.S. shareholder of the CFC and is required 
                                                                       to include in gross income its share of the CFC's subpart F 
Schedules K-2 and K-3, Part VI (Information on                         income, its section 951(a)(1)(B) inclusion, and its GILTI.
Partners' Section 951(a)(1) and Section 951A                           A partner's GILTI is calculated based upon its share of the 
Inclusions)                                                            following amounts for each CFC for which it is a U.S. 
                                                                       shareholder: tested income, tested loss, QBAI, tested loss QBAI 
Note. This information is relevant to partners completing Form         amount, tested interest income, and tested interest expense 
8992 and Forms 1040 and 1120 for income inclusions under               (collectively, GILTI items) (a CFC's subpart F income and GILTI 
section 951(a) (subpart F inclusions), section 951(a)(1)(B)            items, CFC items).
inclusions, and section 951A inclusions.
                                                                       A partner's share of a CFC's subpart F income, amounts used 
Schedules K-2 and K-3, Part VI, must be completed for a                to determine its section 956 amount for a CFC, and a CFC's 
CFC if the partnership owns (within the meaning of section 958)        GILTI items may not be limited to the partner's share of such 
stock of the CFC, unless the partnership owns stock of the CFC         income, amounts, or items through its ownership in the 
solely by reason of applying section 318(a)(3) (providing for          partnership. However, for purposes of completing Part VI of 
downward attribution) as provided in section 958(b).                   Schedules K-2 and K-3, use only the partner's share of a CFC's 
                                                                       subpart F income, amounts used to determine its section 956 
Generally, a foreign corporation is a CFC if more than 50% of          amount for a CFC, and a CFC's GILTI items through the partner's 
either the total combined voting power of all classes of stock         ownership in the partnership.
entitled to vote or the total value of the stock of the corporation is 
owned (within the meaning of section 958(a)) or is considered as       A partner's share through its ownership in the partnership of 
owned by applying the rules of section 958(b) by U.S.                  subpart F income and GILTI items is generally anticipated to be 
shareholders. For this purpose, a U.S. shareholder is a U.S.           calculated by multiplying the percentage in column (d) by the 
person (as defined in section 957(c)) who owns (within the             amount of subpart F income or GILTI item, respectively. For 
meaning of section 958(a)), or is considered as owning by              example, in general, a partner's share through its ownership 
applying the rules of ownership of section 958(b), 10% or more         interest in the partnership of tested income in column (i) is 
of the total combined voting power of all classes of stock entitled    anticipated to be calculated by multiplying the percentage in 
to vote, or 10% or more of the total value of shares of all classes    column (d) by the amount of tested income in column (g). If the 
of stock of such foreign corporation.                                  partner’s share through its ownership in the partnership of 
Exception.   Part VI of Schedule K-2 doesn’t need to be                subpart F income or GILTI items isn’t calculated by multiplying 
completed for a CFC if the partnership doesn’t have a direct or        the percentage in column (d) by the amount of subpart F income 
indirect partner (through pass-through entities only) that is a U.S.   or GILTI items, respectively (for example, because of special 
shareholder of the CFC required to include in gross income a           allocations), then, instead of entering a percentage in column (d) 
subpart F income inclusion and/or section 951(a)(1)(B) inclusion       for that CFC, attach a statement to the Schedules K-2 and K-3 
for the CFC, or calculate section 951A inclusions by taking into       explaining the partner’s share through its ownership in the 
account GILTI items (defined below) of the CFC.                        partnership of the CFC’s subpart F and GILTI items.
Exception.   Part VI of Schedule K-3 for a partner doesn’t need        Line a.  Complete a separate Part VI for each applicable 
to be completed for a CFC if the filer of Form 8865 knows that (a)     separate category of income. However, all GILTI items must be 
the partner isn’t a U.S. shareholder of the CFC required to            reported on only one Part VI. If GILTI items include passive 
include in gross income a subpart F income inclusion and/or            category income, report all GILTI items on the Part VI completed 
section 951(a)(1)(B) inclusion for the CFC, or figure section          for passive category income; otherwise, report all GILTI items on 
951A inclusions by taking into account GILTI items (defined            the Part VI completed for general category income. Enter the 
below) of the CFC; and (b) no U.S. person that indirectly owns         appropriate code on line a.
(through pass-through entities only) an interest in the CFC 
through the partner is a U.S. shareholder of the CFC required to       Note. The other reporting requirements for reporting income by 
include in gross income a subpart F income inclusion and/or            separate category don’t change by reason of reporting GILTI 

18                                                                              Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 19 -

Page 19 of 26        Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                    9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

items that include general category income on a Part VI             a CFC's earnings invested in U.S. property, see Worksheet B in 
completed for passive category income.                              the Instructions for Form 5471.
                                                                    Column (g).  Enter the CFC's tested income, if any, from line 6 
Codes for Categories of Income                                      of Schedule I-1 (Form 5471) for each CFC.
                                                                    Column (h).  Enter the CFC's tested loss, if any, from line 6 of 
             Code                     Category of Income
                                                                    Schedule I-1 (Form 5471) for each CFC. The loss amounts 
             PAS                    Passive Category Income         should be shown as negative numbers.
             901j                     Section 901(j) Income         Column (i). Enter the aggregate share of the tested income 
             GEN                    General Category Income         listed in column (g) for each CFC with tested income.
                                                                    Column (j). Enter the aggregate share of the tested loss listed 
Line b. If any portion of a CFC item is U.S. source, complete a     in column (h) for each CFC with tested loss. The loss amounts 
separate Part VI for U.S.-source CFC items, and check the box       should be shown as negative numbers.
on line b on such separate Part VI.                                 Column (k).  If the CFC has a tested loss in column (h), enter 
Line 1.  Use lines A through K to report information for CFCs       zero. If the CFC has tested income in column (g), enter the 
owned (within the meaning of section 958) by the partnership,       aggregate share of QBAI. A CFC's QBAI is reported on 
and for which Part VI of Schedules K-2 and K-3 must be              Schedule I-1 (Form 5471), line 8.
completed. If the partnership owns a CFC through another            Column (l). If the CFC has tested income in column (g), enter 
partnership (lower-tier partnership) from which it receives a       zero. If the CFC has a tested loss in column (h), enter as a 
Schedule K-3 (Form 1065 or 8865), Part VI, replicate each line of   negative number the aggregate share of the CFC's tested loss 
the Schedule K-3 (Form 1065 or 8865), Part VI, that is related to   QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A 
the CFC on Schedule K-2 (Form 8865), Part VI. For example, if a     CFC's tested loss QBAI amount is reported on Schedule I-1 
partnership directly owns 50% of the CFC's stock and owns 50%       (Form 5471), line 9c, which must be translated to U.S. dollars.
of the CFC's stock through a lower-tier partnership, the CFC 
should be listed on two lines with one line related to the          Column (m).  Enter the aggregate share of the CFC's tested 
partnership's direct ownership and the other line related to the    interest income. A CFC's tested interest income is reported of 
partnership's ownership through the lower-tier partnership. Lines   Schedule I-1 (Form 5471), line 10c.
related to a partnership's direct ownership of CFCs should be       Column (n).  Enter the aggregate share of the CFC's tested 
listed before lines related to a partnership's non-direct ownership interest expense. A CFC's tested interest expense is reported on 
of CFCs. If additional lines are required, attach to the Schedules  Schedule I-1 (Form 5471), line 9d.
K-2 and K-3 a schedule that looks like the current version of Part 
VI.                                                                 Schedules K-2 and K-3, Part VII (Information 
Column (a).  Enter the name of each CFC for which Part VI           Regarding Passive Foreign Investment 
must be completed.                                                  Companies)
Column (b).  Enter the EIN or reference ID number of the CFC. 
Do not enter “FOREIGNUS” or “APPLIED FOR.” For basic                Note.  This information is relevant to partners completing Form 
information about reference ID numbers (including the               8621 and/or that determine income inclusions for the PFICs 
requirements as to the characters permitted), see the               reported on Schedule K-2, Part VII, and Schedule K-3, Part VII.
Instructions for Form 1118.                                           Except as otherwise provided, Schedules K-2 and K-3, Part 
Column (c). Enter the end of the CFC’s tax year using the           VII, must be filed for every partnership that owns PFIC stock 
format YYYYMMDD.                                                    directly or indirectly. However, the following exceptions apply.
Column (d).  Enter the partners' share of CFC items through the     • The U.S. person filing the Form 8865 isn’t required to 
partners' ownership in the partnership (aggregate share). See       complete Schedules K-2 and K-3, Part VII, for a foreign 
Regulations sections 1.951-1(b), 1.951-1(e), and 1.951A-1(d)(1)     corporation if the U.S. person knows that all of the foreign 
for rules on determining the partners' share.                       partnership’s direct and indirect partners that are U.S. persons 
                                                                    (including itself) are either (a) not subject to the PFIC rules for 
Column (e). Enter the aggregate share of the amount of the          the corporation under section 1297(d) because they are subject 
CFC's subpart F income, if any. Note that an amount determined      to the subpart F rules for the corporation, (b) tax-exempt entities 
under section 956(a) isn’t considered subpart F income. For         that aren’t subject to the PFIC rules for the corporation under 
guidance on computing a CFC's subpart F income and the              Regulations section 1.1291-1(e), or (c) pass-through entities 
partners' share of a CFC's subpart F income, see Worksheet A in     with no indirect U.S. taxable partners.
the Instructions for Form 5471.                                     • The U.S. person filing the Form 8865 isn’t required to 
Column (f). Enter the amount determined under section 956 for       complete Schedules K-2 and K-3, Part VII, for a foreign 
the partners that relates to the partners' ownership in the         corporation if the U.S. person knows that the foreign corporation 
partnership, as described in these instructions for column (f)      is treated as a qualifying insurance corporation (QIC) (as defined 
(aggregate section 951(a)(1)(B) inclusion). In determining the      in section 1297(f)(1)) that isn’t treated as a PFIC by reason of 
section 956 amount, use only the partners' share through their      section 1298(b)(1).
ownership in the partnership of:                                    • The U.S. person filing the Form 8865 isn’t required to 
• The average of the amounts of U.S. property held (directly or     complete Schedules K-2 and K-3, Part VII, for a PFIC the stock 
indirectly) by the CFC as of the close of each quarter of the       of which has been marked to market as described in Regulations 
CFC’s tax year, and                                                 section 1.1291-1(c)(4). Instead, the U.S. person filing the Form 
• The applicable earnings of the CFC.                               8865 should report the partnership’s mark-to-market (MTM) gain 
Don’t reduce the amount reported in column (f) for any reduction    or loss on Form 8865, Schedule K, (if required) and report the 
to the partners' section 956 amount under Regulations section       partners’ shares of those amounts on Part III of Schedule K-1 
1.956-1(a)(2). For guidance on computing the partners' share of     (Form 8865) (if required). Note, however, there may be instances 
                                                                    in which the U.S. person filing the Form 8865 will need additional 
                                                                    information for the PFIC the stock of which has been marked to 
Inst. for Schedules K-2 and K-3 (Form 8865) (2023)                                                                                      19

- 20 -

Page 20 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

market as described in Regulations section 1.1291-1(c)(4) to Codes for Classes of PFIC Shares
meet its tax obligations, such as when the section 1291 rules
apply to the U.S. person filing the Form 8865 because the stock Code Class of PFIC Shares
wasn’t marked to market in the first year of its holding period. In
such instances, the U.S. person filing the Form 8865 may use COM Common or Ordinary Shares
Part VII to report the needed information. PRE Preferred Shares
Use Schedule K-2, Part VII, to report certain information for OTH Other Equity Interest
any PFIC owned, directly or indirectly, by the partnership for
which reporting is required, including PFICs for which no QEF or VAR Multiple Classes of Shares or Equity
Interests
section 1296 MTM election has been made and unpedigreed
QEFs (section 1291 funds), and PFICs for which pedigreed QEF,
section 1296 MTM, or other elections have been, or may be, Column (g). If the partnership acquired any PFIC shares
made. during its tax year, provide the date(s) of acquisition of those
shares using the format YYYYMMDD. If the partnership acquired
The U.S. person filing the Form 8865 must also use no shares in a particular PFIC during its tax year, leave this
Schedule K-2, Part VII, to report information for any PFIC for column blank for that PFIC.
which the U.S. person is making an MTM election under section
1296 in the current tax year if the current tax year isn’t the first Reminder. If the partnership acquired shares in a PFIC on
year of the U.S. person’s holding period in the stock (“non-initial multiple dates during the tax year, append a completed
section 1296 MTM election”). See section 1296(j)(1)(A) and Attachment 5 to Schedule K-2, Part VII, and its corresponding
Regulations section 1.1296-1(i) for more information. Schedules K-3, Part VII, providing those dates.
Use Schedule K-3, Part VII, to report the partner's share, Attachment 5
through its ownership in the partnership, of the amounts reported Additional Information for Section 1
on Schedule K-2, Part VII.
General Information Annual Information
Complete only one line on both Sections 1 and 2 for each
PFIC for which reporting on Schedules K-2 and K-3, Part VII, is (a) (b) (g)
Name of PFIC EIN or reference ID Dates PFIC shares
required. Each line completed for a PFIC in Section 1 should number acquired during tax year
correspond to the same line on Section 2. If there is no (if applicable)
information to report for a PFIC in Section 2, columns (c) through
(o), only complete the name and EIN of the PFIC in Section 2,
columns (a) and (b), and leave columns (c) through (o) blank for
that PFIC. For additional information on determining indirect
ownership of PFICs, see Regulations section 1.1291-1(b)(8).
The partnership may have additional required information for
a PFIC for certain columns (for example, scenarios where the
partnership may have multiple different events for the PFIC in the
same tax year, such as multiple dates of acquisitions of, or
distributions for, the PFIC stock). In that case, complete
Schedules K-2, and K-3, Part VII, with the first of those entries for Column (h). Enter the total number of all classes of shares of
a PFIC and attach a statement including the remaining entries the PFIC the partnership owned at the end of its tax year.
for each of those PFIC to Schedule K-2, Part VII, and its Column (i). Enter the total value of all shares in the PFIC held
corresponding Schedules K-3, Part VII, with Attachments 5 by the partnership at the end of the tax year. If the PFIC shares
and/or 6 completed. are not publicly traded, it is possible to rely upon periodic
If the partnership has additional PFICs for which to report account statements provided at least annually to determine the
information that don’t fit on single Schedules K-2 and K-3, Part value of a PFIC unless there is actual knowledge or reason to
VII, attach additional Parts VII of Schedules K-2 and K-3, as know based on readily accessible information that the
needed. statements do not reflect a reasonable estimate of the PFIC's
value and the information provides a more reasonable estimate
of the PFIC's value.
Section 1. General Information
Note. A partner may need additional information not required to
Columns (a) through (c). Enter the name, U.S. EIN or
be reported on this Schedule K-2, Part VII, (or the partner’s
reference ID number, and address of each PFIC held directly or
Schedule K-3, Part VII) from the partnership for the value of the
indirectly by the partnership during its tax year. Do not enter
PFIC shares as of a particular date to aid the partner in making
“FOREIGNUS” or “APPLIED FOR.”
certain elections under Regulations section 1.1291-10,
For basic information about reference ID numbers (including 1.1297-3, or 1.1298-3.
the requirements as to the characters permitted), see the
Instructions for Form 8621. Column (j). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
Columns (d) and (e). Enter the beginning and end of the QIC. See section 1297(f) and Regulations section 1.1297-4 for
PFIC's tax year using the format YYYYMMDD. additional information on QICs.
Column (f). Enter each class of shares in the PFIC owned by Column (k). Check the box if the PFIC has indicated that its
the partnership using the following codes. shares are "marketable stock" as defined in section 1296(e) and
Regulations section 1.1296-2.
Column (l). Check the box if the PFIC also constitutes a CFC
within the meaning of section 957 (PFIC/CFC).

20 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 21 -

Page 21 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Reminder. If the U.S. person filing the Form 8865 knows that all Note. Certain partners may need additional information not
of the partnership's direct and indirect partners that are U.S. required to be reported on this Schedule K-2, Part VII, (or the
persons (including itself) aren’t subject to the PFIC rules for a partner’s Schedule K-3, Part VII) from the QEF for its
PFIC/CFC under section 1297(d) because they are subject to computation of its net capital gain (as defined in Regulations
the subpart F rules for the corporation, it’s not required to section 1.1293-1(a)(2)) to make certain computations under
complete Schedules K-2 and K-3, Part VII, for the PFIC/CFC. section 1061 or the regulations thereunder. The U.S. person
preparing the Form 8865 may request, or the foreign partnership
Note. If the PFIC is a PFIC/CFC, a partner may need certain for which the Form 8865 is filed may aid the U.S. person filing the
additional information for the PFIC/CFC’s E&P not required to be Form 8865 in obtaining, such information from the QEF, though
reported on this Schedule K-2, Part VII, (or the partner’s the QEF isn’t required to provide such information. See section
Schedule K-3, Part VII) from the partnership to aid the partner in 1061 and Regulations sections 1.1061-4 and 1.1061-6 for more
making certain elections under Regulations section 1.1291-9, information.
1.1297-3, or 1.1298-3.
Column (m). Complete column (m) in the following manner. Section 1296 MTM Information
Columns (e) and (f). Enter the fair market value of the PFIC
IF... THEN... stock at the beginning and end of the partnership’s tax year in
• this is the first year of the check the box. columns (e) and (f), respectively. If any shares of the PFIC were
partnership's holding period in stock acquired during the tax year for which the Form 8865 is being
of the foreign corporation, and filed, the fair market value in column (e) should reflect the fair
• the foreign corporation is a PFIC market value of those shares as of the date of acquisition. This
under the income test or asset test of information must be provided unless the U.S. person filing the
section 1297(a) Form 8865 hasn’t made, or doesn’t intend to make, a section
• the foreign corporation was a PFIC check the box. 1296 MTM election for the PFIC, including a non-initial section
in a prior tax year of the partnership's 1296 MTM election.
holding period, and
• the foreign corporation isn’t a Reminder. The U.S. person filing the Form 8865 isn’t required
"former PFIC" within the meaning of to complete Schedules K-2 and K-3, Part VII, for a PFIC the
Regulations section 1.1291-9(j)(2)(iv) stock of which has been marked to market as described in
• the foreign corporation was a PFIC don’t check the box. Regulations section 1.1291-1(c)(4), though it may use Part VII to
in a prior tax year of the partnership's provide the partners with additional information to meet their tax
holding period, and obligations for the PFIC in certain instances, such as when the
• the foreign corporation is a "former section 1291 rules apply because the stock wasn’t marked to
PFIC" within the meaning of market the first year of the shareholder’s holding period.
Regulations section 1.1291-9(j)(2)(iv)
Section 1291 and Other Information
Note. If the foreign corporation is a “former PFIC” within the Note. Generally, the information in columns (g) through (o) is to
meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may assist shareholders of section 1291 funds in satisfying any
need additional information not required to be reported on this information reporting obligations and in computing income
Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII) inclusions for section 1291 funds. However, this information may
from the partnership for the PFIC to aid the partner in making be relevant to PFICs for which a QEF election (pedigreed or
certain elections under Regulations section 1.1298-3. unpedigreed), section 1296 MTM election (including a non-initial
section 1296 MTM election), or other election has been made by
a partner or other indirect PFIC shareholder. Accordingly,
Section 2. Additional Information on PFIC or QEF complete columns (g) through (o) for each PFIC for which
reporting on Schedule K-2, Part VII, and Schedule K-3, Part VII,
is required. However, note the instructions for column (k)
General Information regarding reporting distributions from PFICs for which the U.S.
Columns (a) and (b). Enter the name and U.S. EIN (or person filing the Form 8865 has made a pedigreed QEF election
reference ID number) of each PFIC held directly or indirectly by or section 1296 MTM election (other than a non-initial section
the partnership during its tax year. Don’t enter “FOREIGNUS” or 1296 MTM election).
“APPLIED FOR.” Reminder. If the partnership has additional required information
for a PFIC for any of columns (g) through (j) or (l) through (m) (for
QEF Information example, multiple distributions for the PFIC stock), the U.S.
person filing the Form 8865 must complete those columns with
Columns (c) and (d). Enter the partnership's share of the total the first of those entries and attach a statement including the
ordinary earnings and net capital gain (as defined in Regulations remaining entries to Schedule K-2, Part VII, and its
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year corresponding Schedules K-3, Part VII, with the information
in which or with which the tax year of the PFIC ends in columns contained in Attachment 6.
(c) and (d), respectively. The PFIC should provide a statement
that provides information to assist in determining these amounts. Column (g). Enter the date(s) on which the partnership initially
See Regulations section 1.1295-1(g) for additional information acquired each block of stock in the PFIC using the format
on annual PFIC statements. YYYYMMDD.
Provide the information received in an annual information Column (h). Enter the amount of each distribution of cash
statement for the PFIC, unless the U.S. person filing the Form and/or the fair market value of any other property distributed to
8865 hasn’t made, or doesn’t intend to make, a QEF election for the partnership by the PFIC during the tax year, if any.
the PFIC.

Inst. for Schedules K-2 and K-3 (Form 8865) (2023) 21

- 22 -

Page 22 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Note. Deemed distributions by QEFs don’t need to be reported “base erosion percentage test.” Partnerships aren’t subject to the
on this Schedule K-2, Part VII (or the partner’s Schedule K-3, BEAT; however, corporate partners of a partnership that are
Part VII). However, partners which have made, or intend to make, applicable taxpayers under Regulations section 1.59A-2 may be
an election under section 1294, and which are deemed to have subject to the BEAT. Except for purposes of determining a
received a distribution from the QEF, may require this information partner's base erosion tax benefits under Regulations section
to complete any computations under section 1294 (including for 1.59A-7(d)(1), and whether a taxpayer is a registered securities
Form 8621, if required). See section 1294(f) and Regulations dealer, BEAT determinations are made by the partner. See
section 1.1294-1T for additional information. Regulations section 1.59A-7 for further information regarding the
application of section 59A to partnerships and the Instructions
Column (i). Enter the date(s) of distribution of the amounts
for Form 8991 for additional information on whether a corporate
entered in column (h) using the format YYYYMMDD.
partner is an applicable taxpayer subject to the BEAT.
Column (j). Enter the total creditable foreign taxes attributable To complete Schedules K-2 and K-3, Part VIII, the foreign
to a distribution from the PFIC. See section 1291(g) and the related parties of each partner must be identified, subject to the
instructions for Form 8621, Part V, line 16d, for additional exception for small partners. It’s expected that the partners will
information on creditable foreign taxes attributable to PFIC collaborate to identify the foreign related parties of each partner.
distributions, including apportioning creditable foreign taxes to A foreign related party of the partner is a foreign person that is:
the portion of a distribution which constitutes an excess • Any 25% owner of the applicable taxpayer (as defined in
distribution and certain rules related to creditable foreign taxes Regulations section 1.59A-1(b)(17)(ii)(A)),
on a disposition of PFIC stock. • Any person who is related (within the meaning of section
Column (k). Enter the total amount of distributions the 267(b) or 707(b)(1)) to the applicable taxpayer or any 25%
partnership received from the PFIC in the 3 preceding tax years, owner of the applicable taxpayer, or
or, if shorter, the total amount of distributions the partnership • Any other person who is related to the applicable taxpayer
received during its holding period of the PFIC stock. However, within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).
don’t enter any amount in this column for a PFIC for which the Exception for small partners. Part VIII of Schedule K-3
U.S. person filing the Form 8865 has made a pedigreed QEF isn’t required to be prepared for small partners meeting the
election or section 1296 MTM election (other than a non-initial following 3 requirements.
section 1296 MTM election). 1. The partner's interest in the partnership represents less
Column (l). Enter the date(s) on which the partnership than 10% of the capital and profits of the partnership at all times
disposed of any block of stock in the PFIC during the during the tax year.
partnership's tax year, if any, using the format YYYYMMDD. 2. The partner is allocated less than 10% of each
Column (m). If the partnership disposed of any block of stock partnership item of income, gain, loss, deduction, and credit for
in the PFIC during the partnership's tax year, enter the amount the tax year.
realized by the partnership on each disposition. 3. The partner's interest in the partnership has a fair market
value of less than $25 million on the last day of the partner's tax
Column (n). If the partnership disposed of any block of stock in year, determined using a reasonable method.
the PFIC during the partnership's tax year, enter the
partnership's tax basis in the shares of the PFIC on the date of See Regulations section 1.59A-7(d)(2) for further information
disposition. regarding the application of the exception for small partners.
Schedule K-3. Enter the partner's share, through its Exception for certain other partners. Don’t complete
ownership in the partnership, of the partnership's tax basis in the Schedule K-3, Part Vlll, for a partner that is an individual.
PFIC shares. The partner's share of the basis in the PFIC shares Don’t complete Schedule K-3, Part VIII, for a partner that is an
should include any applicable adjustments specific to the S corporation.
partner, such as section 743(b) adjustments or adjustments
Complete Section 1, lines 1–4, of Schedule K-3, Part VIII, for
made under the PFIC regime. See sections 1293(d) and
partners that are RICs and REITs but don’t complete Section 2
1296(b), and Regulations sections 1.1297-3 and 1.1298-3 for
for these partners.
adjustments made under the PFIC regime.
Column (o). Enter the partnership's gain or loss on the Section 1. Applicable Taxpayer
disposition of PFIC shares. This equals column (m) minus
column (n). Lines 1a through 4a. Enter the partnership's total gross
receipts for the current year and each of the 3 preceding tax
Schedules K-2 and K-3, Part VIII (Partners’ years. The determination of the partnership's gross receipts is
Information for Base Erosion and Anti-Abuse made in accordance with Regulations section 1.448-1T(f)(2)(iv).
Tax (Section 59A)) Lines 1b through 4b. Complete lines 1b through 4b if the
partnership has a foreign partner or there is reason to know it
Note. This information is relevant for partners completing Form has a foreign partner through a partner that is a pass-through
8991. entity. Enter the partnership’s total gross receipts on income
This Part VIII of Schedules K-2 and K-3 must be completed effectively connected with a U.S. trade or business (ECI) for the
for corporate partners who are determining if they are subject to current year and each of the 3 preceding tax years which the
the BEAT, and to figure their BEAT, if any. This information foreign partner(s) would take into account as income that is ECI.
includes the partner's share of the partnership's gross receipts, If the foreign partner(s) is subject to tax on a net basis pursuant
the partner's amount of base erosion payments made through to an applicable income tax treaty of the United States, enter the
the partnership, and the partner's base erosion tax benefits. The gross receipts that would be attributable to transactions taken
BEAT is generally levied on certain large corporations that have into account in determining its net taxable income.
deductions and certain other items paid or accrued to foreign Lines 1c through 4c. Complete lines 1c through 4c if the
related parties (a base erosion payment) that are 3% of their partnership has a foreign partner or has reason to know it has a
total deductions or higher (2% in the case of certain banks or foreign partner through a partner that is a pass-through entity.
registered securities dealers), a determination referred to as the

22 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 23 -

Page 23 of 26   Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                      9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Enter the total non-ECI gross receipts as the difference between     is subject to the allowance for depreciation (or amortization in 
column (a) and column (b).                                           lieu of depreciation).
Schedule K-3.  For purposes of section 59A, each partner in          Column (c). Enter the amount of the partners' base erosion 
a partnership includes on its Schedule K-3, Part VIII, the share of  tax benefits attributable to deductions allowed under chapter 1 
partnership gross receipts in proportion to the partner's            for the tax year for depreciation (or amortization in lieu of 
distributive share (as determined under sections 704(b) and (c))     depreciation) for intangible property rights acquired in the current 
of items of gross income that were taken into account by the         year or prior years from all foreign persons that are related 
partnership under section 703 or 704(c) (such as remedial or         parties of any of the partners.
curative items under Regulations sections 1.704-3(c) or (d)).
                                                                     Line 9. Rents, royalties, and license fees. 
Line 5. Amounts included in the denominator of the base              Column (a).  Enter the amount paid or accrued by the 
erosion percentage as described in Regulations section               partnership for the tax year for the use or right to use tangible or 
1.59A-2(e)(3). Enter the amount of deductions and other items        intangible property resulting in rents, royalties, and/or license 
allocated to the partners from the partnership that will be          fees.
included in the denominator of the partners' base erosion            Column (b).  Enter the amount paid or accrued to all foreign 
percentage. For a description of deductions that aren’t included     persons that are related parties of any of the partners for the use 
in the denominator, see Regulations section 1.59-2(e)(3)(ii).        or right to use tangible or intangible property resulting in rents, 
                                                                     royalties, and/or license fees.
Section 2. Base Erosion Payments and Base                            Column (c). Enter the amount of the partners' base erosion 
Erosion Tax Benefits                                                 tax benefits attributable to amounts paid or accrued to all foreign 
                                                                     persons that are related parties of any of the partners for the use 
Column (b). Base erosion payments.    For purposes of                or right to use tangible or intangible property that results in rents, 
determining whether a payment or accrual by a partnership is a       royalties, and/or license fees.
base erosion payment, any amount paid or accrued by the              Line 10a. Compensation/consideration paid for services 
partnership is treated as paid or accrued by each partner based      NOT excepted by section 59A(d)(5). 
on the partner's distributive share of the item of deduction for 
that amount. A partner that is an applicable taxpayer has a base     Column (a). Enter the amount paid or accrued by the 
erosion payment for any amount paid or accrued by the                partnership for the tax year as compensation or consideration for 
partnership to a foreign person (as defined in Regulations           services, excluding any amount that qualifies for the services 
section 1.59A-1(b)(10)) that is a related party to the partner (as   cost method exception in section 59A(d)(5).
defined in Regulations section 1.59A-1(b)(12)) for which a           Column (b).  Enter the amount paid or accrued to all foreign 
deduction is allowable under chapter 1 and for certain other         persons that are related parties of any of the partners as 
items on lines 13 and 15. See Regulations section 1.59A-3 and        compensation or consideration for services, excluding any 
the Instructions for Form 8991 for more information on the           amount that qualifies for the services cost method exception in 
definition of a base erosion payment.                                section 59A(d)(5).
                                                                     Column (c). Enter the amount of the partners' base erosion 
Column (c). Base erosion tax benefits.  A partner's                  tax benefits attributable to amounts paid or accrued to all foreign 
distributive share of any deduction or reduction in gross receipts   persons that are related parties of any of the partners 
attributable to a base erosion payment is the partner's base         representing compensation or consideration paid for services, 
erosion tax benefit. A partner's base erosion tax benefits are       excluding amounts qualifying for the services cost method 
determined separately for each asset, payment, or accrual, as        exception in section 59A(d)(5).
applicable, and aren’t netted with other items. A partner's base 
erosion tax benefit may be more than the partner's base erosion      Line 10b. Compensation/consideration paid for services 
payment (for example, in the case of special allocations made by     excepted by section 59A(d)(5). 
the partnership). See the Instructions for Form 8991 and             Column (a).  Enter the amounts paid or accrued by the 
Regulations section 1.59A-7(d) for further information               partnership to any foreign person that is a related party of any of 
concerning a partner's base erosion tax benefits.                    the partners for services qualifying for the services cost method 
                                                                     exception in section 59A(d)(5).
General.  For line 8, columns (b) and (c); line 9, columns (b) 
and (c); line 10a, columns (b) and (c); line 11, columns (b) and     Line 11. Interest expense. 
(c); line 12, columns (b) and (c); line 13, columns (b) and (c);     Column (a).  Enter the amount of interest paid or accrued by 
line 14a, columns (b) and (c); line 15, columns (b) and (c); and     the partnership for the tax year (excluding interest paid or 
line 16, columns (b) and (c), don’t include amounts that a partner   accrued in a prior year treated as paid or accrued in the current 
doesn’t take into account pursuant to the exception for certain      year under section 163(j) or similar provisions).
small partners. See Regulations section 1.59A-7(d)(2) and            Column (b).  Enter the amount of interest expense paid or 
Exception for small partners, earlier. For Schedule K-2, Part VIII,  accrued to all foreign persons that are related parties of any of 
report the total allocated to all partners, and for Schedule K-3,    the partners (excluding interest paid or accrued in a prior year 
Part VIII, report the amount allocated to each individual partner.   treated as paid or accrued in the current year under section 
Line 8. Purchase or creation of property rights for intangi-         163(j) or similar provisions).
bles (patents, trademarks, etc.).                                    Column (c).  Enter the amount of the partners' base erosion 
Column (a).    Enter the amount paid or accrued by the               tax benefits attributable to interest expense paid or accrued by 
partnership in connection with the acquisition or creation of        the partnership that is allowed as a deduction in the current tax 
intangible property rights (patents, copyrights, trademarks, trade   year. If the partner is a foreign person, include the individual lines 
secrets, etc.) that is subject to the allowance for depreciation (or from column (c) of Worksheet A on the applicable Schedule K-3.
amortization in lieu of depreciation) for the tax year.              Schedule K-3.     When completing line 11 on the 
Column (b).    Enter the amount paid or accrued to all foreign       Schedule K-3, if the partner is a foreign person, enter the total 
persons that are related parties of any of the partners in           from column (a) of Worksheet A on the partner's Schedule K-3 in 
connection with the acquisition or creation of intangible property   column (a) of line 11, enter the total from column (b) of 
rights (patents, copyrights, trademarks, trade secrets, etc.) that   Worksheet A on the Schedule K-3 in column (b) of line 11, and 

Inst. for Schedules K-2 and K-3 (Form 8865) (2023)                                                                                     23

- 24 -

Page 24 of 26 Fileid: … schk-2&k-3/2023/a/xml/cycle04/source 9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

enter the total from column (c) of Worksheet A on the payment isn’t a qualified derivative payment if it’s properly
Schedule K-3 in column (c) of line 11. allocable to the nonderivative component.
Complete Worksheet A for all partnership-related items and Line 15. Payments reducing gross receipts made to surro-
complete a Worksheet A for each foreign partner's share of the gate foreign corporation.
amounts reported on the partnership Worksheet A and attach a Column (a). Enter the amount paid or accrued by the
statement containing the partner’s share of the information in partnership for the tax year to certain expatriated entities
Worksheet A to the Schedule K-3. described in section 59A(d)(4)(C)(i).
Line 12. Payments for the purchase of tangible personal Column (b). Enter the amount paid or accrued to certain
property. expatriated entities that results in a reduction of the gross
Column (a). Enter the amount paid or accrued by the receipts of the partnership. This amount includes payments to a
partnership for the tax year for the purchase of tangible personal surrogate foreign corporation that is a related party to the
property. partner, but only if the entity first became a surrogate foreign
Column (b). Enter the amount paid or accrued to all foreign corporation after November 9, 2017. The amount also includes
persons that are related parties of any of the partners for the payments to a foreign person that is a member of the same
purchase of tangible personal property. expanded affiliated group, as defined in section 7874(c)(1), as
Column (c). Enter the amount of base erosion tax benefits the surrogate foreign corporation. A surrogate foreign
attributable to amounts paid or accrued to any foreign persons corporation is defined in section 7874(a)(2)(B) but doesn’t
that are related parties of any of the partners for the purchase of include a foreign corporation that is treated as a domestic
tangible property. corporation under section 7874(b).
Column (c). Enter the base erosion tax benefits attributable
Line 13. Premiums and/or other considerations paid or ac- to amounts paid or accrued to certain expatriated entities
crued for reinsurance as covered by section 59A(d)(3) and described in column (b) resulting in a reduction of gross receipts
section 59A(c)(2)(A)(iii). of the partnership.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year for reinsurance. Line 16. Other payments—specify.
Column (b). Enter the amount of any premiums or other Column (a). Enter the amount paid or accrued for the tax
consideration paid or accrued to all foreign persons that are year by the partnership that hasn’t been included on lines 8
related parties of any of the partners for reinsurance taken into through 15 above.
account under section 803(a)(1)(B) (relating to return premiums Column (b). Enter the amount paid or accrued to any foreign
and premiums or other consideration arising out of indemnity person that is a related party of any of the partners that is a base
reinsurance that reduces life insurance gross income) or section erosion payment that hasn’t otherwise been included on lines 8
832(b)(4)(A) (relating to amounts deducted from gross premiums through 15 above.
written on insurance contracts for return premiums and Column (c). Enter the amount of the partners' base erosion
premiums paid for reinsurance). tax benefits related to other specified base erosion payments not
Column (c). Enter the amount of the partners' base erosion listed in any of the categories on lines 8 through 15 above.
tax benefits attributable to premiums or other consideration as Attachment. For amounts reported on line 16, attach a
described in section 59A(c)(2)(A)(iii) paid or accrued to any statement to both Schedules K-2 and K-3 (for distributive share)
foreign person that is a related party of any of the partners for describing the type and amount of other payments, using the
reinsurance. same column headings as specified in this schedule: “Total Base
Erosion Payment,” “Total Base Erosion Tax Benefit.” For each
Line 14a. Nonqualified derivative payments. type of payment, the attachment must identify the relationship of
Column (a). Enter the amount paid or accrued by the a partner to the foreign related party consistent with the
partnership for the tax year attributable to derivative contracts as categories and instructions for columns (b) and (c) of this
defined in section 59A(h)(4). schedule.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners for Line 17, column (c). Base erosion tax benefits related to
derivative contracts that are not eligible for the qualified payments reported on lines 6 through 16, on which tax is
derivative payment exception under section 59A(h) and imposed by section 871 or 881, with respect to which tax
Regulations section 1.59A-6. Don’t include any amount paid that has been withheld under section 1441 or 1442 at 30%
is a qualified derivative payment on line 14a, column (b). (0.30) statutory withholding tax rate. Enter the aggregate
amount of the partners' base erosion tax benefits, reported on
Column (c). Enter the amount of base erosion tax benefits
attributable to nonqualified derivative payments paid or accrued lines 8 through 16, on which tax is imposed under section 871 or
881 and for which tax has been deducted and withheld under
to any foreign person that is a related party of any of the
partners. section 1441 or 1442 at a 30% statutory withholding tax rate.
Line 18, column (c). Portion of base erosion tax benefits re-
Line 14b. Qualified derivative payments excepted by sec-
tion 59A(h). Enter the total amount of qualified derivative ported on lines 6 through 16, on which tax is imposed by
section 871 or 881, with respect to which tax has been
payments paid or accrued by the partnership. Generally, a
qualified derivative payment is any payment made by the withheld under section 1441 or 1442 at a reduced with-
taxpayer pursuant to a derivative contract, provided that the holding rate pursuant to an income tax treaty. Multiply the
taxpayer recognizes gain or loss on the derivative contract as if it ratio of percentage withheld divided by 30% (0.30) times base
erosion tax benefit. Complete Worksheet B for all
were sold for its fair market value on the last business day of the
tax year; treats the gain or loss as ordinary; and treats the partnership-related items and attach a Worksheet B to the
Schedule K-3 for each partner's share of the amounts reported
character of all other items of income, deduction, gain, or loss for
a payment pursuant to the derivative as ordinary. A payment isn’t on the partnership Worksheet B.
a qualified derivative payment if the payment would be treated as Complete Worksheet B to determine the portion of the base
a base erosion payment if it weren’t made pursuant to a erosion tax benefits, reported on lines 8 through 16, on which tax
derivative (such as interest, royalty, or services income). For a is imposed under section 871 or 881 and for which tax has been
contract with both derivative and nonderivative components, a deducted and withheld at a reduced withholding tax rate (but not
exempt from tax) pursuant to a U.S. income tax treaty. Keep a

24 Inst. for Schedules K-2 and K-3 (Form 8865) (2023)

- 25 -

Page 25 of 26         Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                                                  9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Worksheet A—Interest Paid or Accrued by the Partnership
                                                        (a)                                (b)                                (c)
                                           Total Interest Paid or Accrued in the  Interest Paid or Accrued to Foreign Interest Expense Paid or Accrued to 
                                           Current Year          Related Parties of the Foreign                       Foreign Related Parties of the 
                                                                 Partner in the Current Year                          Foreign Partner That Is Allowed as a 
                                                                                                                      Deduction in the Current Year
(1) Interest Expense on Liabilities 
Described in Regulations Section 
1.882-5(a)(1)(ii)(A) or (B) (Direct 
Allocations)
(2) Interest Paid on U.S.- Booked 
Liabilities Under Regulations Section 
1.882-5(d)(2)(vii)
(3) Interest Paid on All Other Liabilities 
of the Partnership
Totals. Combine line (1) through line (3)

Worksheet B—Section 2, Line 18, Column (c)

Section 2, Line 18
            A                               B                    C                                D                              E
Type of base erosion                Amount of base erosion tax  Treaty-reduced withholding Divide column C by 30%     Multiply column B by 
payment                             benefit                 rate                           (0.30) (round to 4 decimal column D
                                                                                           places)
                                                                   %
                                                                   %
                                                                   %
                                                                   %
                                                                   %
                                                                   %
                     Add the amounts in column E and enter the total on line 18, column (c)

copy of the completed Worksheet B for the partnership’s 
records.

Inst. for Schedules K-2 and K-3 (Form 8865) (2023)                                                                                                   25

- 26 -

Page 26 of 26          Fileid: … schk-2&k-3/2023/a/xml/cycle04/source                9:06 - 4-Jan-2024

The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.

Index
 
                                     Foreign-Derived Intangible Income    Parts of Sch. K-2, in general                  2
A                                      (FDII) Deduction apportionment     Parts of Schedules K-2 and K-3, in 
                                       factors 11
Attachment 1 4                                                             general 2
                                     Form 8621, Information to            PFIC, QEF general information                   20
Attachment 2 4                         Complete  19                       Purchase or creation of property 
Attachment 3 17                      Future Developments   1               rights for intangibles 23
Attachment 4 17
Attachment 5 20                      G                                    R
B                                    General Instructions 1               R&E expenses   9
                                     Gross income 7                       Rental income 8
Base Erosion and Anti-Abuse Tax  22
Base Erosion Payments and Base       H                                    S
  Erosion Tax Benefits  23
Box 1. Gain on personal property     High-taxed income  4                 Schedule K-2, Identifying 
  sale. 3                                                                  Information  2
                                     I                                    Schedule K-3, Identifying 
C                                    Income resourced by treaty  7         Information  3
Capital gains and losses  8          Interest expense 9                   Section 1291 and Other 
                                                                           Information  21
Charitable contributions 9           Interest expense apportionment 
Codes for Classes of PFIC Shares 20    factors 10                         Section 1296 MTM Information                    21
                                                                          Section 250 deduction re FDII                   14
Codes for Types of Tax  11                                                Section 267A disallowed deduction                  5
Collectibles (28%) gain 8            N
                                                                          Section 901(j) income  7
Collectibles loss 9                  Net long-term capital gain 8         Section 951(a)(1) and Section 951A 
Computer-Generated Schedules K-2     Net long-term capital loss 9          Inclusions   18
  and K-3 2                          Net section 1231 gain 8              Section 951A category income                    7
Country code 7                                                            Section 986(c) gain and loss                   8
Currency  2                          O                                    Section 987 gain and loss 8
                                     Ordinary dividends and qualified     Section 988 gain and loss 8
D                                      dividends 8                        Specific Instructions 2
DEI and QBAI on Form 8993   14       Other deductions 9                   Splitter arrangements 3
Distributions from foreign           Other income 9                       Stewardship Expenses   10
  corporations to partnership 16     Other interest expense 9
Downstream loans    5                Other international items 6          T
Dual consolidated loss  6            Other Tax Information 13             Table 1. Information on Personal 
                                                                           Property Sold   3
E                                    P                                    Taxes assigned to section 951A 
EIN 2                                Part III. Other Information for       category  12
Example 1 4                            Preparation of Form 1116 or        Total deductions 9
Example 2 8                            1118 9                             Total gross income 9
Example 3 12                         Part IV. Information on Partners’ 
Example 5 15                           Section 250 Deduction With         U
                                       Respect to Foreign-Derived 
                                       Intangible Income (FDII)  14       Unrecaptured section 1250 gain                    8
F                                    Part VI. Information on Partners'    Upstream Loans   6
Foreign branch category income   7     Section 951(a)(1) and Section 
Foreign oil and gas taxes 3            951A Inclusions)  18               W
Foreign tax translation 4            Part VII. Information To Complete    What’s New 1
Foreign taxes not creditable but       Form 8621  19
                                                                          Where to File 1
  deductible 9                       Part VIII. Partners' Information for 
Foreign taxes paid or accrued to       Base Erosion and Anti-Abuse Tax    Who Must File 1
  sanctioned countries  12             (Section 59A)  22                  Worksheet A, Interest Paid or Accrued 
Foreign taxes related to PTEP        Partner determination 7               by the Partnership   25
  resourced by treaty   12           Partner’s section 250 deduction re   Worksheet B, Sec. 2, Line 18, Column 
Foreign-derived DEI on Form 8993  15   FDII 14                             (c) 25
Foreign-derived gross receipts 15    Partnership determination  6

          26

PDF file checksum: 4197267371

(Plugin #1/9.12/13.0)