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                                                                                                           Department of the Treasury
                                                                                                           Internal Revenue Service
2022

Partnership Instructions for 

Schedules K-2 and K-3 

(Form 1065)

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

Section references are to the Internal Revenue Code unless                  Reporting by domestic partnerships with solely domestic 
otherwise noted.                                                            activity and U.S. partners.  The instructions provide further 
Contents                                                             Page   guidance and examples concerning the need for reporting by 
What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1  domestic partnerships with solely domestic activity and with 
                                                                            partners that are U.S. persons.
General Instructions  . . . . . . . . . . . . . . . . . . . . . . . . .  2
Purpose of Schedules K-2 and K-3                 . . . . . . . . . . .   2  Revised reporting for Part I, box 1. Table 1 in Part I, box 1, 
                                                                            has been revised to require reporting of gains rather than both 
Who Must File      . . . . . . . . . . . . . . . . . . . . . . . . . .   2  proceeds and basis. Also, instead of reporting the date of sale of 
When and Where To File           . . . . . . . . . . . . . . . . . . .   4  the property, if the gain is capital, the partnership will now report 
How To Complete Schedules K-2 and K-3                      . . . . . .   5  whether the gain is long-term or short- term. Finally, the 
                                                                            partnership may combine stock sales by country instead of 
Specific Instructions . . . . . . . . . . . . . . . . . . . . . . . . .  5  listing each stock sale separately for that country.
Schedule K-2, Identifying Information . . . . . . . . . .                5
                                                                            Boxes 7, 8, and 9 on Part I. The instructions clarify the 
Schedule K-3, Identifying Information . . . . . . . . . .                6  reporting with respect to Forms 5471, Information Return of U.S. 
Part I. Partnership's Other Current Year                                    Persons With Respect to Certain Foreign Corporations; 8621, 
International Information            . . . . . . . . . . . . . . . . .   6  Information Return by a Shareholder of a Passive Foreign 
Part II. Foreign Tax Credit Limitation           . . . . . . . . . .     13 Investment Company or Qualified Electing Fund; 8858, 
                                                                            Information Return of U.S. Persons With Respect to Foreign 
Part III. Other Information for Preparation of                              Disregarded Entities (FDEs) and Foreign Branches (FBs); and 
Form 1116 or 1118 . . . . . . . . . . . . . . . . . . . .                15 8865, Return of U.S. Persons With Respect to Certain Foreign 
Part IV. Partners' Section 250 Deduction with                               Partnerships; and other forms.
Respect to FDII           . . . . . . . . . . . . . . . . . . . . . .    20
                                                                            New box 12 on Schedule K-3, Part I, for Form 8865.         If the 
Part V. Distributions From Foreign                                          partnership transferred property to a foreign partnership that 
Corporations to Partnership . . . . . . . . . . . . . .                  23 would subject one or more of its domestic partners to reporting 
Part VI. Information on Partners' Section                                   under section 6038B and Regulations section 1.6038B-2(a)(2) 
951(a)(1) and Section 951A Inclusions . . . . . .                        25 but did not file Schedule O (Form 8865), Transfer of Property to 
Part VII. Information to Complete Form 8621 . . . .                      27 a Foreign Partnership (Under Section 6038B), containing all the 
                                                                            information required under Regulations section 1.6038B-2, with 
Part VIII. Partnership's Interest in Foreign                                respect to the transfer, the partnership must provide the 
Corporation Income (Section 960)                   . . . . . . . . .     30 necessary information for each partner to fulfill its reporting 
Part IX. Partners' Information for Base                                     requirements under Regulations section 1.6038B-2.
Erosion and Anti-Abuse Tax (Section 59A) . . .                           33 New box 13 on Part I for other items of international tax 
Part X. Foreign Partners' Character and                                     relevance. The instructions clarify additional reporting that may 
Source of Income and Deductions . . . . . . . . .                        37 be required with respect to box 13 (formerly box 12).
Part XI. Section 871(m) Covered                                             Country codes. The instructions clarify the use of country 
Partnerships       . . . . . . . . . . . . . . . . . . . . . . . . .     41 codes and add a new code “XX.”
Part XIII. Foreign Partner's Distributive Share                             Capital gains and losses.    The instructions clarify the reporting 
of Deemed Sale Items on Transfer of                                         of capital gains and losses in Parts II and X.
Partnership Interest           . . . . . . . . . . . . . . . . . . .     41
                                                                            Research and experimental expense apportionment.            The 
Future Developments                                                         instructions clarify when a partnership must complete Part III, 
For the latest information about developments related to                    Section 1; Part IV, Section 3, lines 15 and 16; and Part X, 
Schedule K-2 (Form 1065) and Schedule K-3 (Form 1065), and                  Section 3, line 5, with respect to the apportionment factors for 
their instructions, such as legislation enacted after they were             research & experimental (R&E) expense.
published, go to IRS.gov/Form1065.                                          Interest expense and stewardship expense apportionment. 
                                                                            The instructions clarify how to report information on Part II, 
What’s New                                                                  Section 2, and Part III, Section 2, and expand the section to 
                                                                            cover stewardship expense.
New exception to completing Schedules K-2 and K-3. 
These instructions add a new exception for filing and furnishing            Part III, Sections 3 and 4.  The instructions clarify the 
Schedules K-2 and K-3 for tax years beginning in 2022. See the              partnerships required to report information in these sections.
Domestic filing exception.

Dec 23, 2022                                                         Cat. No. 74375Q

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Foreign tax redeterminations. The instructions clarify the Exceptions to Part VII added and clarified. The instructions
reporting of foreign tax redeterminations on Part III, Section 4, add an exception to completing Part VII for any partnership that
line 3. In addition, the instructions describe new reporting knows all of its direct and indirect partners that are U.S. persons
concerning contested taxes that partnerships need to provide to are either not subject to the PFIC rules under section 1297(d),
their partners for the partners to elect to claim a provisional are certain tax-exempt entities, or are pass-through entities with
credit for contested taxes under Regulations section 1.905-1(f) no taxable domestic owners. The instructions also add an
(2), published on January 4, 2022. exception to completing Part VII for partnerships that mark to
market stock of a PFIC as described in Regulations section
Final regulations apply aggregate treatment to domestic
1.1291-1(c)(4) and clarify when reporting is required for foreign
partnerships for certain purposes. Final regulations under
corporations that may be treated, or may deemed to be treated,
section 958, published on January 25, 2022, treat a domestic
as qualifying insurance corporations.
partnership as an aggregate of its partners for purposes of
sections 951, 951A, and 956(a), and for purposes of any Updates to references to mark-to-market (MTM) elections
provision that specifically applies by reference to any of those in Part VII. The instructions clarify that MTM elections for PFICs
sections or the regulations thereunder. See Regulations section referenced in the instructions generally refer to elections under
1.958-1(d)(1). Under the final regulations, except for purposes of section 1296 and not any other section of the Code or
determining U.S. shareholder, controlling domestic shareholder, regulations. Additionally, the instructions provide guidance on
and controlled foreign corporation (CFC) statuses, a domestic how to report information on Schedules K-2 and K-3, Part VII, for
partnership is not treated as owning the stock of a foreign PFICs with respect to which an election under section 1296 is
corporation within the meaning of section 958(a). For purposes being made in the current tax year if the current tax year is not
of determining the persons that own stock of a foreign the first year of the partnership’s holding period in the PFIC
corporation under section 958(a), stock of a foreign corporation stock.
owned by a domestic partnership is treated in the same manner
Subpart F income groups added to Part VIII. In tax year
as stock of a foreign corporation owned by a foreign partnership.
2022, new line 1f is added to Part VIII to allow the partnership to
The final regulations apply to tax years of foreign corporations
report foreign personal holding company income under section
beginning on or after January 25, 2022, and to tax years of U.S.
954(c)(1)(F) (income from notional principal contracts), section
persons in which or with which such foreign corporations’ tax
954(c)(1)(G) (payments in lieu of dividends), and section 954(c)
years end. However, a domestic partnership may apply the final
(1)(H) (personal service contracts). The instructions also clarify
regulations to tax years of a foreign corporation beginning after
other reporting on Part VIII in relation to Form 5471.
December 31, 2017, and to tax years of the domestic
partnership in which or with which such tax years of the foreign Part IX revisions. The instructions clarify the reporting
corporation end, provided certain consistency requirements are required on Section 1, lines 1c through 4c.
met. See Regulations section 1.958-1(d)(4)(i). For tax years of Reporting to foreign partners. The instructions clarify when a
foreign corporations beginning on or after January 25, 2022, or if partnership must report information to foreign partners on Part X
the partnership applies the final regulations to tax years of and how to report certain amounts (including original issue
foreign corporations beginning after December 31, 2017, but discount) on Part X.
before January 25, 2022, the partnership will provide the
information necessary for its partners to determine any section
951(a) income inclusions on Part VI of Schedule K-3 (with the General Instructions
aggregate amounts for all partners reported on Part VI of
Schedule K-2). For tax years of foreign corporations beginning The Instructions for Form 1065 and Instructions for
before January 25, 2022, and to which the partnership does not Schedule K-1 (Form 1065) generally apply to Schedules K-2 and
apply the final regulations, the partnership should, with respect K-3. This instruction provides additional information needed to
to foreign corporations of which it is a U.S. shareholder, report complete Schedules K-2 and K-3 for tax years beginning in
as follows: section 951(a) income inclusions on Schedules K 2022.
and K-1, line 11, Other income (loss) (see the instructions for
line 11, code H, and line 20, code Y); for foreign tax credit Purpose of Schedules K-2 and K-3
limitation purposes, the partnership will also need to report Schedule K-2 is an extension of Schedule K of Form 1065 and is
section 951(a) income inclusions on Part II of Schedule K-2 (and used to report items of international tax relevance from the
Part II of Schedule K-3 for the partner’s distributive share of such operation of a partnership.
inclusions); and for foreign-derived intangible income purposes,
the partnership will need to report section 951(a) income Schedule K-3 is an extension of Schedule K-1 (Form 1065)
inclusions on Part IV of Schedule K-2 (and Part IV of and is generally used to report to partners their share of the
Schedule K-3 for the partner’s distributive share of such items reported on Schedule K-2. Partners must include the
inclusions). information reported on Schedule K-3 on their tax or information
Foreign-derived intangible income deduction. The returns, if applicable.
instructions clarify the reporting on Part IV, Section 1, line 1; and
Section 3, line 13. Who Must File
Any partnership required to file Form 1065 that has items
Exceptions added to Part V. The instructions add an relevant to the determination of the U.S. tax or certain
exception to completing Part V of the Schedule K-2 with respect withholding tax or reporting obligations of its partners under the
to distributions by a foreign corporation and an exception to international provisions of the Internal Revenue Code must
completing Part V of the Schedules K-3 for a partner with complete the relevant parts of Schedules K-2 and K-3. See each
respect to distributions by a foreign corporation. part and section for a more detailed description of who must file
Exceptions added to Part VI. The instructions add an each part and section. Penalties may apply for filing Form 1065
exception to completing Part VI of the Schedule K-2 with respect without all required information or for furnishing Schedules K-3
to a CFC and an exception to completing Part VI of the to partners without all required information. The penalties that
Schedules K-3 for a partner with respect to a CFC. apply with respect to Form 1065 and Schedule K-1 apply with
respect to Schedules K-2 and K-3, respectively. See Penalties in
the Instructions for Form 1065.

-2- Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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Note. Except as otherwise required by statute, regulations, or         7701(a)(2) and (4)) does not need to (a) complete and file with 
other IRS guidance, a partnership is not required to obtain            the IRS the Schedules K-2 and K-3, or (b) furnish to a partner 
information from its direct or indirect partners to determine if it    the Schedule K-3 (except where requested by a partner after the 
needs to file each of these parts.                                     1-month date (defined in criteria number 4, below)) if each of the 
                                                                       following four criteria are met with respect to the partnership’s 
Note. A partnership is only required to complete and file the          tax year 2022.
relevant portions of Schedules K-2 and K-3, as applicable. For            1. No or limited foreign activity. During a domestic 
example, if the partnership does not own (within the meaning of        partnership’s tax year 2022, the domestic partnership either has 
section 958) stock of a foreign corporation other than solely by       no foreign activity (as defined below), or, if it does have foreign 
reason of applying section 318(a)(3) (providing for downward           activity, such foreign activity is limited to (a) passive category 
attribution) as provided in section 958(b), it is not required to      foreign income (determined without regard to the high-taxed 
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.            income exception under section 904(d)(2)(B)(iii)); (b) upon 
Note. Schedules K-2 and K-3 consist of the most common                 which not more than $300 of foreign income taxes allowable as a 
international tax provisions of the Internal Revenue Code.             credit under section 901 are treated as paid or accrued by the 
However, not all provisions are specifically identified on these       partnership; and (c) such income and taxes are shown on a 
schedules. To the extent that an international provision is            payee statement (as defined in section 6724(d)(2)) that is 
impacted and is not otherwise specifically identified, the             furnished or treated as furnished to the partnership.
partnership should check box 13 on Schedule K-2, Part I, and           Foreign activity. For purposes of the domestic filing exception, 
Schedule K-3, Part I, and attach a statement to both Schedules         foreign activity means any of the following. (a) foreign income 
K-2 and K-3 (for distributive share).                                  taxes paid or accrued (as defined in section 901 and the 
                                                                       regulations thereunder); (b) foreign source income or loss (as 
Note. A partnership with no foreign source income, no assets           determined in sections 861 through 865, and section 904(h), and 
generating foreign source income, no foreign partners, and no          the regulations thereunder); (c) ownership interest in a foreign 
foreign taxes paid or accrued may still need to report information     partnership (as defined in sections 7701(a)(2) and (5)); (d) 
on Schedules K-2 and K-3. For example, if the partner claims a         ownership interest in a foreign corporation (as defined in 
credit for foreign taxes paid or accrued by the partner, the           sections 7701(a)(3) and (5)); (e) ownership of a foreign branch 
partner may need certain information from the partnership to           (as defined in Regulations section 1.904-4(f)(3)(vii)); (f) 
complete Form 1116 or 1118. Also, a partnership that has only          ownership interest in a foreign entity that is treated as 
domestic partners may still be required to complete Part IX when       disregarded as an entity separate from its owner (as defined in 
the partnership makes certain deductible payments to foreign           Regulations section 301.7701-3).
related parties of its domestic partners. The information reported        2. U.S. citizen/resident alien partners. During tax year 
in Part IX will assist any domestic corporate partner in               2022, all the direct partners in the domestic partnership are: (a) 
determining the amount of base erosion payments made                   individuals that are U.S. citizens; (b) individuals that are resident 
through the partnership, and in determining if the partners are        aliens (as defined in section 7701(b)(1)(A) and the regulations 
subject to the base erosion and anti-abuse tax (BEAT). Further,        thereunder); (c) domestic decedent’s estates (that is, 
if the domestic partnership with no foreign activity or foreign        decedent’s estates that are not foreign estates as defined in 
partners has direct or indirect domestic corporate partners, Part      section 7701(a)(31)(A)), with solely U.S. citizen and/or resident 
IV (concerning foreign-derived intangible income (FDII)) must be       alien individual beneficiaries; (d) domestic grantor trusts (that is, 
completed. A domestic or foreign publicly traded partnership as        trusts described under sections 671 through 678) that are not 
defined in section 7704(b) (PTP) with no foreign activity or           foreign trusts as defined in section 7701(a)(31)(B)) and that have 
foreign partners may need to complete Part XI. See each part for       solely U.S. citizen and / or resident alien individual grantors and 
applicability.                                                         solely U.S. citizen and / or resident alien individual beneficiaries; 
Example 1.     BEAT Example. Foreign corporation wholly                (e) domestic non-grantor trusts (that is, trusts subject to tax 
owns DC, a domestic corporation, and foreign corporation               under section 641 that are not foreign trusts as defined in section 
(“foreign subsidiary”). DC satisfies the gross receipts test. See      7701(a)(31)(B)) with solely U.S. citizen and/or resident alien 
Regulations section 1.59A-2(d). In Year 1, DC owns a 50%               individual beneficiaries; (f) S corporations with a sole 
interest in a domestic partnership, USP. An unrelated domestic         shareholder; or (g) single-member LLCs, where the LLC’s sole 
corporation owns the remaining 50% interest in USP. DC’s               member is one of the persons in subparagraphs (a) through (f), 
investment in USP does not qualify for the small partner               and the LLC is disregarded as an entity separate from its owner 
exception. See Regulations section 1.59A-7(d)(2).                      (as defined in Regulations section 301.7701-3).
In Year 1, USP pays the foreign subsidiary $100 for services.             3. Partner notification. With respect to a partnership that 
The services are not eligible for the services cost method             satisfies criteria 1 and 2, partners receive a notification from the 
exception. See Regulations section 1.59A-3(b)(3)(i). DC’s              partnership at the latest when the partnership furnishes the 
distributive share of the $100 payment to the foreign subsidiary       Schedule K-1 to the partner. The notice can be provided as an 
is $50.                                                                attachment to the Schedule K-1. The notification must state that 
                                                                       partners will not receive Schedule K-3 from the partnership 
For purposes of determining whether a payment or accrual by            unless the partners request the schedule.
a partnership is a base erosion payment, any amount paid or 
accrued by USP is treated as paid or accrued by each partner              4. No 2022 Schedule K-3 requests by the 1-month date. 
based on the partner’s distributive share of the item of deduction     The partnership does not receive a request from any partner for 
with respect to that amount. See Regulations section 1.59A-7(d)        Schedule K-3 information on or before the 1-month date. The 
(2). Therefore, DC is treated as having paid $50 to the foreign        “1-month date” is 1 month before the date the partnership files 
subsidiary.                                                            the Form 1065. For tax year 2022 calendar year partnerships, 
                                                                       the latest 1-month date is August 15, 2023, if the partnership 
DC must complete Form 8991 to compute its base erosion                 files an extension.
minimum tax amount (if any); therefore, USP must complete the 
relevant portions of Part IX of Schedules K-2 and K-3.                 Note. If a partnership receives a request from a partner for the 
Domestic filing exception (exception to filing Schedules               Schedule K-3 information after the 1-month date and has not 
K-2 and K-3).  A domestic partnership (as defined under section        received a request from any other partner for Schedule K-3 
                                                                       information on or before the 1-month date, the domestic filing 

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)           -3-

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exception is met and the partnership is not required to file the tax need to complete, attach, or file any parts or sections relevant to
year 2022 Schedules K-2 and K-3 with the IRS or furnish the tax husband and wife. USP must provide a copy of the filed
year 2022 Schedule K-3 to the non-requesting partners. Schedule K-3 to A on the date that USP files its Form 1065. USP
However, the partnership is required to provide the tax year does not need to furnish a Schedule K-3 to husband and wife.
2022 Schedule K-3, completed with the requested information, Example 4. The facts are the same as in Example 3 except
to the requesting partner on the later of the date on which the that USP receives the request from A on August 20, 2023. USP
partnership files the Form 1065 or 1 month from the date on qualifies for the domestic filing exception because A requested
which the partnership receives the request from the partner. See the Schedule K-3 after the 1-month date. USP is not required to
Example 4. The partnership must complete and file tax year file the tax year 2022 Schedules K-2 and K-3 with the IRS or
2023 Schedules K-2 and K-3 with respect to the requesting furnish the Schedule K-3 to husband and wife. However, USP is
partner by the tax year 2023 Form 1065 filing deadline. required to provide the Schedule K-3, completed with the
requested information, to A on September 20, 2023, the later of
Note for partnerships that satisfy criteria 1 through 3, but
the date on which USP files the Form 1065 or 1 month from
do not satisfy criterion 4. If the partnership received a
August 20, 2023. Because A requested a Schedule K-3 for tax
request from a partner for Schedule K-3 information on or before
year 2022, USP must file tax year 2023 Schedules K-2 and K-3
the 1-month date and therefore the partnership does not satisfy
with the IRS with respect to the information requested by A.
criterion 4, the partnership is required to file the Schedules K-2
and K-3 with the IRS and furnish the Schedule K-3 to the Note. If a partnership does not meet the domestic filing
requesting partner. The Schedules K-2 and K-3 are required to exception, it may meet the Form 1116 Exemption to filing the
be completed only with respect to the parts and sections Schedules K-2 and K-3. See below.
relevant to the requesting partner. For example, if a partner
requests the information reported on Part III, Section 2 (Interest When and Where To File
Expense Apportionment Factors), the partnership is required to
complete and file Schedule K-2, Part III, Section 2 with respect Attach Schedules K-2 and K-3 to the partnership’s Form 1065
to the partnership’s total assets and Schedule K-3, Part III, and file both by the due date (including extensions) for that
Section 2 with respect to the requesting partner’s distributive return.
share of the assets. On the date that the partnership files Provide Schedule K-3 to the partners of the partnership
Schedules K-2 and K-3 with the IRS, the partnership must according to the timeline for providing the Schedule K-1. See the
provide a copy of the filed Schedule K-3 to the requesting Instructions for Form 1065.
partner. The partnership does not need to complete, attach, file,
or furnish any other parts or sections of the Schedules K-2 and See the Instructions for Form 1065 for requirements with
K-3 to the IRS, the requesting partner, or any other partner. The respect to recordkeeping.
partnership should keep records of the information requested by See the Instructions for Form 1065 concerning amendments
the partner. See Example 3. or adjustments to Schedules K-2 and K-3.
If a partnership receives requests from partners for
Schedule K-3 information both on or before the 1-month date Computer-Generated Schedules K-2 and K-3
and after the 1-month date, the partnership is required to file Generally, all computer-generated forms must receive prior
Schedules K-2 and K-3 as described in the prior paragraph only approval from the IRS and are subject to an annual review.
with respect to the partner requests received on or before the However, see the Exception below. Requests for approval may
1-month date. With respect to requests received after the be submitted electronically to substituteforms@irs.gov, or
1-month date, the partnership is required to provide the requests may be mailed to:
Schedule K-3, completed with that partner’s requested
information, on the later of the date on which partnership files the Internal Revenue Service
Form 1065 or 1 month from the date on which the partnership Attn: Substitute Forms Program
receives the request from the partner. See Examples 3 and 4. SE:W:CAR:MP:P:TP
Example 2. Husband and wife, U.S. citizens, each own a 1111 Constitution Ave. NW, Room 6554
50% interest in USP, a domestic partnership. USP and husband Washington, DC 20224
and wife each have a tax year end of December 31. USP invests
in a regulated investment company (RIC). With respect to tax Exception. If a computer-generated Schedule K-2 or K-3
year 2022, USP receives a Form 1099 from the RIC reporting conforms to and does not deviate from the official form and
$100 of creditable foreign taxes paid or accrued on passive schedules, it may be filed without prior approval from the IRS.
category foreign source income. USP does not have any foreign
activity other than that from the RIC. Husband and wife receive Important. Be sure to attach the approval letter to a
notification from USP on an attachment to Schedule K-1 that computer-generated Schedule K-2 or K-3. However, if the
they will not receive the Schedule K-3 unless they so request. computer-generated form is identical to the IRS prescribed form,
Husband and wife do not request Schedule K-3 from USP for tax it does not need to go through the approval process, and an
year 2022. USP qualifies for the domestic filing exception, and, attachment is not necessary.
as such, USP need not complete Schedules K-2 and K-3. Every year, the IRS issues a revenue procedure to provide
Example 3. The facts are the same as in Example 2 except guidance for filers of computer-generated forms. In addition,
that husband and wife each own a 40% interest in USP, and A, a every year, the IRS issues Pub. 1167, General Rules and
U.S. citizen, owns a 20% interest in USP. A requests Specifications for Substitute Forms and Schedules, which
Schedule K-3 from USP for tax year 2022 and USP receives this reprints the most recent applicable revenue procedure. Pub.
request on February 1, 2023. After requesting an extension, 1167 is available at IRS.gov/irb/2021-43_IRB#REV-
USP files Form 1065 on August 31, 2023. USP does not qualify PROC-2021-42. The procedures relevant to Form 1065 and
for the domestic filing exception because A requested the Schedule K-1 (Form 1065) apply for purposes of Schedules K-2
Schedule K-3 by the 1-month date (July 31, 2023). As such, and K-3.
USP must complete and file with the IRS the parts and sections
of the Schedules K-2 and K-3 that are relevant to A. With respect
to the Schedules K-2 and K-3 filed with the IRS, USP does not

-4- Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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How To Complete Schedules K-2 and K-3 Form 8621 and to provide partners with information to determine
income inclusions with respect to the passive foreign investment
Reporting currency. Report all amounts in U.S. dollars except company (PFIC).
where specified otherwise. Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).
References to other forms. References in these instructions Used to provide the foreign corporation's net income in the
to Form 1040, U.S. Individual Income Tax Return, are intended, income groups for purposes of the partner's deemed paid taxes
if applicable, to include Form 1040-SR, U.S. Tax Return for computation with respect to inclusions under sections 951A,
Seniors, as well as other tax returns for noncorporate partners 951(a)(1), and 1293(f). Partners will use the information to figure
such as Form 1041, U.S. Income Tax Return for Estates and and claim a deemed paid foreign tax credit on Form 1118.
Trusts. Similarly, references to Form 1120, U.S. Corporation Part IX of Schedule K-2 (and Part IX of Schedule K-3).
Income Tax Return, are intended, if applicable, to apply to other Used to provide information for the partner to figure its base
forms in the 1120 series. References to forms which have been erosion and anti-abuse tax (BEAT). Partners will use the
replaced are intended, if applicable, to include the replacement information to complete Form 8991, Tax on Base Erosion
forms. Payments of Taxpayers With Substantial Gross Receipts.
Uses of the parts of Schedule K-2 and Schedule K-3, in Part X of Schedule K-2 (and Part X of Schedule K-3).
general. Used to provide information for the partner to figure its tax
liability with respect to income effectively connected with a U.S.
Part I of Schedule K-2 (and Part I of Schedule K-3). Used trade or business (ECI) or with respect to fixed, determinable,
to report international tax items not reported elsewhere on annual, or periodical (FDAP) income, partners will use the
Schedule K-2 or K-3. information to figure and report any U.S. tax liability on Forms
Part II of Schedule K-2 (and Part II of Schedule K-3). 1040-NR, U.S. Nonresident Alien Income Tax Return, and
Used to figure the partnership’s income or loss by source and 1120-F, U.S. Income Tax Return of a Foreign Corporation, or
separate category of income and to report the partner’s other applicable forms.
distributive share of such income or loss. Partners will use the Part XI of Schedule K-2 (and Part XI of Schedule K-3).
information to figure and claim a foreign tax credit on Form 1116 Used to provide certain information to U.S. and foreign partners
or 1118. with respect to section 871(m) by a PTP that satisfies certain
Part III of Schedule K-2 (and Part III of Schedule K-3). other requirements. Certain partners will use the information to
Used to report information necessary for the partner to determine their U.S. withholding tax obligations and to figure and
determine the allocation and apportionment of R&E expense, report any U.S. tax liability on Forms 1042 and 1042-S.
interest expense, and the foreign-derived intangible income Part XII. Reserved.
(FDII) deduction for purposes of the foreign tax credit limitation.
Also used to report foreign taxes paid or accrued by the Part XIII of Schedule K-3. Used to provide information for a
partnership and the partner’s distributive share of such taxes. foreign partner to figure its distributive share of deemed sale
Also used to report income adjustments under section 743(b) by items on a transfer of the partnership interest. Partners will use
source and separate category. Partners will use the information the information to complete Form 4797, Sales of Business
to figure and claim a foreign tax credit on Form 1116 or 1118. Property; Form 6252, Installment Sale Income; and Form 8949,
Sales and Other Dispositions of Capital Assets.
Part IV of Schedule K-2 (and Part IV of Schedule K-3).
Used to report the information necessary for the partner to
determine its section 250 deduction with respect to FDII. Specific Instructions
Partners will use the information to claim and figure a section
250 deduction with respect to FDII on Form 8993, Section 250 If the information required in a given section exceeds the
Deduction for Foreign-Derived Intangible Income (FDII) and ! space provided within that section, do not write “See
Global Intangible Low-Taxed Income (GILTI). CAUTION attached” in the section or leave the section blank.
Part V of Schedule K-2 (and Part V of Schedule K-3). Instead, complete all entry spaces in the section and attach the
Used to report information the partner needs, in combination remaining information on additional sheets. For all attachments,
with other information known to the partner, to determine the include the part, section, line number, and column of the relevant
amount of each distribution from a foreign corporation that is portion of Schedule K-2 and Schedule K-3. The additional
treated as a dividend or excluded from gross income because sheets must conform to the IRS version of that section.
the distribution is attributable to previously taxed earnings and
profits (PTEP) in the partner’s annual PTEP accounts with
respect to the foreign corporation, and the amount of foreign Schedule K-2, Identifying Information
currency gain or loss on the PTEP that the partner is required to At the top of each new page, enter the name of the partnership
recognize under section 986(c). as it appears on Form 1065. At the top of each new page, enter
Partners will report the dividends and foreign currency gain or the employer identification number (EIN) of the partnership as it
loss on Form 1040 or 1120. If eligible, partners will also use this appears on the Form 1065.
information to figure and claim a dividends received deduction Item A—Withholding foreign partnership. If the partnership
under section 245A on Form 1120. Partners will also use the is a withholding foreign partnership under Rev. Proc. 2017-21,
information to figure and claim a foreign tax credit on Form 1116 2017-6 I.R.B. 791, check the "Yes" box. Otherwise, check the
or 1118. "No" box.
Part VI of Schedule K-2 (and Part VI of Schedule K-3). If the "Yes" box is checked, provide the partnership's
Used to provide information the partner needs to determine any withholding foreign partnership employer identification number
inclusions under sections 951(a)(1) and 951A. Partners will use (WP-EIN). Enter the partnership's WP-EIN regardless of whether
the information to complete Form 8992, U.S. Shareholder the partnership filed this Form 1065 using its WP-EIN.
Calculation of Global Intangible Low-Taxed Income (GILTI), and
Forms 1040 and 1120 with respect to subpart F income Item B—Qualified derivatives dealer. If the partnership
inclusions, section 951(a)(1)(B) inclusions, and section 951A (including the home office or any branch) is a qualified
inclusions. derivatives dealer under Rev. Proc. 2017-15, 2017-3 I.R.B. 437,
Part VII of Schedule K-2 (and Part VII of Schedule K-3). check the "Yes" box. Otherwise, check the "No" box.
Used to provide information needed by partners to complete

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If the "Yes" box is checked, provide the partnership's qualified personal property sold by the partnership is treated as sold by
intermediary employer identification number (QI-EIN). the partners. See section 865(i)(5). A U.S. citizen or resident
alien individual with a tax home (as defined in section 911(d)(3))
Item C—Part applicability. Check the “Yes” box to indicate the
in a foreign country is treated as a nonresident with respect to
applicable parts of Schedule K-2 and Schedule K-3. Complete
the sale of personal property only if an income tax of at least
each applicable part.
10% of the gain derived from the sale is actually paid to a foreign
Check the “No” box to indicate the inapplicable parts of country with respect to that gain. See section 865(g). In addition,
Schedule K-2 and Schedule K-3. Do not complete, file, or attach if a U.S. resident maintains an office or other fixed place of
to the Form 1065 or Schedule K-3 the inapplicable parts. business in a foreign country, income from the sale of personal
property attributable to such office or other fixed place of
Schedule K-3, Identifying Information business is foreign source only if an income tax of at least 10%
Items A and B. Items A and B should be the same as reported of the income from the sale is actually paid to a foreign country
on Schedule K-1, Part I, items A and B. with respect to such income. See section 865(e)(1).
If the partnership has income from the sale of personal
Items C and D. Items C and D should be the same as reported property (other than inventory, depreciable personal property,
on Schedule K-1, Part II, items E and F. and certain intangible property excepted from the general rule of
Item E. Item E should correspond to Schedule K-2, Identifying section 865(a)), and the partnership pays income tax to a foreign
Information, item C. country with respect to income from the sale or the income is
eligible for re-sourcing under an applicable treaty, it must check
Schedule K-2, Part I (Partnership’s Other box 1 and attach a statement to Schedule K-2 and Schedule K-3
Current Year International Information), and (for distributive share) reflecting all the information shown in
Table 1. The partnership may combine sales of stock property
Schedule K-3, Part I (Partner’s Share of by country. Otherwise, do not combine sales of property. Each
Partnership’s Other Current Year International item of property sold must be listed separately with the
Information) information shown in Table 1. In column (b), if the gain is capital,
enter “long-term” or “short-term.” For column (g), enter the
Notes. two-letter code from the list at IRS.gov/CountryCodes. Do not
• Certain partners will use the information reported in the enter "various" or "OC" for the country code. If the property sale
attachments with respect to boxes 1 through 5 and 10 to claim is taxed by more than one country, complete a separate line for
and figure a foreign tax credit on Form 1116 or 1118. that country, but indicate in some manner (for example, a
• Certain partners will also use the information reported in the footnote) that the property entered on both lines is the same
attachments with respect to box 6 to prepare their tax returns property.
(Forms 1040, 1120, 1040-NR, and 1120-F, as applicable) by Box 2. Foreign oil and gas taxes. A separate foreign tax
taking into account that under section 267A they are not allowed credit limitation is applied with respect to foreign oil and gas
deductions for the amounts listed in the statement with respect taxes. See section 907(a) and Regulations section 1.907(a)-1 for
to box 6. details. If the partnership has such taxes, it must check box 2
• Certain partners will use the information reported in and attach a completed Schedule I (Form 1118) to the
attachments with respect to boxes 7 through 9 to identify any Schedule K-2 and Schedule K-3 (with the partner’s distributive
international tax information reporting forms or other share). The partnership need not complete Form 1118,
international tax forms that may impact the partners’ tax returns. Schedule I, Part I, column 12; Part II, lines 2 through 4; or Part III,
• Certain partners may use the information reported in lines 1 and 3. The partnership must attach Schedule I (Form
attachments with respect to boxes 7 and 11 to determine any 1118) even if there are no corporate partners because the
dual consolidated losses which may not be deducted on Form limitation applies to individuals eligible to claim a foreign tax
1120. credit.
This part is used to report information for international tax Note. The partnership attaches a partially completed Schedule I
items not reported elsewhere on the Schedule K-2. Check the (Form 1118) so that the partner has the information it needs to
box to indicate whether any of the following international tax complete Schedule I (Form 1118) or Form 1116. The partnership
items are applicable in the tax year. If applicable, attach is not attaching Schedule I (Form 1118) as a form required to be
statements, as described below, to the Schedule K-2. If filed by the partnership for purposes of the partnership
applicable, the partnership must also complete Schedule K-3, determining creditable taxes because a partnership cannot claim
Part I, and include with the Schedule K-3 the attachment(s) as a foreign tax credit.
described below with the partner's distributive share of the
amounts. Box 3. Splitter arrangements. Foreign taxes with respect to a
foreign tax credit splitting event are suspended until the related
Box 1. Gain on personal property sale. In general, income income is taken into account by the taxpayer. See section 909.
from the sale of personal property is sourced according to the There is a foreign tax credit splitting event with respect to foreign
residence of the seller. See section 865. For sourcing purposes,
Table 1

Information on Personal Property Sold (For use with Sch. K-2 (Form 1065), Part I, box 1; also for use
with Sch. K-3 (Form 1065), Part I, box 1)

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

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taxes of a payor if in connection with a splitter arrangement the relate to that portion of the related income if determinable by the
income is or will be taken into account by a covered person. See partnership.
Regulations section 1.909-2(a). A covered person, as defined in
Regulations section 1.909-1(a)(4), includes, for example, any Box 4. Foreign tax translation. If the partnership reports any
entity in which the payor holds, directly or indirectly, at least a foreign taxes on Schedules K-2 and K-3, Part III, Section 4, it
10% ownership interest (determined by vote or value). A payor, must check the box for item 4 and attach to Schedules K-2 and
as defined in Regulations section 1.909-1(a)(3), includes, for K-3 the statement described in the instructions for those
example, a person that takes foreign income taxes paid or sections.
accrued by a partnership into account pursuant to section 702(a) Box 5. High-taxed income. If the partnership has passive
(6). income, check the box for item 5 and attach a statement to
The partnership must report foreign taxes that are potentially Schedules K-2 and K-3 with Worksheet 1 or 2, or both,
suspended on Schedule K-2, Part III, Section 4, line 2E, and completed. The partner will use this information to determine
each partner's share of such taxes on Schedule K-3, Part III, whether its passive income is high-taxed passive income.
Section 4, line 2E. A partnership may not be able to determine Income received or accrued by a U.S. person that would
whether taxes are suspended and whether related income is otherwise be passive income is not treated as passive income if
taken into account. However, where the partnership is able to the income is determined to be high-taxed income. See section
determine that taxes are potentially suspended, or potentially 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income,
unsuspended, it must report such taxes and the information a partner must group its shares of items of passive income from
requested in these instructions for box 3. For example, where a a partnership according to the rules in Regulations section
partnership owns a reverse hybrid and the foreign country 1.904-4(c)(3), except that the portion, if any, of the share of
assesses tax on the partnership for income earned by the income attributable to income earned by a domestic partnership
reverse hybrid, the partnership should report such taxes as through a foreign qualified business unit (QBU) is separately
potentially suspended taxes. grouped under the rules of Regulations section 1.904-4(c)(4).
Report foreign taxes that are potentially suspended on See also Regulations section 1.904-4(c)(5)(ii). For this purpose,
Schedule K-2, Part III, Section 4, line 2E, and each partner's a foreign QBU is a qualified business unit (as defined in section
share of such taxes on Schedule K-3, Part III, Section 4, line 2E. 989(a)), other than a controlled foreign corporation (CFC) or
Check box 3 and attach a statement to Schedule K-2 and noncontrolled 10%-owned foreign corporation, that has its
Schedule K-3 that includes the following for each splitter principal place of business outside the United States. See
arrangement in which the partnership participates that would Regulations section 1.904-4(c)(3).
qualify as a splitter arrangement under section 909 if one or
more partners are covered persons with respect to an entity that Note. Passive income is not treated as subject to a withholding
took into account related income from the arrangement. tax or other foreign tax when a credit is disallowed in full for such
Section 1 of attached statement—Potentially suspended foreign tax, for example, under section 901(k).
taxes. Example 5. In Year 1, USP, a domestic partnership, has two
1. Explanation of the splitter arrangement (for example, domestic corporate partners with equal interests in the
reverse hybrid owned by the partnership). partnership. In Year 1, USP receives $100 of passive dividend
income from a noncontrolled 10%-owned foreign corporation
2. Amount of taxes paid or accrued by the partnership in subject to a 15% withholding tax. USP also receives $150 of
connection with the splitter arrangement. passive interest income from an unrelated person subject to a
3. Amount of related income on which such taxes were paid 30% withholding tax. USP incurs $80 of expenses that are
or accrued. allocable to the interest income. USP also receives $50 of
4. The two-letter code for the country to which the taxes passive dividend income from a CFC, which is not subject to
were paid or accrued from the list at IRS.gov/CountryCodes. Do foreign tax. No expenses are allocable to the dividend income.
not enter “various” or “OC” for the country code. USP’s branch operation in Country X that is treated as a QBU
under section 989(a) receives $100 of passive dividend income
5. The separate category and source of income to which the
subject to a 15% withholding tax. Finally, USP earns $400 of
taxes are assigned if determinable by the partnership.
passive income with respect to its branch operation in Country X
Section 2 of attached statement—Potentially that is treated as a QBU under section 989(a). Such income is
unsuspended taxes. Include a separate section that reports subject to foreign tax (but not withholding tax) of $40. Expenses
the following with respect to each splitter arrangement for which of $120 are allocable to the distributive share of branch income.
the partnership has taken into account any related income. No expenses are allocable to the dividend income.
1. Origin year of the splitter arrangement. For Year 1, USP checks box 5 on Part I of Schedule K-2
2. Explanation of the splitter arrangement (for example, (Form 1065) and attaches Worksheet 1 and Worksheet 2 to
reverse hybrid owned by the partnership). Schedule K-2.
3. Amount of taxes paid or accrued by the partnership in USP completes the same worksheets with the distributive
connection with the splitter arrangement in the origin year of the shares and attaches those worksheets to each Schedule K-3
splitter arrangement. provided to the partners.
4. Amount of related income on which such taxes were paid Box 6. Section 267A disallowed deduction. Check box 6 if
or accrued in the origin year of the splitter arrangement. the partnership paid or accrued any interest or royalty for which
5. The two-letter code for the country to which the taxes the partnership knows, or has reason to know, that one or more
were paid or accrued from the list at IRS.gov/CountryCodes. Do of its partners are not allowed a deduction under section 267A.
not enter “various” or “OC” for the country code. See the instructions for Form 1065, Schedule B, line 22, and
6. The separate category and source of income to which the FAQs for section 267A at IRS.gov/businesses/partnerships/faqs-
for-Form-1065-Schedule-B-Other-Information-Question-22 for
taxes are assigned if determinable by the partnership.
additional information regarding section 267A. In addition, for
7. Amount of related income taken into account in the each partner that is disallowed a deduction under section 267A,
current tax year and the amount of taxes originally paid that the partnership should, on the Schedule K-3 as to the specific

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Worksheets 1 and 2 for Schedule K-2

Worksheet 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

Worksheet 2

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU: _______________________________________________________________
  (Complete a separate Worksheet 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

Worksheets for Example 5

Worksheet 1 for Example 5

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%        $170                                  $60
  or more
B Passive income subject to withholding tax of less           0                                 0
  than 15% but greater than zero
C Passive income not subject to any foreign tax               50                                0
D Passive income subject to no withholding tax, but           0                                 0
  subject to other foreign tax

Worksheet 2 for Example 5

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU: _________Country X QBU_____________
  (Complete a separate Worksheet 2 for each         I. Passive Income Net of Allocable Expenses II. Taxes 
  foreign QBU)
B Passive income subject to withholding tax of 15%        $100                                  $15
  or more
C Passive income subject to withholding tax of less           0                                 0
  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, but       280                                   40
  subject to other foreign tax

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partner, check box 6 in Part I, and attach to the Schedule K-3 a Exception for Form 8621. With respect to Schedule K-3,
statement titled “Section 267A Disallowed Deduction”that the partnership should check box 9 if the partnership checked
separately lists the following information. box 9 on the Schedule K-2. The partnership should indicate in
A. The amount of interest paid or accrued by the partnership an attachment to the Schedule K-3 that Form(s) 8621 is
for which the partner is not allowed a deduction under attached to Schedule K-2. The partnership need not attach Form
section 267A. 8621 to the Schedule K-1 or K-3.
B. The amount of royalty paid or accrued by the partnership Form 8990. If the partnership has filed Form 8990, check box 9
for which the partner is not allowed a deduction under and provide on Schedule K-1 the information needed to
section 267A. complete Form 8990, Schedule A, for foreign partners which are
C. The extent to which information reported on other parts of required to report their distributive share of excess business
the Schedule K-3 (for example, a line in Part II, Section 2; or interest expense, excess taxable income, and excess business
Part IX, Section 2) reflects interest or royalty for which the interest income, if any, that is attributable to income effectively
partner is not allowed a deduction under section 267A. connected with a U.S. trade or business. See the instructions for
When completing other parts of Schedules K-2 and K-3 Schedule K-1 (Form 1065), line 20, code AH.
! (for example, a line in Part II, Section 2; or Part IX, See Other Forms, Returns, and Statements That May Be
CAUTION Section 2), list an amount without regard to whether the Required in the Instructions for Form 1065.
partner is disallowed a deduction under section 267A for the
amount. Note. If the partnership attached any of the forms identified in
boxes 7, 8, and 9 to the Form 1065, the partnership need not
Note for boxes 7, 8, and 9. If the filer meets an exception, attach them again to the Schedule K-2.
such as the multiple filer exception, to filing Forms 5471, 8865, Box 10. Partner loan transactions. A partnership will need to
and/or 8858, the filer is not required to complete and attach check this box and attach a statement with the information in the
those forms. However, the filer must still attach to the Form 1065 applicable Table 2 or 3 if either the partnership knows or has
any required statements to qualify for the exception to filing the reason to know that it (a) received a loan from its partner (or a
Forms 5471, 8865, and/or 8858. Further, in the case of the Form member of the partner’s affiliated group) (“downstream loan”), as
5471 multiple filer exception, the partnership must provide on the described in Regulations section 1.861-9(e)(8); or (b) loaned an
Schedule K-3 to its partners any information that the partnership amount to its partner (or a member of the partner’s affiliated
receives from the person required to file the Form 5471 and that group) (“upstream loan”), as described in Regulations section
is requested by the instructions for Schedules K-2 and K-3, such 1.861-9(e)(9).
as Schedule Q (Form 5471) information, if applicable.
Downstream loans. On an attached statement, the
Box 7. Form 8858 information. If the partnership filed one or partnership will provide the details with respect to any
more Forms 8858, or if another person filed the Form(s) 8858 on downstream loans from its partner or a member of the partner’s
behalf of the partnership, check box 7 and ensure that Form(s) affiliated group, including the amount of interest expense paid or
8858 is attached to the Form 1065. With respect to accrued by the partnership. Report the information separately for
Schedule K-3, the partnership should check box 7 if the each separate loan. The reporting should be as follows in
partnership checked box 7 on the Schedule K-2. The partnership Table 2.
need not attach Form 8858 to the Schedules K-1 or K-3.
Box 8. Form 5471 information. If the partnership filed one or Table 2. Downstream Loans
more Forms 5471, or if the partnership received Form(s) 5471 as
an attachment to a Schedule K-3 issued to the partnership, Name of Lender’s Date Amount Interest
check box 8 and attach the form(s). The Form 5471 does not Lender TIN of of Expense
need to be attached to the Schedules K-1 or K-3 if the Loan Loan for the
partnership knows or has reason to know that its direct partner Year
(and any indirect partners) does not need the information on
Form 5471 to prepare its tax return. For example, the
partnership would not need to attach the Form 5471 to
Schedules K-3 for certain tax-exempt partners. A pass-through If there are any partners in the same affiliated group as the
entity partner that receives a Form 5471 with a Schedule K-1 or lender, attach to each of the Schedules K-2 and K-3 a statement
K-3 must provide the relevant portions of Form 5471 to its to expand the columns in the table to include the information
partner unless the pass-through entity knows or has reason to requested in the first two columns for each such partner.
know that its direct partner (and any indirect partners) does not Upstream loans. On an attached statement, the partnership
need the information on the Form 5471 to prepare its tax return. will provide the details with respect to any upstream loans to its
If a partner only needs certain information from the Form 5471, partner or a member of the partner’s affiliated group, including
such as the Schedule Q, the partnership need only attach that the amount of interest income received or accrued by the
portion to the Schedule K-3 and not the complete Form 5471. partnership. Report the information separately for each separate
Box 9. Other forms. If the partnership filed any other loan. The reporting should be as follows in Table 3.
international tax forms, or if another person filed these forms on
behalf of the partnership, or if the partnership received these Table 3. Upstream Loans
forms as an attachment to a Schedule K-1 or K-3 issued to the
partnership, check box 9 and attach those forms to Form 1065 Name of Borrower’s Date Amount Interest
and Schedule K-1, if applicable to the partner. This includes, but Borrower TIN of of Income
is not limited to, the following forms. Loan Loan for the
• Form 5713, International Boycott Report. Year
• Form 8833, Treaty-Based Return Position Disclosure Under
Section 6114 or 7701(b).
• Form 8621.

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If there are any partners in the same affiliated group as the Schedule K-2, Parts II and III, and Schedule K-3,
borrower, attach to each of the Schedules K-2 and K-3 a
Parts II and III
statement to expand the columns in the table to include the
information requested in the first two columns for each such Note. Certain partners will use the following information to claim
partner. and figure a foreign tax credit on Form 1116 or 1118. If the
partnership does not qualify for the domestic filing exception,
Box 11. Dual consolidated loss. Check box 11 if either (a) the Schedules K-2 and K-3, Parts II and III, must be completed
reporting partnership directly or indirectly owns a foreign branch unless (a) the partnership does not have a direct or indirect
(as defined in Regulations section 1.367(a)-6T(g)) or an interest partner that is eligible to claim a foreign tax credit or (b) no direct
in a hybrid entity (as defined in Regulations section or indirect partner would have to file a Form 1116 or Form 1118
1.1503(d)-1(b)(3)), or (b) the reporting partnership is a hybrid to claim the foreign tax credit.
entity (as defined in Regulations section 1.1503(d)-1(b)(3)).
However, box 11 should not be checked if the reporting Partners eligible to claim credit. A partner that is eligible to
partnership knows that none of its partners is a domestic claim a foreign tax credit includes a domestic corporation, a U.S.
corporation other than a RIC, a real estate investment trust citizen or resident, U.S. citizen or resident beneficiaries of
(REIT), or an S corporation. A domestic corporate partner’s domestic trusts and estates, certain foreign corporations, and
interest in the reporting partnership or its indirect interest in a certain nonresident individuals. See sections 901 and 906. An
foreign branch or hybrid entity may be treated as a separate unit indirect partner includes a partner that owns the partnership
and subject to the dual consolidated loss (DCL) rules pursuant to through a pass-through entity (for example, a partnership, S
Regulations section 1.1503(d)-1 through 1.1503(d)-8. A corporation, or a trust (see Regulations section 1.904-5(a)(4)(iv)
reporting partnership may need to provide information to its for the definition of pass-through entity)). An indirect partner also
domestic corporate partners, in addition to the information includes a partner that owns the partnership through a foreign
provided in this schedule, in order for such partners to comply corporation. See sections 960 and 1293(f).
with the DCL rules (for example, the partner’s share of income or Form 1116 exemption exception. Under section 904(j),
DCL attributable to the foreign branch or interest in a hybrid certain partners are not required to file a Form 1116 (“Form 1116
entity). exemption”). Also see Foreign Tax Credit—How to Figure the
Box 12. Reserved for future use (Schedule K-2). (Form Credit. A domestic partnership is not required to complete
8865 information (Schedule K-3)). If the partnership Schedules K-2 and K-3 if all partners are eligible for the Form
transferred property to a foreign partnership that would subject 1116 exemption and the partnership receives notification of the
one or more of its domestic partners to reporting under section partners’ eligibility for such exemption by the 1-month date (as
6038B and Regulations section 1.6038B-2(a)(2) but did not file defined above). If a partnership receives notification from only
Schedule O (Form 8865), Transfer of Property to a Foreign some of the partners that they are eligible for the Form 1116
Partnership (Under Section 6038B), containing all the exemption, the partnership need not complete the Schedule K-3
information required under Regulations section 1.6038B-2, with for those exempt partners but must complete the Schedules K-2
respect to the transfer, the partnership must provide the and K-3 with respect to the other partners to the extent that the
necessary information for each partner to fulfill its reporting partnership does not qualify for the domestic filing exception.
requirements under Regulations section 1.6038B-2. The Example 6. Husband and wife, U.S. citizens, each own a
partnership should check box 12 on Schedule(s) K-3 and attach 50% interest in USP, a domestic partnership. Husband and wife
the relevant information, as applicable to each partner. Box 12 and USP each have a calendar tax year. USP invests in a RIC.
should not be checked on Schedule K-2. USP receives a Form 1099 from the RIC reporting $400 of
Box 13. Other international transactions. If the partnership creditable foreign taxes paid or accrued on passive category
has transactions, income, deductions, payments, or anything foreign source income. USP’s only foreign activity is that from
else that is impacted by the international tax provisions of the the RIC. Husband and wife do not pay or accrue any foreign
Internal Revenue Code and such events are not otherwise taxes other than their distributive share of USP’s foreign taxes.
reported on this part or other parts of Schedules K-2 and K-3, Husband and wife also do not have any other foreign source
report that information on a statement that is attached to income. Husband and wife qualify for the Form 1116 exemption
Schedules K-2 and K-3 and check box 13. and notify USP by the 1-month date that they do not need the
Schedule K-3. Even though USP does not qualify for the
Do not report with respect to box 13: domestic filing exception because the creditable foreign taxes
• Form 8804, Annual Return for Partnership Withholding Tax; treated as paid or accrued by USP are greater than $300,
and because husband and wife notify USP by the 1-month date that
• Form 8805, Foreign Partner’s Information Statement of they do not need the Schedule K-3 under the Form 1116
Section 1446 Withholding Tax. exemption, USP need not complete Schedules K-2 and K-3.
These forms are separately filed with the IRS. A partnership that does not have or receive sufficient
Do report with respect to box 13: information or notice regarding a direct or indirect partner must
• Form 926, Return by a U.S. Transferor of Property to a presume such partner is eligible to claim a foreign tax credit and
Foreign Corporation; such partner would have to file a Form 1116 or Form 1118 to
• Information a partner (whether direct or indirect) that is a U.S. claim a credit. As such, the partnership must complete the
shareholder of a CFC needs to complete the Form 5471; Schedules K-2 and K-3, including Parts II and III, accordingly.
• Information a filer needs to complete Form 8865 to the extent
that one of the partners (whether direct or indirect) is an entity for Partnerships with no foreign partners and limited or no for-
which there is a Form 8865 filing requirement. eign activity. In many instances, a partnership with no foreign
• When the gain deferral method, as described in Regulations partners, no foreign source income, no assets generating foreign
section 1.721(c)-3, is being applied, a partnership that is a source income, and no foreign taxes paid or accrued may still
section 721(c) partnership will attach to the Schedule K-1 need to report information on Schedules K-2 and K-3. For
provided to a U.S. transferor the information required under example, if the partner claims the foreign tax credit, the partner
Regulations sections 1.721(c)-6(b)(2) and (3). generally needs certain information from the partnership on
Schedule K-3, Parts II and III, to complete Form 1116 or 1118.
This information should have been reported in prior years,
including before the Tax Cuts and Jobs Act, with the Schedules

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K and K-1, and is information the partner needs to compute the Example 7. U.S. citizens A and B own equal interests in
foreign tax credit limitation, which determines the amount of USP, a domestic partnership. USP has no foreign activity. In
foreign tax credit available to the partner. Year 1, A pays $2,000 of foreign income taxes on passive
Exception. See the domestic filing exception. category income other than capital gains reported to A on a
Section 904 generally limits the foreign tax credit to the payee statement. A has interest expense of $5,000 and USP
portion of U.S. tax liability attributable to foreign source taxable does not have interest expense. None of A’s interest expense is
income. Foreign source taxable income is foreign source gross directly allocable. A does not have an overall domestic loss in
income less allocable expenses. In general, the partnership tax year 2022.
must complete the Schedules K-2 and K-3, Parts II and III, Because A must complete Form 1116 to claim a foreign tax
because the partnership’s gross income, gross receipts, credit, A requests a Schedule K-3 by the 1–month date, and
expenses, assets, and foreign taxes paid may affect the foreign therefore the domestic filing exception does not apply to USP
tax credit available to the partner. The source of certain gross with respect to A. USP must complete the relevant portions of
income and gross receipts is determined by the partner. In Parts II and III of Schedules K-2 and K-3 (for A). The tax book
addition, some expenses of the partnership are allocated and value of USP’s assets is $100,000 (reported on Schedule K-2,
apportioned by the partner. Because of this partner Part III, Section 2, column (a)) and A’s share of those assets is
determination, it is not possible for the partner to assume that all $50,000 (reported on Schedule K-3, Part III, Section 2, column
income of the partnership is U.S. source and all expenses of the (a)). Not including its distributive share of the assets of USP, the
partnership reduce U.S. source income. Also, the allocation and tax book value of A’s assets is $50,000. Of A’s assets, $10,000
apportionment of certain partner expenses take into account generate passive category foreign source income and $40,000
distributive shares of assets and income of the partnership that generate U.S. source income. A has passive category foreign
are not otherwise reported in the specified format on the source taxable income before interest expense of $8,000. A’s
Schedule K-1. U.S. tax rate is 25%. A’s interest expense and USP’s assets are
For example, for sourcing purposes, personal property sold characterized in the same category under sections 163 and 469
by the partnership is treated as sold by the partners. See section for purposes of Regulations section 1.861-9T(d). A uses the tax
865(i)(5). Generally, income from the sale of certain personal book value (as opposed to the alternative tax book value) to
property (excluding inventory) is sourced according to the allocate and apportion interest expense.
residence of the seller. In cases in which the partner is a A’s interest expense is apportioned between U.S. source and
pass-through entity, the partnership might not know the ultimate foreign source income ratably based on the tax book value of A’s
residence of the first non-pass-through partner. The partnership U.S. source and foreign source assets. Without taking into
is not required to separately state gain from the sale of personal account the distributive share of USP’s assets, the amount of A’s
property on Schedules K and K-1 because it is generally interest expense that would reduce passive category foreign
included in ordinary income. However, the gain is separately source income is $1,000 ($5,000 x (10,000/50,000)). Therefore,
reported on Schedules K-2 and K-3, Part II. A’s passive category foreign source taxable income would be
As another example, the partner’s R&E expense (which $7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A may only
includes the distributive share of the partnership’s R&E expense) use $1,750 (25% x $7,000) of the $2,000 of foreign taxes. See
is allocated and apportioned by the partner. See Regulations section 904.
section 1.861-17(f). R&E expense is allocated and apportioned Taking into account the distributive share of USP’s assets,
based on the gross receipts by SIC code. R&E expense by SIC the amount of A’s interest expense that reduces passive
code is not required reporting on Schedules K and K-1 but is category foreign source income is $500 ($5,000 x
reported on Schedules K-2 and K-3, Part II. The partner needs (10,000/100,000)). Therefore, A’s passive category foreign
Schedule K-3, Part III, Section 1, for the partner’s share of the source taxable income would be $7,500 ($8,000 − $500). At a
partnership’s gross receipts by SIC code for purposes of 25% U.S. tax rate, A may use $1,875 (25% x $7,500) of the
allocating and apportioning R&E expense. $2,000 of foreign taxes—an additional foreign tax credit amount
In some cases, the partner will be able to use the information of $125 after taking into account A’s share of the tax book value
reported on Parts II and III to increase the foreign tax credit of the partnership assets. B does not request a Schedule K-3
limitation, and the amount of available foreign tax credit to the from USP for tax year 2022. Under the domestic filing exception,
partner. For example, Part III, Section 2, provides the partner USP does not need to complete Schedule K-3 for B.
with the tax book value of the assets of the partnership. In Example 8. The facts are the same as in Example 7, except
general, a partner apportions interest expense to reduce U.S. that A has $5,000 of deductions that are not definitely related to
source income or foreign source income based on the tax book any gross income as described in Regulations section
value of its assets, including its distributive share of the 1.861-8(e)(9), and A and USP have no other expenses. Further,
partnership’s interest expense and assets. See section 864(e) A’s share of USP’s gross income is $50,000. Not including its
(2) and Regulations section 1.861-9(e). Taking into account the distributive share of the income of USP, A’s gross income is
assets of a domestic partnership generating solely U.S. source $50,000. Of A’s gross income, $5,000 is passive category
income would result in more expense allocated to reducing U.S. foreign source gross income and $45,000 is U.S. source gross
source income and less expense allocated to reduce foreign income. USP does not have any gross income the source of
source income. Additional foreign source income increases the which is determined by the partner.
partner’s foreign tax credit limitation and the ability of the partner A’s expenses must be ratably apportioned based on A’s
to claim foreign tax credits. The regulations provide exceptions gross income (including its distributive share of the income of
to asset method apportionment for certain less-than-10% limited USP). See Regulations section 1.861-8(c)(3). Therefore, USP
partners, and the instructions take this into account by excepting must complete Schedule K-2, Part II, and Schedule K-3, Part II
the partnership from completing certain portions of the (for A). Before taking into account the distributive share of USP’s
Schedules K-2 and K-3 with respect to these partners. gross income, the amount of A’s expenses described in
Schedules K and K-1 contain net amounts but do not include Regulations section 1.861-8(e)(9) that reduce foreign source
separately stated reporting for the partnership’s interest expense income is $500 ($5,000 x (5,000/50,000)). Therefore, A’s foreign
for international tax reporting purposes, or the tax book value of source taxable income would be $4,500 ($5,000 − $500). At a
the assets. See Regulations section 1.861-9(e). See later 25% U.S. tax rate, A may only use $1,125 (25% x $4,500) of the
instructions for further guidance. $2,000 of foreign taxes. See section 904.

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Taking into account the distributive share of USP’s gross completing the Schedule K-3 for the less-than-10% limited
income, the amount of A’s expenses described in Regulations partners, the partner's distributive share of the partnership’s
section 1.861-8(e)(9) that reduce foreign source income is $250 foreign source gross income and gross receipts should be
($5,000 x (5,000/100,000). Therefore, A’s foreign source taxable reported as passive category income and its deductions
income would be $4,750 ($5,000 − $250). At a 25% U.S. tax allocated and apportioned to foreign source income should be
rate, A may use $1,187.50 (25% x $4,750) of the $2,000 of reported as reducing passive category income. Regulations
foreign taxes in Year 1, which is an additional foreign tax credit section 1.904-4(n)(1)(ii)(A). See Part II, column (c); Part III,
amount of $62.50 after taking into account A’s distributive share Section 1, column (c); Part III, Section 3, column (b); and Part III,
of the gross income of USP. Section 5, column (d). Report the foreign taxes paid or accrued
Because A and USP do not have R&E expense or interest on foreign source income as passive category income in Part III,
expense, and because USP did not pay or accrue any foreign Section 4, column (d).
taxes, USP does not need to complete Schedules K-2 and K-3, If the partnership knows that some of its partners are limited
Part III. partners that own less than 10% of a capital and profits interest
in the partnership, do not complete Schedule K-3, Part III,
Note. A partner may need the distributive share of the Section 2, for these partners. See Regulations section
partnership’s gross income for purposes of allocating and 1.861-9(e)(4)(i).
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9). Foreign branch category income. A domestic partnership
itself does not have foreign branch category income. However,
General filing instructions. On Schedule K-2, Parts II and III, report all amounts that would be foreign branch category income
the partnership reports its gross income, gross receipts, cost of of its partners as if all partners were U.S. persons that were not
goods sold, certain deductions, and taxes by source and pass-through entities. See Schedule K-2, Part II, column (b);
separate category. The partnership also reports information that Part III, Sections 1 and 2, column (b); and Part III, Sections 4 and
the partner needs to allocate and apportion expenses and 5, column (c). The partner's distributive share of the amounts
determine the source of certain items of gross income and gross determined by the partnership are reported on equivalent
receipts. Unless specifically noted below, the partnership reports columns in Schedule K-3, Parts II and III.
on Schedule K-3, Parts II and III, the partner’s share of the Schedule K-3. Any amounts reported on Schedule K-2 as
partnership’s gross receipts, gross income, cost of goods sold, foreign branch category income should be reported as general
certain deductions, and taxes by source and separate category. category income on the Schedule K-3, Parts II and III, provided
The partner adds its share of the partnership’s foreign source to foreign individuals and foreign corporations.
gross income, gross receipts, cost of goods sold, certain
deductions, and taxes by separate category to its other foreign Section 901(j) income. Income derived from each sanctioned
source gross income, gross receipts, cost of goods sold, certain country is subject to a separate foreign tax credit limitation. If the
deductions, and taxes in that separate category to figure its partnership derives such income, enter code "901j" on the line
foreign tax credit. The partnership also reports on the after “category code.” See Schedule K-2, Part II, Sections 1 and
Schedule K-3 the distributive share of expenses and the 2, column (e); Part III, Sections 1 and 2, column (e); Part III,
allocation and apportionment factors so that the partner may Section 3, column (d); and Part III, Sections 4 and 5, column (f).
determine expenses allocated and apportioned to foreign source The partner's distributive share of the amounts determined by
income. the partnership are reported on equivalent columns in
Schedule K-3, Parts II and III. See the Instructions for Form 1118
Partnership determination. The source and separate for the potential countries to be listed with the section 901(j)
category of certain gross receipts, gross income, and cost of category of income.
goods sold as well as the allocation and apportionment of
certain deductions can be determined by the partnership. This Note. As of the date of these instructions, section 901(j) is the
includes deductions that are definitely related to certain gross only category reported on Part II, Sections 1 and 2, column (e);
income of the partnership. See Regulations section 1.861-8(b) Part III, Sections 1 and 2, column (e); Part III, Section 3, column
(1). See Schedule K-2, Part II, columns (a) through (e); Part III, (d); and Part III, Section 5, column (f).
Section 1, columns (a) through (e); Part III, Section 3, columns
(a) through (d); and Part III, Section 5, columns (a) through (f). In Section 951A category income. Section 951A category
Part III, Section 2, columns (a) through (e), some partnership income is any amount of global intangible low-taxed income
assets may be characterized by source and separate category (GILTI) includible in gross income under section 951A (other
by the partnership. This includes certain assets that attract than passive category income). (Section 951A category income
directly allocated interest expense under Temporary Regulations does not include passive category income.) If the partnership
section 1.861-10T(b) and (c). See Temporary Regulations pays or accrues tax on the receipt of a distribution of PTEP
section 1.861-10T(d)(2). assigned to the reclassified section 951A PTEP group or section
951A PTEP group, the partnership must assign those taxes to
In Part III, Section 4, in the U.S. and Foreign columns, the section 951A category income.
partnership assigns foreign taxes paid or accrued to a separate
category and source. The partnership will enter such taxes on Part III, Section 4,
column (b). This code is not utilized in other portions of Parts II
The partner's distributive share of the amounts determined by and III.
the partnership are reported on equivalent columns in
Schedule K-3, Parts II and III. Income re-sourced by treaty. If a sourcing rule in an
applicable income tax treaty treats any U.S. source income as
Certain gross income, gross receipts, assets, cost of goods foreign source, and there is an election to apply the treaty, the
sold, deductions, and taxes are not assigned to a source or
income will be treated as foreign source. This category applies if
separate category by the partnership. See Partner the partnership pays or accrues foreign taxes on receipt of a
determination, later.
distribution of PTEP that is sourced from an annual PTEP
Schedule K-3. If the partnership knows that some of its account of the partnership that corresponds to the separate
partners are limited partners that own less than 10% of the value category relating to U.S. source income included under section
of the partnership and that do not hold their interest in the 951(a)(1) or 951A and re-sourced as foreign source income
ordinary course of the partner's active trade or business, when under a treaty.

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The designations below are only relevant for Part III, Section possession within which the gross income and gross receipts
4, column (f). are sourced. If a type of income is sourced from more than three
Code “RBT PAS.” If an applicable income tax treaty treats countries, attach a schedule with the information required on
any U.S. source passive category income as foreign source Schedule K-2, Part II, and Schedule K-3, Part II, for that type of
passive category income, and there is an election to apply income.
the treaty, enter code “RBT PAS.” If income is U.S. source, enter “US.” Do not enter “various” or
Code “RBT GEN.” If an applicable income tax treaty treats “OC” for the country code.
any U.S. source general category income as foreign source
general category income, and there is an election to apply Note. For Part II, column (f), enter the code “XX” if the
the treaty, enter code “RBT GEN.” partnership cannot determine the country or U.S. possession
Code “RBT 951A.” If an applicable income tax treaty treats with respect to which the gross income and gross receipts are
any U.S. source section 951A category income as foreign sourced because the source is determined by the partner.
source section 951A category income, and there is an However, do not enter the code “XX” for Part II, column (f), if an
election to apply the treaty, enter code “RBT 951A.” income tax of at least 10% of the gain derived from the sale is
actually paid to a foreign country with respect to that gain. See
Partner determination. In Schedule K-2, Part II, Section 1, sections 865(e) and 865(g). Instead, enter for Part II, column (f),
column (f); Part III, Section 1, column (f); Part III, Section 3, lines the foreign country to which the partnership paid the tax of at
1 and 2, column (e); and Part III, Section 5, column (g), enter the least 10% of the gain.
gross income, income adjustments, and gross receipts of the
partnership that are required to be sourced by the partner. This Each gross income and gross receipts item (for example,
includes income from the sale of most personal property other sales vs. interest income) may have different countries listed on
than inventory, depreciable property, and certain intangible A, B, C, etc., given that the partnership might not have sales
property sourced under section 865. This also includes certain income and interest income, for example, from the same
foreign currency gain on section 988 transactions. See the country. Line 24 should sum each country’s total income
instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax reported on Part II, regardless of the line on which such income
Credit for Individuals, for additional details. Attach a statement to is reported, whether A, B, C, etc.
the Form 1065 to identify the separate category of income under Exceptions. The instructions for Forms 1116 and 1118
section 904(d) of the amounts listed in Part II, Section 1, column specify exceptions from the requirement to report gross income
(f). In Schedule K-2, Part II, Section 2, column (f), and Part III, and gross receipts by foreign country or U.S. possession with
Section 3, lines 3 and 4, column (e), include deductions that are respect to RICs and section 863(b). See the instructions to the
allocated and apportioned by the partner. This includes most Forms 1116 and 1118 for these exceptions that apply in
interest expense and R&E expense. See Regulations sections completing the Schedules K-2 and K-3, Parts II and III. Do not
1.861-9(e) and 1.861-17(f). In Schedule K-2, Part III, Section 2, enter a foreign country or U.S. possession (to report on a
column (f), enter the assets that are assigned to a source and country-by-country basis) for lines 16 through 18.
separate category by the partner. In Schedule K-2, Part III,
Section 4, in the Partner column, enter the foreign taxes that are Note. Schedules K-2 and K-3 request that gross income and
assigned to a source of income by the partner. This includes gross receipts be reported by country or U.S. possession
taxes imposed on certain sales income. The partner's because such information is requested on Forms 1116 and
distributive share of the amounts determined by the partnership 1118. Income and taxes are reported by country on the Forms
are reported on equivalent columns on Schedule K-3, Parts II 1116 and 1118 so that, for example, the IRS may initially
and III. evaluate whether taxpayers are claiming credits for compulsory
payments to foreign governments.
Schedule K-2, Part II, and Schedule K-3, Part II Example 9. In Year 1, USP, a domestic partnership, has
(Foreign Tax Credit Limitation) employees who perform services in Country X and Country Y.
USP earns $25,000 of general category services income,
Section 1. Gross Income, Lines 1 Through 24 $10,000 with respect to Country X and $15,000 with respect to
Country Y. The two-letter code for Country X is AA and the
Schedule A (Form 1118) requires a corporation to separately two-letter country code for Country Y is YY. USP makes the
report certain types of gross income and gross receipts by following entries on the first two lines of Schedule K-2, Part II,
source and separate category. Separate reporting is required under line 2.
because each type of gross income and gross receipts has a
different sourcing rule. See sections 861 through 865 (and Example 9 Table
section 904(h) and, in some cases, U.S. income tax treaties).
Schedules K-2 and K-3, Part II, Section 1, generally follow the Description (d)
separately reported types of gross income and gross receipts on A AA $10,000
Schedule A. Individuals must follow the same sourcing rules, but
Form 1116 only requires reporting of total gross income from B YY $15,000
foreign sources by separate category. Therefore, those required
to file Form 1116 will report line 24 by country on their Form
1116, Part I, line 1a. Section 1 also generally follows the types of Lines 3 and 4. Rental income. These lines are reported
gross income and gross receipts separately reported on Form separately because they are reported separately on Form 1065,
1065, Schedule K. Schedule K. The sourcing rule may be the same for both types
of rental income.
For each line, report the total for each country in column (g).
Lines 7 and 8. Ordinary dividends and qualified dividends.
Country code. Forms 1116 and 1118 require the taxpayer to Enter only ordinary dividends on line 7 and only qualified
report the foreign country or U.S. possession with respect to dividends on line 8. Do not include as ordinary dividends or
which the gross income and gross receipts are sourced. On lines qualified dividends the amount of any distributions received to
1 through 24, for each gross income and gross receipts item, the extent that they are attributable to PTEP in annual PTEP
enter on a separate line (A, B, or C) the two-letter code from the accounts of the partnership. See the instructions for line 19 for
list at IRS.gov/CountryCodes for the foreign country or U.S.
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when a partnership might have an income inclusion with respect but rather total section 986(c) gains for the year are reported on
to a foreign corporation. line 16. Total section 986(c) losses for the year are reported on
line 46.
Note. The amount by which distributions are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner is Note. A partnership is only responsible for computing and
not determined by the partnership and therefore is not taken into reporting foreign currency gain or loss under section 986(c) with
account for purposes of determining the ordinary dividends to be respect to distributed PTEP sourced from an annual PTEP
entered on line 7 or the qualified dividends to be entered on account of the partnership. It is not responsible for computing or
line 8. reporting foreign currency gain or loss under section 986(c) with
respect to distributed PTEP sourced from an annual PTEP
Lines 11 through 15 and 27 through 30. Capital gains and
account of a direct or indirect partner.
losses. These lines generally match the types of gains and
losses reported separately on Form 1065, Schedule K. Further, Lines 17 and 47. Section 987 gain and loss. The source of
section 904(b)(2)(B) contains rules regarding adjustments to section 987 gain or loss is generally determined by reference to
account for capital gain rate differentials (as defined in section the source of the income or asset giving rise to such gain or loss.
904(b)(3)(D)) for any tax year. A partnership may also obtain section 987 gain or loss
information from Form 8858. This is not reported as a net
Example 10. Partnership has the following amounts amount but rather total section 987 gains for the year are
reported on line 17. Total section 987 losses for the year are
for the tax year 2022: reported on line 47.
Short-term capital gains/losses Lines 18 and 48. Section 988 gain and loss. The source of
foreign currency gain or loss on section 988 transactions is
Total $900 generally determined by reference to the residence of the
U.S. Source $1,000 taxpayer or QBU on whose books the asset, liability, or item of
Passive category (France) $400 income or expense is properly reflected. If the source is
determined by reference to the residence of the taxpayer
Passive category (Canada) ($300) partner, the section 988 gain and loss would be reported in
Passive category (Haiti) ($200) column (f).
Line 19. Section 951(a) inclusions. Report section 951(a)
inclusions if the domestic partnership takes into account such
Partnership reports these amounts on Schedule K-2, income. A domestic partnership does not have a section 951(a)
Part II, Section 1, line 11, as follows: inclusion with respect to a foreign corporation for tax years of the
foreign corporation that begin on or after January 25, 2022. A
(a) U.S. source (b) Foreign source domestic partnership may not have a section 951(a) inclusion
passive with respect to a foreign corporation for tax years of the foreign
corporation that begin before January 25, 2022, if, pursuant to
Line 11 Regulations section 1.958-1(d)(4), it applies Regulations section
A US $1,000 1.958-1(d)(1) through (3) to be treated as not owning stock of a
B FR $400 foreign corporation within the meaning of section 958(a) for
purposes of section 951, and for purposes of any other provision
C CA ($300) that applies by reference to section 951.
D HA ($200) Line 20. Other income. Attach a statement to both Schedules
K-2 and K-3 describing the amount and type of other income.
The statement must conform to the format of Part II.
Line 12. Net long-term capital gain. Do not include gains
reported on lines 13, 14, and 15 on line 12. Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then, add the gross income
Line 13. Collectibles (28%) gain. Report collectibles gain on on lines 1 through 23 by country or possession and enter the
line 13 and not line 12. total by country in rows A, B, and C (and additional rows if more
Line 14. Unrecaptured section 1250 gain. Report than three countries). The sum of the amounts in rows A, B, C,
unrecaptured section 1250 gain on line 14 and not on line 12. If etc., does not need to equal the amount on line 24, given that not
gain is both unrecaptured section 1250 gain and net section every gross income amount is required to be reported by
1231 gain, report the gain on line 14 and not on line 15, but country.
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain. Section 2. Deductions, Lines 25 Through 54
Line 15. Net section 1231 gain. Report net section 1231 gain
on line 15 and not on line 12 unless such amount is also Schedule A (Form 1118) requires a corporation to separately
unrecaptured section 1250 gain. See the instructions for line 14. report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
Line 28. Net long-term capital loss. Do not include losses type of deduction may be allocated and apportioned according
reported on line 29. to a different methodology. See, for example, Regulations
Line 29. Collectibles loss. Report collectibles loss on line 29 sections 1.861-8 through -20 and Temporary Regulations
and not on line 28. sections 1.861-8T and -10T. For purposes of allocating and
apportioning expenses, in general, a partner adds the
Lines 16 and 46. Section 986(c) gain and loss. Include the distributive share of the partnership's deductions to its other
partnership’s share of a lower-tier pass-through entity’s section deductions incurred directly by the partner. See Regulations
986(c) gain or loss, and the amount of section 986(c) gain or section 1.861-8(e)(15). Generally, Section 2 follows the
loss on distributions of PTEP sourced from an annual PTEP separately reported types of deductions and losses on
account of the partnership. This is not reported as a net amount Schedule A (Form 1118). Individuals must generally follow the

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same expense allocation and apportionment rules, but Form See Regulations sections 1.861-9(e)(4)(i) and 1.904-4(n)(1)(ii)
1116 only requires separate reporting of certain deductions by for more information.
separate category. See Form 1116, Part I, lines 2 through 5. Exception. See Regulations section 1.861-9(e)(8) and (9) for
Section 2 also generally corresponds to the deductions a special rule for partnership loans. See also Box 10. Partner
separately reported on Form 1065, Schedule K. loan transactions, earlier.
Line 32. R&E expenses. In general, R&E expenses are Note. Interest expense is always included on lines 39 through
allocated and apportioned by the partner and reported in column 43 and not on other lines.
(f). See Regulations section 1.861-17(f). R&E expenses, as
described in section 174, are ordinarily definitely related to gross Line 45. Foreign taxes not creditable but deductible. See
intangible income reasonably connected with relevant broad the instructions for Forms 1116 and 1118 for examples of foreign
product categories of the taxpayer and are allocable to gross taxes that are deductible but not creditable.
intangible income as a class related to such product categories. Note. Foreign taxes that are creditable (even if a partner
The product categories are determined by reference to the chooses to deduct such taxes) are not reported as expenses on
three-digit classification of the Standard Industrial Classification Part II. Creditable taxes are reported on Part III, Section 4.
Manual (SIC code). See osha.gov/data/sic-manual.
Lines 49 and 50. Other deductions. Attach to the Schedules
Line 38. Charitable contributions. Charitable contribution K-2 and K-3 a statement describing the amount and type of
deductions are apportioned solely to U.S. source gross income. other deductions. The statement must conform to the format of
See Regulations section 1.861-8(e)(12). Therefore, this Part II.
deduction should be reported in column (a).
Lines 39 and 40. Interest expense specifically allocable un- Schedule K-2, Part III, and Schedule K-3, Part III
der Regulations section 1.861-10 and -10T. Apart from (Other Information for Preparation of Form 1116
interest expense entered on line 39, enter on line 40 interest
expense that is directly allocable under Temporary Regulations or 1118)
section 1.861-10T to income from specific partnership property. Section 1. R&E Expenses Apportionment Factors
Such interest expense is treated as directly allocable to income
generated by such partnership property. See Temporary This section requires the partnership to report information that a
Regulations section 1.861-9T(e)(1). partner will use to allocate and apportion its R&E expense for
Lines 41 through 43. Other interest expense. A partner’s foreign tax credit limitation purposes.
distributive share of a partnership’s interest expense that is not A partnership is not required to complete Section 1 of Part III
directly allocable to income from specific partnership property is unless either (1) the partnership incurs R&E expense; or (2) the
generally allocated and apportioned by the partner, subject to partner is expected to license, sell, or transfer its intangible
certain exceptions, and included in column (f). See Temporary property to the partnership (as provided in Regulations section
Regulations section 1.861-9T(e)(1). 1.861-17(f)(3)).
Interest expense incurred by certain individuals, estates, and
trusts is characterized based on the categories of interest Deductible R&E expenses, as described in section 174, are
expense in sections 163 and 469: active trade or business ordinarily definitely related to gross intangible income
interest, investment interest, or passive activity interest, adjusted reasonably connected with relevant broad product categories of
for any interest expense directly allocated under Temporary the taxpayer and are allocable to gross intangible income as a
Regulations section 1.861-10T. See Regulations section class related to such product categories. The product categories
1.861-9T(d). The amounts in each category of interest expense are determined by reference to the three-digit classification of
are reported on lines 41 through 43. See Example 11, later. If the the SIC code. In general, R&E expenses are apportioned based
partnership’s only partners are corporate partners, the on gross receipts. R&E expenses are allocated and apportioned
partnership need not report its interest expense by the by the partner. See Regulations section 1.861-17(f)(1). This
categories of interest expense in sections 163 and 469. All such requires that the partnership reports to its partners the gross
interest expense may be reported as business interest expense receipts by SIC code according to source and separate category
on line 41. of income. This also requires that the partnership reports the
Exception. With respect to limited partners that each own amount of R&E expense performed in the United States and
less than 10% of the capital and profits interests of the outside the United States to apply exclusive apportionment. See
partnership, and such interests are not owned in the ordinary Regulations section 1.861-17(f)(2).
course of the partner’s active trade or business, the partnership Column (e). As of the date of these instructions, the only
reports the partners’ distributive share of interest expense as separate category that could be included in column (e) is the
reducing passive category foreign source income. Because a section 901(j) category of income. See the Instructions for Form
partnership cannot enter interest expense in column (c), attach a 1118 for the potential countries to be listed with the section
statement to the Schedules K-2 and K-3 indicating that the 901(j) category of income.
amounts reported in column (f) reduce passive category income
as a result of this rule. However, if the partnership interest is held Line 1. Enter the gross receipts by SIC code for each grouping.
in the ordinary course of the partner's active trade or business, a Such gross receipts include both the partnership’s gross
partner's share of the partnership’s interest expense (other than receipts and certain other parties' gross receipts. See
partnership interest expense that is directly allocated to Regulations section 1.861-17(d)(3) and (4). Sales of parties
identified property under Regulations section 1.861-10T) is controlled by the partnership should be included in line 1 if such
apportioned in accordance with the partner's relative distributive controlled parties can reasonably be expected to benefit from
share of gross foreign source income in each separate category the R&E expense connected with the product categories. This
and of gross domestic source income from the partnership. includes sales that benefit from the partner’s R&E expenses if
Because a partnership cannot enter interest expense in columns licensed through the partnership. Sales of uncontrolled parties
(a) through (e), attach a statement to the Schedules K-2 and K-3 are also taken into account if such sales involve intangible
indicating that the amounts reported in column (f) are property that was licensed or sold to the uncontrolled party if the
apportioned to the respective columns as a result of this rule.

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uncontrolled party can reasonably be expected to benefit from Line 2. On Schedule K-2, report the partnership’s average of
the R&E expense. the beginning-of-year and end-of-year inside basis adjustments
Line 2. Report the amount of R&E expense related to activity under sections 734(b) and 743(b). On Schedule K-3, report the
performed in the United States and the amount of R&E expense partner’s distributive share of the adjustments reported on
related to activity performed outside the United States by SIC Schedule K-2.
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 is not reported according to source or separate partner’s distributive share of the reductions in asset values
category. reported on Schedule K-2.
Note. The SIC code for line 2B(i) does not 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
Section 2. Interest Expense Apportionment distributive share of the excluded assets reported on
Schedule K-2. Include on line 5, assets without directly
Factors identifiable yield referred to in Regulations section 1.861-9T(g)
(3)(iii).”
This section requires the partnership to report information that a
partner will use to allocate and apportion its interest expense for Line 6. Individual partners who are general partners or who are
foreign tax credit limitation purposes. limited partners with an interest in the partnership of 10% or
more follow the same rules as corporate partners whose interest
Complete this Section 2 only if the partnership or the partners in the partnership is 10% or more except that their interest
have interest or stewardship expenses. expense must be apportioned according to the interest expense
Stewardship expenses. In the case of the partner’s classifications under sections 163 and 469. See Regulations
stewardship expenses incurred to oversee the partnership, the section 1.861-9T(d). This includes reporting the assets
partnership's value is determined and characterized under the according to such classifications. If the partnership has no such
asset method in Regulations section 1.861-9 (taking into partners, the partnership need not complete Schedule K-2, Part
account any adjustments under sections 734(b) and 743(b)). III, Section 2, lines 6b through 6d, or Schedule K-3, Part III,
See Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the Section 2, lines 6b through 6d. The partnership includes the total
instructions with respect to Part III, Section 2, for interest amount on line 6a.
expense apportionment factors apply generally to the partner’s Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
stewardship expense apportionment. and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
and 6d if the partnership has individual, estate, and certain trust
With respect to corporate partners with an interest in the partners (whether direct or indirect through a pass-through
partnership of 10% or more, interest expense, including the entity).
partner's distributive share of partnership interest expense, is Example 11. A, a U.S. citizen, has a 10% interest in USP, a
apportioned by reference to the partner's assets, including the domestic partnership. USP is engaged in the active conduct of a
partner’s pro rata share of partnership assets. See Regulations U.S. trade or business. USP’s business generates only domestic
section 1.861-9(e)(2). Interest expense is apportioned based on source income. USP also has an investment portfolio consisting
the average value of assets. See Regulations section 1.861-9(g) of several less-than-10% stock investments. USP has a bank
(2)(i)(A). A taxpayer can use either the tax book value or the loan. The proceeds of the bank loan were divided equally
alternative book value of its assets. See Regulations section between the business and the investment portfolio. A’s only
1.861-9(i). Under both methods, the partner uses the interest expense is that from its distributive share of the USP
partnership's inside basis in its assets, including adjustments loan.
required under sections 734(b) and 743(b). See Regulations
section 1.861-9(e)(2) and -9(e)(3). When reporting the asset that A’s share of the interest expense with respect to the loan for
is the basis of stock in nonaffiliated 10%-owned corporations, USP’s business is $2,000. It is apportioned on the basis of
adjust such amount for earnings and profits (E&P). See business assets. Because all business income is domestic
Regulations section 1.861-12(c)(2)(i)(A). source, the business assets are domestic assets and reported
on Schedules K-2 and K-3, Part III, Section 2, column (a),
Note. Attach to Form 1065 a second Part III, Section 2, if the line 6b. A’s $2,000 share of the interest expense is reported on
partnership reports both the tax book value and the alternative Schedule K-3, Part II, column (f), line 41. It is apportioned to U.S.
tax book value of its assets to the partners source income by the partner.
Column (b). The partnership characterizes its pro rata share of The interest expense for A’s share of the loan for USP’s
the partnership assets that give rise to foreign branch category investments is $2,000 and is reported on Schedule K-3, Part II,
income as assets in the foreign branch category. See column (f), line 42. The investment interest must be apportioned
Regulations section 1.861-9(e)(10). on the basis of investment assets. Applying the asset method,
$80,000 of USP’s adjusted basis in its investment portfolio stock
Line 1. On Schedule K-2, report the average of the generates domestic source income and $120,000 of USP’s
beginning-of-year and end-of-year inside basis in the adjusted basis in the stock generates foreign source passive
partnership’s total assets. See Regulations section 1.861-9(g)(2) income. USP reports these amounts on Schedule K-2, Part III,
(i)(A). On Schedule K-3, report the partner’s distributive share of Section 2, line 6c, columns (a) and (c), respectively. A’s
the assets reported on Schedule K-2. Include on line 1, assets distributive share of the adjusted basis in USP’s stock is $8,000
without directly identifiable yield referred to in Regulations with respect to the stock generating domestic source income
section 1.861-9T(g)(3)(iii). and $12,000 with respect to the stock generating foreign source
passive income. Such amounts are reported on Schedule K-3,
Part III, Section 2, line 6c, columns (a) and (c), respectively. With

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respect to the interest expense on the loan for USP’s Regulations section 1.861-13(a)(5), the partner must apply those
investments, $800 ((8,000/20,000) x $2,000) is apportioned to rules to characterize the stock.
domestic source income and $1,200 ((12,000/$20,000) x With respect to partnership-owned CFCs, the partnership will
$2,000) is apportioned to foreign source passive income. report on line 8, column (f), the total value of its stock in all such
Schedule K-3. If the partnership's partners are not limited to foreign corporations. The value of the stock is the partnership’s
corporate partners, when completing Schedule K-3, Part III, inside basis in the stock adjusted to take into account the E&P of
Section 2, for the corporate partners with an interest of 10% or the foreign corporations as explained in Regulations section
more in the partnership, do not complete lines 6b through 6d. 1.861-12(c)(2). The partnership must attach a statement to the
Include the total distributive share on line 6a. Schedules K-2 and K-3 with the following information for each
Lines 7 and 8. The amounts reported on lines 7 and 8 are foreign corporation for which basis is reported on line 8.
subsets of the amounts reported on line 6 representing the value • Name of foreign corporation.
of stock held by the partnership in certain foreign corporations. • EIN or reference ID number. Do not enter “FOREIGNUS” or
In determining its foreign tax credit limitation, a partner should “APPLIED FOR.”
disregard interest expense that is “properly allocable'' to stock of • Percentage of voting and value of stock owned by partnership
a 10%-owned foreign corporation that has been characterized in such foreign corporation.
as a section 245A asset. See section 904(b)(4) and Regulations • Value of the stock in such corporation.
section 1.904(b)-3(a)(1)(ii). The amount of properly allocable
deductions is determined by treating the section 245A subgroup Section 3. Foreign-Derived Intangible Income
for each separate category as a statutory grouping for purposes (FDII) Deduction Apportionment Factors
of allocating and apportioning interest deductions on the basis of
assets. Assets in a section 245A subgroup only include stock of
a specified 10%-owned foreign corporation that has been Do not complete this Section 3 if the partnership knows that it
characterized as a section 245A asset. has no domestic corporate partners (whether direct or indirect).

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

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Attachment. As previously mentioned in the instructions for passive category income, and there is an election to apply
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for the treaty, enter code “RBT PAS.”
distributive share), for each of the amounts listed in lines 1 Code “RBT GEN.” If an applicable income tax treaty treats
through 3, attach to the Schedules K-2 and K-3 a statement any U.S. source general category income as foreign source
reporting the following information. general category income, and there is an election to apply
• The dates on which the taxes were paid or accrued. the treaty, enter code “RBT GEN.”
• The exchange rates used. Code “RBT 951A.” If an applicable income tax treaty treats
• The amounts in both foreign currency and U.S. dollars. See any U.S. source section 951A category income as foreign
section 986(a). source section 951A category income, and there is an
election to apply the treaty, enter code “RBT 951A.”
Column (a). Enter the code for the type of tax.
Line 1. Enter in U.S. dollars the total foreign taxes (described in
Codes for Types of Tax section 901 or section 903) that were paid or accrued by the
partnership (according to its method of accounting for such
taxes). Do not reduce the amount that you report on line 1 by the
Code Type of Tax reductions reported on line 2. Do not report redetermined taxes
WHTD Withholding tax on dividends on line 1. Report such taxes on line 3.
WHTP Withholding tax on distributions of If the partnership uses the cash method of accounting, check
PTEP the "Paid" box and enter foreign taxes paid during the tax year
WHTB Withholding tax on branch on line 1. Report each partner's share on Schedule K-3, Part III,
remittances Section 4, line 1.
WHTR Withholding tax on rents, royalties, If the partnership uses the accrual method of accounting,
and license fees check the “Accrued” box and enter foreign taxes accrued on
line 1. Report each partner's share on Schedule K-3, Part III,
WHTI Withholding tax on interest Section 4, line 1.
ECI Taxes paid or accrued to foreign
countries or possessions on certain Note. Check only one box “Paid” or “Accrued” depending on the
effectively connected income method of accounting the partnership takes into account foreign
OTHS Other foreign taxes paid or accrued taxes.
on sales income Enter on a separate line (that is, after A, B, and C) taxes paid
OTHR Other foreign taxes paid or accrued or accrued to each country. Enter the two-letter code from the list
on services income at IRS.gov/CountryCodes. Do not enter “various” or “OC” for
country code.
OTH Other foreign taxes paid or accrued
Exceptions. The instructions for Forms 1116 and 1118
If there are multiple types of tax for the same country, specify exceptions from the requirement to report gross income
generate multiple alpha rows for the same country, one row for and gross receipts by foreign country or U.S. possession with
each type of tax. For example, see below: respect to RICs and section 863(b).
Example 12. The facts are the same as in Example 9,
Description (a) Type of tax discussed earlier. USP uses the cash method of accounting and
A AA WHTD pays taxes of $1,000 and $3,000 to Countries AA and YY,
respectively. USP completes Part III, Section 4, line 1, as
B AA OTH follows.

Example 12 Table
Column (b). Taxes assigned to section 951A category.
Taxes assigned to section 951A category income are taxes paid (a) (e)
or accrued on distributions of PTEP assigned to the reclassified
section 951A PTEP and section 951A PTEP groups. A Direct (901/903) Paid Type of tax Foreign
partnership might not be able to complete this column due to foreign taxes
lack of information regarding the treatment of the current year A AA OTHR 1,000
distributions.
B YY OTHR 3,000
Column (f). Other category.
Foreign taxes paid or accrued to sanctioned countries. Line 2. Enter on line 2 as negative number, the sum of the taxes
No credit is allowed for foreign taxes paid or accrued to certain in the following categories.
sanctioned countries. A. Taxes on foreign mineral income (section 901(e)).
Foreign taxes related to PTEP resourced by treaty. If the B. Reserved.
partnership pays or accrues foreign taxes on receipt of a C. Taxes attributable to boycott operations (section 908).
distribution of PTEP that is sourced from an annual PTEP D. Reduction in taxes for failure to timely file (or furnish all of
account that corresponds to the separate category relating to the information required on) Forms 5471 and 8865 (section
U.S. source income included under section 951(a)(1) and 6038(c)).
resourced as foreign source income under a treaty, such taxes E. Foreign income taxes paid or accrued during the current
are included in column (f). tax year with respect to splitter arrangements under section
On the line after "category code," enter one of the following 909.
codes. F. Foreign taxes on foreign corporate distributions. For
Code “RBT PAS.” If an applicable income tax treaty treats example, report taxes on dividends eligible for a deduction
any U.S. source passive category income as foreign source under section 245A and ineligible for credit under section
245A(d). Also, include taxes on a distribution of PTEP

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assigned to the following PTEP groups: reclassified section approximation of the final foreign income tax liability and,
965(a) PTEP, reclassified section 965(b) PTEP, section therefore, is not considered an amount of tax paid for purposes
965(a), section 965(b) PTEP, a portion of which are not of section 901 until the contest is resolved. Thus, a partnership
creditable. The partnership may be unable to determine the generally does not take into account a contested liability as a
amount of a distribution that is attributable to non-previously creditable foreign tax expenditure until the contest is resolved
taxed E&P or PTEP for which a foreign tax credit may be and the liability has been paid. See Regulations section
partially or entirely disallowed. However, it is important to 1.905-1(f)(1). However, to the extent that a partnership has
track this amount as a tax on a distribution. remitted a contested foreign income tax liability to a foreign
G. Other. Attach a statement to Schedules K-2 and K-3 country, partners may elect to claim a provisional foreign tax
indicating the reason for the reduction. credit for their distributive share of such contested foreign
There is no need to report the amounts on line 2 by country. income tax liability. See Regulations section 1.905-1(f)(2).
Partnerships that are contesting a foreign income tax liability
Line 3. Enter in U.S. dollars the change in foreign tax as a
with a foreign country but that have remitted all or a portion of
result of a foreign tax redetermination. See section 905(c) and
such contested liability should report information about the
Regulations sections 1.905-3 through -5. If the amount is less
contested tax on line 3, and check the “Contested tax” box. In
than the original foreign tax, report the change as a negative
addition, partnerships should attach a statement and include
amount. If the amount is more than the original foreign tax, report
information necessary for partners to complete Form 7204 and
the change as a positive amount.
Schedule L (Form 1118) (for direct or indirect corporate
Exception. Partnerships subject to subchapter C of partners), or Schedule C (Form 1116) (for direct or indirect
chapter 63 of the Code (BBA Partnerships) are generally individual, trust, or estate partners), including a description of the
required to file an administrative adjustment request (AAR) contest and a description of the contested foreign income tax. If
under Regulations section 1.905-4(b)(2)(ii) to account for a it is unknown whether the partners are corporations, individuals,
foreign tax redetermination. If an AAR is filed with respect to a estates, or trusts, provide the information necessary for the
foreign tax redetermination (or if an AAR will be timely filed), do partners to complete both Schedule L (Form 1118), Parts I and II
not report the foreign tax redetermination on line 3. (as applicable), and Schedule C (Form 1116), Parts I and II (as
applicable).
Note. Payment of additional foreign taxes that relate to an
earlier tax year by a partnership that uses the cash method of
accounting does not result in a foreign tax redetermination. See Section 5. Other Tax Information
Regulations section 1.905-3(a). Such amounts should be
reported on line 1 as foreign taxes paid by the partnership in the This section provides other tax information that a partner needs
current year. to figure its foreign tax credit limitation.
Report the U.S. tax year to which the foreign tax relates. This Column (b). Do not report any amounts in this column.
is the U.S. tax year that includes the close of the foreign tax year Column (f). As of the date of these instructions, this column will
to which the tax relates. Report the date on which the tax was only include the section 901(j) category and the countries
paid. If there is more than one date tax is paid, enter one of the relevant to that category. See the Instructions for Form 1118 for
dates paid on the schedule itself and then attach to the the potential countries to be listed with the section 901(j)
Schedules K-2 and K-3 a statement including all of the category of income. No credit is allowed for taxes paid or
information reported on the schedule with the other dates paid. accrued to a country described in section 901(j). However, a
If there is more than one redetermination in a year with deduction is generally allowed with respect to a tax described in
respect to different countries, report such redeterminations on section 901(j).
separate lines. Enter the two-letter code from the list at IRS.gov/
CountryCodes. Line 1. For partnerships other than PTPs, report the total of all
partners’ shares of the net positive income adjustments resulting
Exceptions. The instructions for Forms 1116 and 1118 from all section 743(b) basis adjustments. Net positive income
specify exceptions from the requirement to report gross income adjustments from all section 743(b) basis adjustments means
and gross receipts by foreign country or U.S. possession with the excess of all section 743(b) adjustments allocated to the
respect to RICs and section 863(b). Do not enter “various” or partner that increase the partner's taxable income over all
“OC” for the country code. section 743(b) adjustments that decrease the partner's taxable
Similarly, if there is more than one redetermination in a year income.
with respect to the same country, but the redeterminations are Attach to Schedules K-2 and K-3 a statement showing each
related to different years, report such redeterminations on section 743(b) basis adjustment making up the total and identify
separate lines. the assets to which it relates and the separate category and
source of the income generated by the assets. Make sure to
In addition, if the direct or indirect partners are corporations, include the class of gross income or deduction, for example,
attach a statement that includes the information on Schedule L sales income, interest income, or depreciation deduction. The
(Form 1118), Parts I and II, as applicable, with respect to each partnership may group these section 743(b) basis adjustments
foreign tax redetermination. If the direct or indirect partners are by asset category or description in cases where multiple assets
individuals, estates or trusts, attach a statement that includes the are affected if the assets generate the same separate category
information on Schedule C (Form 1116), Parts I and II, as and source of income. The section 743(b) positive income
applicable, with respect to each foreign tax redetermination. If adjustments should be included as relevant in other parts of the
the indirect partners are unknown, attach a statement that Schedule K-2. For example, the section 743(b) income
includes both the information on Schedule L (Form 1118), Parts I adjustments should be reflected as part of the total depreciation
and II, as applicable, and Schedule C (Form 1116), Parts I and II, reported on Part II, Section 2.
as applicable.
Line 2. For partnerships other than PTPs, report the total of all
Contested taxes. In general, a contested foreign income tax partners' shares of the net negative income adjustment resulting
liability does not accrue until the contest is resolved and the from all section 743(b) basis adjustments. Net negative income
amount of the liability has been finally determined. In addition, a adjustments from all section 743(b) basis adjustments means
contested foreign income tax liability is not a reasonable the excess sum of all section 743(b) adjustments allocated to the
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partner that decrease partner taxable income over all section USP has $100 in gross receipts from services, $50 in cost of
743(b) adjustments that increase partner taxable income. Attach services, and $25 in properly allocated and apportioned
to the Schedules K-2 and K-3 a statement showing each section deductions (none of which are interest or R&E expenses).
743(b) basis adjustment making up the total and identify the Because the performance of these services results in DOGEI, it
assets to which it relates and the separate category and source does not give rise to DEI, but rather the net amount ($25) is
of the income generated by the assets. Make sure to include the reported on Schedule K-2 Part IV, Section 1, line 6, and 50% of
class of gross income or deduction, for example, sales income, the net amount is reported to DC on the same line and section of
interest income, or depreciation deduction. The partnership may Schedule K-3, so that DC can treat this amount as an exclusion
group these section 743(b) basis adjustments by asset category from its DEI. DC’s DEI is determined without this amount by
or description in cases where multiple assets are affected if the subtracting the amount from DEI on Part I, line 2e, of Form 8993.
assets generate the same separate category and source of USP owns two properties, Asset C which has an adjusted
income. The section 743(b) negative income adjustments should basis of $1,000, and Asset D which has an adjusted basis of
be included as relevant in other parts of the Schedule K-2. For $1,200. Asset C is used in the production of Product A and Asset
example, the section 743(b) income adjustments should be D is used in providing the DOGEI services. Because sales of
reflected as part of the total depreciation reported on Part II, Product A give rise to DEI, USP should report the partnership’s
Section 2. adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV,
Section 1, line 8 (and $500 is reported to DC on the same
Schedule K-2, Part IV (Information on Partners’ section/line of Schedule K-3). This increases DC’s qualified
Section 250 Deduction With Respect to business asset investment (QBAI), and thereby increases DC’s
Foreign-Derived Intangible Income (FDII)), and deemed tangible income return (DTIR). The increase to DTIR
decreases DC’s DII which in turn decreases its section 250
Schedule K-3, Part IV (Information on Partner’s deduction for FDII. DC uses the amount to determine its DTIR
Section 250 Deduction With Respect to from partnerships on Part I, line 7b, of Form 8993. The services,
Foreign-Derived Intangible Income (FDII)) however, do not give rise to DEI, so USP should not include the
partnership’s adjusted basis in Asset D ($1,200) on line 8.
Note. Certain partners will use the following information to claim USP has no sales or services provided to foreign persons
and figure a section 250 deduction with respect to FDII on Form and therefore no FDDEI to report on Section 2 of Part IV. Even
8993. though the partnership has no interest or R&E deductions, in
This part is used by the partnership to report information to a many cases, the partnership would still have to complete Part IV,
direct domestic corporate partner (other than REITs, RICs, and Section 3.
S corporations) or to a partner which is a partnership that has a Section 250 allows a domestic corporation a deduction for its
direct or indirect domestic corporate partner (other than REITs, FDII and a direct or indirect domestic corporate partner must
RICs, and S corporations) needed to determine the domestic take into account certain activities of a partnership in computing
corporate partner's FDII. A partnership that does not have or the domestic corporation's FDII. For the treatment of a domestic
receive sufficient information or notice regarding a partner must corporation that is a partner in a partnership, see Regulations
presume the partner is a domestic corporate partner or a sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These
partnership that has a direct or indirect domestic corporate instructions generally indicate how a partnership should
partner and the partnership must complete the Schedules K-2 complete Part IV (of both Schedules K-2 and K-3). However,
and K-3, Part IV, accordingly. Any partnership with direct or Schedule K-2 includes the total of all partners’ amounts and
indirect domestic corporate partners must complete this part, Schedule K-3 includes each partner’s share.
though the partnership does not have foreign-derived gross
receipts. Even if a partnership has no foreign activities, and Enter each amount and total amounts in U.S. dollars. The
therefore has no FDDEI as reported in Section 2 of this part, the partnership should determine and report the partner's share of
partnership must still report the information required by Sections each item of the partnership contained on this form in
1 and 3 of this part so that any direct or indirect domestic accordance with the partner's distributive share of the underlying
corporate partner can correctly determine its section 250 item of income, gain, deduction, and loss of the partnership. The
deduction. For example, a domestic corporate partner would still partnership should report these amounts based on the best
need information about the partnership’s qualified business information available to it about how its partners might use this
asset investment (see the instructions for line 8 of this part) in information to determine their FDII deduction. The partnership
such a case to determine its deemed tangible income return and may report certain information differently to each partner
deemed intangible income. See section 250(b)(2). depending on federal income tax determinations that the partner
Example 13. DC is a domestic corporation that owns a 50% makes. Each partner must then figure its FDII deduction using
interest in a domestic partnership, USP. USP manufactures and Form 8993 including the information reported to it on
sells Product A and provides services, both solely to United Schedule K-3, Part IV, taking into account partner
States persons. The services give rise to domestic oil and gas determinations. A partner must obtain (and if requested by a
extraction income (DOGEI) for purposes of section 250(b)(3)(A) partner, the partnership must provide) any further necessary
(i)(V). USP has $200 in gross receipts from sales of Product A, information from the partnership to correctly determine its FDII
$100 in cost of goods sold, and $50 in properly allocated and deduction.
apportioned deductions (none of which are interest or R&E Special rules for determining foreign use apply to
expenses). USP reports these amounts on Schedule K-2, Part transactions that involve property or services provided to related
IV, Section 1, lines 2a–2c, respectively, and 50% of these parties (see section 250(b)(5)(C) and Regulations section
amounts on the same section and lines of the Schedule K-3 that 1.250(b)-6).
USP issues to DC, because this information is necessary for DC
to compute its deduction eligible income (DEI). The net amount For special substantiation requirements under the
increases DC’s DEI, which increases its deemed intangible regulations, see sections 1.250(b)-3(f), 1.250(b)-4(d)(3), and
income (DII) and in turn increases its section 250 deduction for 1.250(b)-5(e)(4). In all other cases, a taxpayer claiming a
FDII. DC uses these amounts to calculate its gross DEI on Part I, deduction under section 250 will still be required to substantiate
line 4, of Form 8993. that it is entitled to the deduction even if it is not subject to the
specific substantiation requirements contained in the

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regulations. See section 6001 and Regulations section Line 6. Domestic oil and gas extraction income. Enter the
1.6001-1(a). Therefore, the partner must be able to satisfy the amount of net domestic oil and gas extraction income before
general or special substantiation requirements to be eligible for interest and R&E deductions. The term “domestic oil and gas
the deduction. To the extent the partner does not have the extraction income” means income described in section 907(c)(1)
necessary information in its possession to substantiate the determined by substituting “within the United States” for “outside
deduction, the partnership must maintain the information. the United States.”
As described above, the partnership should determine the Line 7. Foreign branch income. Enter the amount of net
partner's share of each item below in accordance with the foreign branch income before interest and R&E deductions (as
partner's distributive share of the underlying item of income, defined in section 904(d)(2)(J)). A partnership should report all
gain, deduction, and loss of the partnership. income that would be foreign branch income of its partners as if
all partners were U.S. persons.
Section 1. Information To Determine Deduction Line 8. Partnership QBAI. Enter the amount, if any, of the
Eligible Income (DEI) and Qualified Business partnership QBAI. A domestic corporation’s QBAI is its share of
Asset Investment (QBAI) on Form 8993 the average of the aggregate adjusted bases, determined as of
the close of each quarter of the tax year, in certain specified
Line 1. Net income (loss). This amount may equal line 1 of tangible property. See Regulations section 1.250(b)-2(b). The
Analysis of Net Income (Loss) on page 5 of Form 1065. adjusted basis is determined by using the alternative
Line 2a. DEI gross receipts. Enter DEI gross receipts. depreciation system under section 168(g) and allocating
depreciation deductions with respect to such property ratably to
Line 2b. DEI cost of goods sold. Enter the amount of cost of each day during the period in the tax year to which such
goods sold attributable to the amount on line 2a. depreciation relates. See Regulations section 1.250(b)-2(e). The
Line 2c. DEI properly allocated and apportioned deduc- specified tangible property is that which is used in the trade or
tions. Enter the amount of deductions (including taxes) properly business of the corporation in the production of gross income
allocable to gross DEI, without interest and R&E expense. See included in the domestic corporation’s gross DEI and is of a type
Regulations section 1.250(b)-1(d)(2) for more details. Enter the with respect to which a deduction is allowable under section
amounts of interest and R&E expenses on lines 13 and 16, 167. See Regulations section 1.250(b)-2(b). If a domestic
respectively.”Deductions properly allocable to gross DEI are corporation holds an interest in one or more partnerships during
determined without regard to sections 163(j), 170(b)(2), 172, a tax year (including indirectly through one or more partnerships
246(b), and 250. that are partners in a lower-tier partnership), the QBAI of the
domestic corporation for the tax year is increased by the sum of
Lines 3 through 7 are exclusions from DEI used to determine the domestic corporation’s partnership QBAI with respect to
the partner’s DEI. each partnership for the tax year. See Regulations section
Line 3. Section 951(a) inclusions. Enter any amounts 1.250(b)-2(g)(1). Partnership QBAI is the sum of the domestic
included in the gross income under section 951(a)(1). Include corporation’s proportionate share of the partnership’s adjusted
the section 78 gross-up with respect to the inclusion under basis in the property and the domestic corporation’s partner
section 951(a)(1). A domestic partnership does not have a specific QBAI basis in the property for the partnership tax year
section 951(a) inclusion with respect to a foreign corporation for that ends with or within the tax year. See Regulations section
tax years of the foreign corporation that begin on or after January 1.250(b)-2(g)(2). Partnership specified tangible property means,
25, 2022. A domestic partnership may not have a section 951(a) with respect to a domestic corporation, tangible property that is
inclusion with respect to a foreign corporation for tax years of the used in the trade or business of the partnership, of a type with
foreign corporation that begin before January 25, 2022, if, respect to which a deduction is allowable under section 167, and
pursuant to Regulations section 1.958-1(d)(4)(i), it applies used in the production of gross income included in the domestic
Regulations section 1.958-1(d)(1) through (3) to such tax years, corporation’s gross DEI. See Regulations section 1.250(b)-2(g)
which treats a domestic partnership as not owning stock of a (5).
foreign corporation within the meaning of section 958(a) for If a partnership cannot determine the portion of partnership
purposes of section 951, and for purposes of any other provision specified tangible property (for example, if the partnership does
that applies by reference to section 951. not know if property gives rise to the production of gross income
in one of the excluded categories from DEI that is determined by
Note. Partners will determine whether any amount included in the partner, which would cause such property to not be
the gross income of such corporate partner is GILTI under classified as partnership specified tangible property), then in
section 951A (or the section 78 gross-up with respect to this reporting the amount of a partner's share of the partnership
inclusion under section 951A), which can only be determined by QBAI, the partnership must separately state any information so a
the partner and therefore is not reported on Part IV, Section 1, of direct or indirect domestic corporate partner can distinguish
Schedules K-2 and K-3. between the amount of the adjusted bases in a partnership's
Line 4. CFC dividends. Enter the amount of any dividend tangible property that the domestic corporation would include in
received from a CFC with respect to which the partner is a U.S. its adjusted bases in the partnership specified tangible property
shareholder as defined under section 951(b). Do not include as and the amount of the adjusted bases in the partnership's
a dividend any amount received from a CFC to the extent that tangible property that the domestic corporation would not
such amount is attributable to PTEP in the annual PTEP include in its adjusted bases in the partnership specified tangible
accounts of the partnership. See sections 959(a) and 959(d). property.
If tangible property was used in the production of DEI and in
Note. The amount by which distributions are attributable to the production of income that is non-DEI, then it is considered
PTEP in annual PTEP accounts of a direct or indirect partner is dual-use property and treated as specified tangible property in
not taken into account for purposes of determining the CFC the same proportion that the amount of the gross income
dividends to be entered on line 4. included in DEI produced with respect to the property bears to
Line 5. Financial services income. Enter the amount of net the total amount of gross income produced with respect to the
financial services income (as defined in section 904(d)(2)(D)) property. See Example 2 of Regulations section 1.250(b)-2(g)(8)
before interest and R&E deductions. for guidance on how to figure the partner adjusted basis. If

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specified tangible property is only partially depreciable, then only FDDEI under the rules of Regulations sections 1.861-8 through
the depreciable portion is QBAI. 1.861-14T and 1.861-17 by treating section 250(b) as an
Example 14. X and Y are both domestic corporations that operative section described in Regulations section 1.861-8(f).
are partners in USP, a partnership that holds three types of See Regulations section 1.250(b)-1(d)(2).
assets: A, B, and C. All types of assets are tangible property Line 9. Gross receipts. Enter the amount, if any, of the
used in the trade or business of USP and with respect to which a partnership's foreign-derived gross receipts separately for
deduction is allowable under section 167. The production of aggregate sales of general property, aggregate sales of
income from A assets is DEI with respect to X and Y. Thus, the A intangible property, and aggregate services. Foreign-derived
assets are partnership specified tangible property with respect to gross receipts means gross receipts that are used to figure
X and Y, and USP includes a proportionate amount of the gross FDDEI as defined in Regulations section 1.250(b)-1(c)
adjusted bases of all A assets in calculating each partner’s (16).
partnership QBAI. The production of income from B assets is
DEI with respect to X. However, with respect to Y, the production Line 10. COGS. Enter the amount of cost of goods sold
of income from B assets is non-DEI. Thus, the B assets are attributable to the amount(s) on line 9.
partnership specified tangible property with respect to X only, For purposes of this form, when figuring FDDEI, cost of goods
and USP includes a proportionate amount of the adjusted bases sold includes the cost of goods sold to customers, and adjusted
of all B assets only in calculating X’s partnership QBAI. The C basis of non-inventory property sold or otherwise disposed of in
assets are dual-use property, because the production of only trade or business.
part of the income from the C assets is DEI with respect to X and In making that determination, attribute costs of goods sold to
Y. Thus, the C assets are partnership specified tangible property gross receipts using a reasonable method in accordance with
with respect to both X and Y, but USP includes a proportionate Regulations section 1.250(b)-1(d)(1).
amount of the adjusted bases of all C assets in calculating each Cost of goods sold must be attributed to gross receipts with
partner’s partnership QBAI only in the proportion that the amount respect to gross DEI or gross FDDEI regardless of whether
of the gross income included in DEI produced with respect to the certain costs included in cost of goods sold can be associated
C assets bears to the total amount of gross income produced with activities undertaken in an earlier tax year (including a year
with respect to the C assets. before the effective date of section 250).
Section 2. Information To Determine Line 11. Allocable deductions. Enter the amount of the
allocable deductions. See Regulations section 1.250(b)-1(d)(2)
Foreign-Derived Deduction Eligible Income on for more details. Enter the amounts of interest and R&E
Form 8993 expenses on lines 13 and 16, respectively. Deductions are
determined without regard to sections 163(j),170(b)(2), 172,
Foreign-derived gross receipts means, with respect to a 246(b), and 250.
partnership, gross receipts of the partnership for the
Column (a). General property. Enter the amount of the
partnership's tax year that are used to figure gross
deductions that are allocated and apportioned to gross FDDEI
foreign-derived deduction eligible income (FDDEI) as defined in
from all sales of general property.
Regulations section 1.250(b)-1.
Column (b). Intangible property. Enter the amount of the
Each place where general property is listed refers to amounts deductions that are allocated and apportioned to gross FDDEI
connected to the sale, lease, exchange, or other disposition of from all sales of intangible property.
general property to a foreign person and, as established to the
satisfaction of the Secretary, is for a foreign use as defined in Column (c). Services. Enter the amount of the deductions that
Regulations sections 1.250(b)-3 and 1.250(b)-4(d). The term are allocated and apportioned to gross FDDEI from all services.
“general property” means any property other than intangible Line 12. Other apportioned deductions. Enter all other
property; a security (as defined in section 475(c)(2)); an interest apportioned deductions that relate to gross FDDEI that are not
in a partnership, trust, or estate; or a commodity described in otherwise included on lines 11, 13, and 16. If a deduction does
section 475(e)(2)(A) that is not a physical commodity or a not bear a definite relationship to a class of gross income
commodity described in section 475(e)(2)(B) through (D). constituting less than all of gross income, it shall ordinarily be
treated as definitely related and allocable to all of the taxpayer's
Each place where intangible property is listed refers to gross income, including gross DEI and gross FDDEI, except
amounts connected to the sale, license, exchange, or other where otherwise directed in the regulations.
disposition of intangible property to a foreign person and, as
established to the satisfaction of the Secretary, is for a foreign Section 3. Other Information for Preparation of
use as defined in Regulations sections 1.250(b)-3 and
1.250(b)-4(d)(2). Form 8993
Line 13. Interest deduction. The term “interest” refers to the
Each place where services are listed refers to amounts gross amount of interest expense incurred by a taxpayer in a
connected to services that, as established to the satisfaction of given year. Generally, interest expense includes any expense
the Secretary, are provided to any person, or with respect to that is currently deductible under section 163 (including original
property, located outside the United States as defined in issue discount (OID)), and interest equivalents. See Temporary
Regulations section 1.250(b)-5. Regulations section 1.861-9T(b) for the definition of interest
equivalents and Temporary Regulations section 1.861-9T(c) for
If a transaction includes both a sales component and a
sections that disallow, suspend, or require the capitalization of
service component, the transaction is classified as either a sale
interest deductions. Include excess business interest expense
or as a service according to the overall predominant character of
(EBIE) determined under 163(j)(4) on this line. Under
the transaction. See Regulations section 1.250(b)-3(d).
Regulations section 1.250(b)-1(d)(2)(ii), deductions are
For purposes of determining a domestic corporation’s determined without regard to sections 163(j),170(b)(2), 172,
deductions that are properly allocable to gross FDDEI, the 246(b), and 250.
corporation’s deductions are allocated and apportioned to gross

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Lines 13A and 13B. Interest expense specifically allocable determined by reference to the three-digit SIC code. R&E
under Regulations sections 1.861-10(e) and -10T. Apart expenses are apportioned between the statutory and residual
from interest expense entered on line 13A, enter on line 13B groupings based on an analysis of the taxpayer’s gross receipts
interest expense that is directly allocable under Temporary from certain sales, leases, licenses, and services. See
Regulations section 1.861-10T to income from specific Regulations section 1.861-17. The exclusive apportionment rule
partnership property. Such interest expense is treated as directly in Regulations section 1.861-17(b) does not apply for purposes
allocable to income generated by such partnership property. of apportioning R&E to gross DEI and gross FDDEI.
See Temporary Regulations section 1.861-9T(e)(1). R&E expenses are allocated and apportioned by the partner.
This requires that the partnership report to its partners the gross
Line 13C. Enter all interest deductions not otherwise included
receipts related to certain income within the statutory and
on lines 13A and 13B.
residual groupings within a SIC code and the partner’s
Line 14. Interest expense apportionment factors. This line distributive share of the partnership’s R&E deductions, if any,
requires the partnership to report information that a partner will connected with the SIC codes.
use to allocate and apportion its interest expense for FDII
Line 15. R&E gross receipts by SIC code. Enter the gross
purposes.
receipts that resulted in gross income for each category, DEI,
Interest deductions are apportioned to gross DEI and FDDEI FDDEI, and then total gross receipts. Note that the Total column
based ordinarily on the tax book value of the taxpayer’s assets. is not a sum of DEI and FDDEI but rather refers to all the
See Regulations section 1.861-9T(g)(1)(i). A taxpayer can use partnership’s gross receipts. Such gross receipts include both
either the tax book value or the alternative tax book value of its the partnership's sales and certain other parties' sales. See
assets. See Regulations section 1.861-9(i). Under both Regulations section 1.861-17(d). Gross receipts from certain
methods, the partner uses the partnership's inside basis in its transactions of parties both controlled or uncontrolled by the
assets, including adjustments required under sections 734(b) partnership may be included on line 15. See generally
and 743(b). See Regulations sections 1.861-9(e)(2) and -9(e) Regulations section 1.861-17(d).
(3). When reporting the asset that is the basis of stock in
nonaffiliated 10%-owned corporations, adjust such amount for Line 16. Enter the amount of the amount of R&E expense by
E&P. See Regulations section 1.861-12(c)(2)(i)(A). SIC code.

The total interest deductions for the members of the Schedule K-2, Part V, and Schedule K-3, Part V
corporation's affiliated group are allocated and apportioned to
the statutory and residual groupings under proposed, final, and (Distributions From Foreign Corporations to
Temporary Regulations sections 1.861-8 through 1.861-14. Partnership)
A corporate partner with a less than 10% interest in a
partnership shall directly allocate its distributive share of the Note. Certain partners will use the following information, in
partnership’s interest expense to its distributive share of combination with other information known to the partners,
partnership gross income. See Regulations section 1.861-9(e) including Schedule P (Form 5471), to exclude from gross
(4). income distributions to the extent that they are attributable to
PTEP in their annual PTEP accounts and report foreign currency
Note. The Total column is not a sum of DEI and FDDEI but gain or loss with respect to the PTEP on Forms 1040 and 1120.
rather refers to the partnership’s specific line totals (that is, that If eligible, partners will also use this information to figure and
would also include non-DEI). claim a dividends received deduction under section 245A on
Form 1120.
Line 14A. Enter the amount of the average of the
beginning-of-year and end-of-year inside basis in the Use Part V of Schedule K-2 to report the distributions made
partnership's assets. See Regulations section 1.861-9(g)(2)(i) by foreign corporations to the partnership.
(A). Use Part V of Schedule K-3 to report the partner's share of
Line 14B. Enter the amount of the average of the the amounts reported on Part V of the Schedule K-2.
beginning-of-year and end-of-year inside basis adjustments Exception. Part V of the Schedule K-2 is not required to be
under sections 734(b) and 743(b). completed with respect to distributions by a foreign corporation if
the partnership knows that (i) none of the distributions by the
Lines 14C and 14D. Enter the amount of the reductions in the
foreign corporation are attributable to PTEP in annual PTEP
partnership's asset values to reflect the partnership's directly
accounts of any direct or indirect partner, and (ii) none of the
allocable interest under Regulations section 1.861-10(e) and
partnership’s direct or indirect partners are eligible to claim a
Temporary Regulations section 1.861-10T. See also Temporary
deduction under section 245A with respect to any distribution by
Regulations section 1.861-9T(e)(1).
the foreign corporation. Nevertheless, the partnership may be
Line 14E. Enter the amount of the average value of assets required to append Worksheet 3 to the Schedule K-2 (discussed
excluded from the apportionment formula. See section 864(e) below).
(3). Exception. Part V of the Schedule K-3 for a partner does not
Lines 15 and 16. R&E expenses apportionment factors. A need to be completed with respect to distributions by a foreign
partnership is not required to complete lines 15 and 16 unless corporation if the partnership knows that (i) none of the
either (1) the partnership incurs R&E expense; or (2) the partner distributions by the foreign corporation are attributable to PTEP
is expected to license, sell, or transfer its intangible property to in annual PTEP accounts of the partner or any U.S. person that
the partnership (as provided in Regulations section 1.861-17(f) is treated as indirectly owning stock of the foreign corporation
(3)). These lines require the partnership to report information that through the partner (“relevant indirect partners”), and (ii) the
a partner will use to allocate and apportion its R&E expense for partner and relevant indirect partners are not eligible to claim a
FDII purposes. R&E expenses deducted under section 174 are deduction under section 245A with respect to any distributions
definitely related to all income reasonably connected with by the foreign corporation. Nevertheless, the partnership may be
relevant broad product categories of the taxpayer and are required to append Worksheet 4 to the Schedule K-3 for the
allocable to all items of gross income as a class related to such partner (discussed below). If this exception is applicable with
product categories. The product categories are generally respect to a foreign corporation, the sum of the amounts
reported on Part V of the Schedules K-3 with respect to the
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022) -23-

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Worksheets 3 and 4
                                                        Worksheet 3 (Schedule K-2)
(a) Name of          (b) EIN or reference (c) Date of distribution (d) Functional (e) Amount of NII  (f) Spot rate             (g) Amount of NII 
distributing foreign ID number                              currency of           PTEP in functional (functional currency      PTEP in U.S. dollars
corporation                                                 distributing foreign  currency           to U.S. dollars)
                                                            corporation

                                                        Worksheet 4 (Schedule K-3)
(a) Name of          (b) EIN or reference (c) Date of distribution (d) Functional (e) Partner’s share of  (f) Spot rate        (g) Partner’s share of 
distributing foreign ID number                              currency of           NII PTEP in functional  (functional currency NII PTEP in U.S. 
corporation                                                 distributing foreign  currency           to U.S. dollars)          dollars
                                                            corporation

foreign corporation may not equal the amounts reported on Part          from the partnership’s gross income under section 1293(c), that 
V of the Schedule K-2 with respect to the foreign corporation.          corresponds to a tax year of the foreign corporation that ended 
                                                                        with or within a tax year of the partnership (i) that began after 
Rows A–O.   Use rows A–O to report information with respect to 
                                                                        December 31, 2012, and (ii) for which an election under 
each distribution by a foreign corporation with respect to its 
                                                                        Regulations section 1.1411-10(g) was not made by the 
stock that the partnership (directly or through pass-through 
                                                                        partnership (such PTEP, “NII PTEP”), append Worksheet 3 to 
entities) owns (within the meaning of section 958) other than 
                                                                        Schedule K-2 and Worksheet 4 to each K-3 in the format shown, 
solely by reason of applying section 318(a)(3) (providing for 
                                                                        adding additional rows as necessary for each distribution by a 
downward attribution) as provided in section 958(b). Each row 
                                                                        foreign corporation. For more information about net investment 
should relate to the partnership’s direct ownership of stock in the 
                                                                        income and net investment income tax relating to CFCs and 
foreign corporation or direct ownership of the ownership 
                                                                        QEFs, see Regulations section 1.1411-10.
interests in a pass-through entity that (directly or through other 
pass-through entities) owns (within the meaning of section 958)         Note.     If additional rows are required, attach statements to 
stock in the foreign corporation other than solely by reason of         Schedules K-2 and K-3 that look like the current version of 
applying section 318(a)(3) (providing for downward attribution)         Schedules K-2, Part V, and Schedule K-3, Part V, respectively.
as provided in section 958(b). For example, if a partnership 
(upper-tier partnership) directly owns 50% of the foreign               Column (b).  Enter the EIN or reference ID number of the 
corporation's stock and owns 50% of the foreign corporation's           distributing foreign corporation. Do not enter "FOREIGNUS" or 
stock through another partnership (lower-tier partnership), then        "APPLIED FOR." For basic information about reference ID 
distributions by the foreign corporation to both the upper-tier         numbers (including the requirements as to the characters 
partnership and the lower-tier partnership are to be reported on        permitted), see the Instructions for Form 1118.
separate rows on the upper-tier partnership's Part V of                 Column (c). Enter the year, month, and day in which the 
Schedules K-2 and K-3 (Form 1065). If the partnership owns              distribution was made using the format YYYYMMDD.
stock of a foreign corporation through another partnership 
(lower-tier partnership) from which it receives a Part V of             Column (d).  Enter the applicable three-character alphabet 
Schedule K-3 (Form 1065 or 8865), the partnership must                  code for the foreign corporation’s functional currency using the 
replicate each line of the Part V of Schedule K-3 (Form 1065 or         ISO 4217 standard. These codes are available at ISO.org/
8865) on its Part V of Schedules K-2 and K-3 (Form 1065). Rows          ISO-4217-currency-codes.html.
for distributions with respect to a partnership's direct ownership 
of foreign corporation stock should be listed before rows for           Note.     Columns (e) and (f) are reported in functional currency.
distributions with respect to a partnership’s ownership of foreign      Column (e).  This represents the partnership’s share of the 
corporation stock through a pass-through entity.                        amount distributed in functional currency. See Schedule R 
If the partnership is a domestic partnership, the partnership           (Form 5471), column (c).
may have annual PTEP accounts with respect to the foreign               Column (f). This represents the partnership's share of the 
corporation, or the foreign corporation may have E&P that, when         amount of E&P distributed in functional currency. See 
distributed, are excludable from the partnership’s gross income         Schedule R (Form 5471), column (d). The total of the amounts 
under section 1293(c). Do not report distributions to the extent        reported in column (f) with respect to a distributing foreign 
that they are attributable to PTEP in annual PTEP accounts of           corporation should equal the partnership's share of the total 
the partnership or to E&P that are excludable from the                  reported on line 9 of all Schedules J on a separate category of 
partnership’s gross income under section 1293(c). Distributions         income basis as reported in Schedule J (Form 5471) TOTAL 
by the foreign corporation to the partnership that are attributable     filed with respect to the distributing foreign corporation.
to PTEP in annual PTEP accounts of the partnership should be 
properly reflected on the Schedules J (Form 5471) for the               Column (g).  Enter the exchange rate on the date of distribution 
foreign corporation. The partnership should provide this                used to translate the amount of the distribution in functional 
information to its partners as appropriate.                             currency to U.S. dollars. See section 989(b)(1). Report the 
However, to the extent a distribution is attributable to PTEP in        exchange rate using the "divide-by convention" specified under 
an annual PTEP account of the partnership with respect to a             Reporting exchange rates in the Instructions for Form 5471.
foreign corporation, or attributable to E&P that are excludable 

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Column (h). Enter the amount of the distribution in U.S. dollars.         Regulations section 1.958-1(d)(1) through (3) to such tax year, 
Translate column (e) using the spot rate reported in column (g).          and is a U.S. shareholder of the foreign corporation during such 
                                                                          tax year, then any subpart F income inclusions and section 
Column (i). Enter the amount of E&P distributed in U.S. dollars.          951(a)(1)(B) inclusions with respect to the foreign corporation for 
Translate column (f) using the spot rate reported in column (g).          such tax year are inclusions of the partnership, which are 
Column (j). If the distributing foreign corporation is a qualified        therefore not reported in Schedules K-2 and K-3, Part VI, 
foreign corporation, determined without regard to section 1(h)            columns (e) and (f), and are instead reported on Schedules K 
(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).                  and K-1, line 11, Other income (loss).
                                                                          Exception.  Part VI of Schedule K-2 does not need to be 
Schedule K-2, Part VI (Information on Partners’                           completed with respect to a CFC if the partnership knows that it 
Section 951(a)(1) and Section 951A Inclusions),                           does not have a direct or indirect partner (through pass-through 
                                                                          entities only) that is a U.S. shareholder of the CFC required to 
and Schedule K-3, Part VI (Information on                                 include in gross income a subpart F income inclusion and/or 
Partner’s Section 951(a)(1) and Section 951A                              section 951(a)(1)(B) inclusion with respect to the CFC, or figure 
Inclusions)                                                               section 951A inclusions by taking into account GILTI items 
                                                                          (defined below) of the CFC.
Note.  Certain partners will use the following information to             Exception.  Part VI of Schedule K-3 for a partner does not 
complete Form 8992 and Forms 1040 and 1120 with respect to                need to be completed with respect to a CFC if the partnership 
income inclusions under section 951(a) (subpart F income                  knows that (i) the partner is not a U.S. shareholder of the CFC 
inclusions), section 951(a)(1)(B) inclusions, and section 951A            required to include in gross income a subpart F income inclusion 
inclusions.                                                               and/or section 951(a)(1)(B) inclusion with respect to the CFC, or 
Schedules K-2 and K-3, Part VI, must be completed with                    figure section 951A inclusions by taking into account GILTI items 
respect to a CFC if the partnership owns (within the meaning of           (defined below) of the CFC; and (ii) no U.S. person that indirectly 
section 958) stock of the CFC, unless the partnership owns                owns (through pass-through entities only) an interest in the CFC 
stock of the CFC solely by reason of applying section 318(a)(3)           through the partner is a U.S. shareholder of the CFC required to 
(providing for downward attribution) as provided in section               include in gross income a subpart F income inclusion and/or 
958(b).                                                                   section 951(a)(1)(B) inclusion with respect to the CFC, or figure 
                                                                          section 951A inclusions by taking into account GILTI items 
Generally, a foreign corporation is a CFC if more than 50% of             (defined below) of the CFC. If the partnership does not complete 
either the total combined voting power of all classes of stock            Part VI of Schedule K-3 for a partner with respect to a CFC, the 
entitled to vote, or the total value of the stock of the corporation,     sum of each partner’s share of the CFC’s subpart F income, 
is owned (within the meaning of section 958(a)) or is considered          section 951(a)(1)(B) inclusion with respect to the CFC, and 
as owned by applying the rules of section 958(b) by U.S.                  share of the CFC’s GILTI items (defined below) reported on all 
shareholders. For this purpose, a U.S. shareholder is a U.S.              Schedules K-3 may not equal the aggregate share of subpart F 
person (as defined in section 957(c)) who owns (within the                income of the CFC, the aggregate section 951(a)(1)(B) inclusion 
meaning of section 958(a)), or is considered as owning by                 with respect to the CFC (defined below), and the aggregate 
applying the rules of ownership of section 958(b), 10% or more            share of the CFC’s GILTI items (defined below), respectively, 
of the total combined voting power of all classes of stock entitled       reported on the Schedule K-2.
to vote, or 10% or more of the total value of shares of all classes       Use Schedule K-3, Part VI, to report the partner's share of the 
of stock of such foreign corporation.                                     amounts needed to figure its subpart F income inclusions, its 
If the partnership is a domestic partnership, then the domestic           section 951(a)(1)(B) inclusions, and its share of items of CFCs 
partnership does not have subpart F income inclusions or                  needed to determine the partner's GILTI inclusion, with respect 
section 951(a)(1)(B) inclusions with respect to a foreign                 to CFCs owned (within the meaning of section 958) by the 
corporation for tax years of the foreign corporation that begin on        partnership.
or after January 25, 2022, under Regulations section 1.958-1(d)           If the partnership must complete Part VI of Schedules K-2 
(1). A domestic partnership may not have subpart F income                 and K-3 with respect to a CFC, then the partnership must 
inclusions or section 951(a)(1)(B) inclusions with respect to a           complete Part VI of Schedules K-2 and K-3 by assuming that 
foreign corporation for a tax year of the foreign corporation that        each partner in the partnership is a U.S. shareholder of the CFC 
begins before January 25, 2022, if, pursuant to Regulations               and is required to include in gross income its share of the CFC's 
section 1.958-1(d)(4)(i), the partnership applies Regulations             subpart F income, an amount determined under section 956 with 
section 1.958-1(d)(1) through (3) to such tax year and, thus, is          respect to the CFC (section 951(a)(1)(B) inclusion), and its 
treated as not owning stock of a foreign corporation within the           GILTI.
meaning of section 958(a) for purposes of section 951, or the             A partner's GILTI is figured based upon its share of the 
partnership is not a U.S. shareholder of the foreign corporation          following amounts for each CFC with respect to which it is a U.S. 
during such tax year. If the partnership does not have subpart F          shareholder: tested income, tested loss, QBAI, tested loss QBAI 
income inclusions or section 951(a)(1)(B) inclusions with respect         amount, tested interest income, and tested interest expense 
to a foreign corporation for a tax year of the foreign corporation,       (collectively, GILTI items) (a CFC's subpart F income and GILTI 
the subpart F income inclusions and section 951(a)(1)(B)                  items, CFC items).
inclusions with respect to the foreign corporation for such tax           A partner's share of a CFC's subpart F income, amounts used 
year that are reported in Schedule K-2, Part VI, columns (e) and          to determine its section 956 amount with respect to a CFC, and 
(f), are not inclusions of the partnership. Schedule K-3, Part VI,        a CFC's GILTI items may not be limited to the partner's share of 
columns (e) and (f), report the information partners will need to         such income, amounts, or items through its ownership in the 
figure and report their subpart F income inclusions and section           partnership. However, for purposes of completing Part VI of 
951(a)(1)(B) inclusions with respect to the CFC.                          Schedules K-2 and K-3, use only the partner's share of a CFC's 
Note. If the partnership is a domestic partnership that is treated        subpart F income, amounts used to determine its section 956 
as owning stock of a foreign corporation within the meaning of            amount with respect to a CFC, and a CFC's GILTI items through 
section 958(a) for purposes of section 951 for a tax year that            the partner's ownership in the partnership.
begins before January 25, 2022, because it does not apply 
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)             -25-

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A partner's share through its ownership in the partnership of       Column (c).  Enter the end of the CFC’s tax year using the 
subpart F income and GILTI items is generally anticipated to be     format YYYYMMDD.
figured by multiplying the percentage in column (d) by the 
amount of subpart F income or GILTI items, respectively. For        Column (d).  Enter the partners' share of CFC items through 
example, in general, a partner's share through its ownership        the partners' ownership in the partnership (aggregate share). 
interest in the partnership of tested income in column (i) is       See Regulations sections 1.951-1(b), 1.951-1(e), and 
anticipated to be figured by multiplying the percentage in column   1.951A-1(d)(1) for rules on determining the partners' share.
(d) by the amount of tested income in column (g). If the partner's 
share through its ownership in the partnership of subpart F         Note. A domestic partnership that is treated as owning stock of 
income or GILTI items is not figured by multiplying the             a CFC within the meaning of section 958(a) for a tax year of the 
percentage in column (d) by the amount of subpart F income or       CFC that begins before January 25, 2022, because it does not, 
GILTI items, respectively (for example, because of special          pursuant to Regulations section 1.958-1(d)(4)(i), apply 
allocations), then, instead of entering a percentage in column (d)  Regulations section 1.958-1(d)(1) through (3) to such tax year, 
for that CFC, attach a statement to Schedules K-2 and K-3           and is a U.S. shareholder of the CFC listed in column (a), does 
explaining the partner's share through its ownership in the         not report amounts with respect to that CFC for that tax year in 
partnership of the CFC's subpart F income and GILTI items.          column (e) or (f).
Line a.  Complete a separate Part VI for each applicable            Column (e).  Enter the aggregate share of the amount of the 
separate category of income. However, all GILTI items must be       CFC's subpart F income, if any. Note that an amount determined 
reported on only one Part VI. If GILTI items include passive        under section 956(a) is not considered subpart F income. For 
category income, report all GILTI items on the Part VI completed    guidance on computing a CFC's subpart F income and the 
for passive category income; otherwise, report all GILTI items on   partners' share of a CFC's subpart F income, see Worksheet A 
the Part VI completed for general category income. Enter the        in the Instructions for Form 5471.
appropriate code on line a.                                         Column (f).  Enter the amount determined under section 956 
                                                                    with respect to the partners that relate to the partners’ ownership 
Note. The other reporting requirements of a partnership with        in the partnership, as described in these instructions for column 
respect to reporting income by separate category do not change      (f) (aggregate section 951(a)(1)(B) inclusion). In determining the 
by reason of the partnership reporting GILTI items that include     section 956 amount, use only the partners’ share through their 
general category income on a Part VI completed for passive          ownership in the partnership of:
category income.                                                    •    The average of the amounts of U.S. property held (directly or 
                                                                    indirectly) by the CFC as of the close of each quarter of the 
Codes for Categories of Income                                      CFC’s tax year, and
                                                                    •    The applicable earnings of the CFC.
             Code                   Category of Income              Do not reduce the amount reported in column (f) for any 
                                                                    reduction to the partners’ section 956 amount under Regulations 
             PAS                    Passive Category Income         section 1.956-1(a)(2). For guidance on computing the partners’ 
             901j                   Section 901(j) Income           share of a CFC’s earnings invested in U.S. property, see 
             GEN                    General Category Income         Worksheet B in the Instructions for Form 5471.
                                                                    Column (g).  Enter the CFC’s tested income, if any, from line 6 
Line b.  If any portion of a CFC item is U.S. source, complete a    of Schedule I-1 (Form 5471) for each CFC.
separate Part VI for U.S.-source CFC items, and check the box       Column (h).  Enter the CFC’s tested loss, if any, from line 6 of 
on line b on such separate Part VI.                                 Schedule I-1 (Form 5471) for each CFC. The loss amounts 
Line 1.  Use lines A–K to report information with respect to        should be shown as negative numbers.
CFCs owned (within the meaning of section 958) by the               Column (i).  Enter the aggregate share of the tested income 
partnership, and for which Part VI of Schedules K-2 and K-3         listed in column (g) for each CFC with tested income.
must be completed. If the partnership owns a CFC through 
another partnership (lower-tier partnership) from which it          Column (j).  Enter the aggregate share of the tested loss listed 
receives a Part VI of Schedule K-3 (Form 1065 or 8865), the         in column (h) for each CFC with tested loss. The loss amounts 
partnership must replicate each line of Part VI of Schedule K-3     should be shown as negative numbers.
(Form 1065 or 8865) that is related to the CFC on its Part VI of    Column (k).  If the CFC has a tested loss in column (h), enter 
Schedule K-2 (Form 1065). For example, if a partnership directly    zero. If the CFC has tested income in column (g), enter the 
owns 50% of the CFC's stock and owns 50% of the CFC's stock         aggregate share of QBAI. A CFC’s QBAI is reported on line 8 of 
through a lower-tier partnership, the CFC should be listed on two   Schedule I-1 (Form 5471).
lines with one line related to the partnership's direct ownership 
and the other line related to the partnership's ownership through   Column (l). If the CFC has tested income in column (g), enter 
the lower-tier partnership. Lines related to a partnership's direct zero. If the CFC has a tested loss in column (h), enter as a 
ownership of CFCs should be listed before lines related to a        negative number the aggregate share of the CFC's tested loss 
partnership's non-direct ownership of CFCs. If additional lines     QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A 
are required, attach a statement to Schedules K-2 and K-3 that      CFC's tested loss QBAI amount is reported on line 9c of 
looks like the current version of Part VI.                          Schedule I-1 (Form 5471) which must be translated to U.S. 
                                                                    dollars.
Column (a).  Enter the name of each CFC for which Part VI 
must be completed.                                                  Column (m).  Enter the aggregate share of the CFC’s tested 
                                                                    interest income. A CFC’s tested interest income is reported on 
Column (b).  Enter the EIN or reference ID number of the CFC.       line 10c of Schedule I-1 (Form 5471).
Do not enter "FOREIGNUS" or "APPLIED FOR." For basic 
information about reference ID numbers (including the               Column (n).  Enter the aggregate share of the CFC’s tested 
requirements as to the characters permitted), see the               interest expense. A CFC’s tested interest expense is reported on 
Instructions for Form 1118.                                         line 9d of Schedule I-1 (Form 5471).

                                                                    -26- Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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Schedule K-2, Part VII, and Schedule K-3, Part                            partnership is making a non-initial section 1296 MTM election, 
                                                                          and for any foreign corporation eligible to be treated as a QIC 
VII (Information To Complete Form 8621)
                                                                          that is treated as a PFIC by reason of section 1298(b)(1), 
Note.  Partners will use the following information to complete            regardless of whether it files Form 8621 for such PFIC. See 
Form 8621 and/or determine income inclusions with respect to              section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for 
the PFICs reported on Schedules K-2 and K-3, Part VII.                    more information related to non-initial section 1296 MTM 
                                                                          elections.
  Except as otherwise provided, Schedules K-2 and K-3, Part 
VII, must be filed by every partnership that owns PFIC stock,             Use Schedule K-3, Part VII, to report the partner's share, 
directly or indirectly. However, the following exceptions apply.          through its ownership in the partnership, of the amounts reported 
• A partnership that knows it has no direct or indirect partners          on Schedule K-2, Part VII.
that are U.S. persons, including U.S persons that own an indirect         Complete only one line on both Sections 1 and 2 for each 
interest in the partnership through one or more foreign entities, is      PFIC for which reporting on Schedule K-2, Part VII, and 
not required to complete Schedules K-2 and K-3, Part VII.                 Schedule K-3, Part VII, is required. Each line completed for a 
• A domestic partnership that has elected to treat a PFIC as a            PFIC in Section 1 should correspond to the same line on Section 
pedigreed qualified electing fund (QEF) or made an MTM                    2. If there is no information to report with respect to a PFIC in 
election under section 1296 with respect to a PFIC applicable to          Section 2, columns (c) through (o), only complete the name and 
the partnership’s tax year (other than a domestic partnership             EIN of the PFIC in Section 2, columns (a) and (b), and leave 
making an MTM election under section 1296 with respect to                 columns (c) through (o) blank for that PFIC. For additional 
PFIC stock in the current tax year if the current tax year is not the     information on determining indirect ownership of PFICs, see 
first year of the partnership’s holding period in such stock              Regulations section 1.1291-1(b)(8).
(“non-initial section 1296 MTM election”)) is not required to 
complete Schedules K-2 and K-3, Part VII, with information                The partnership may have additional required information 
regarding such PFIC if the partnership files Form 8621 for that           with respect to a PFIC for certain columns (for example, 
PFIC. The term “pedigreed QEF” is defined in Regulations                  scenarios where the partnership may have multiple different 
section 1.1291-1(b)(2)(ii).                                               events with respect to the PFIC in the same tax year, such as 
• A partnership that owns stock of a foreign corporation that is          multiple dates of acquisitions of, or distributions with respect to, 
treated as a qualifying insurance corporation (as defined in              the PFIC stock). In that case, complete Schedules K-2 and K-3, 
section 1297(f)(1)) (QIC) and which is not treated as a PFIC by           Part VII, with the first of such entries for a PFIC and attach a 
reason of section 1298(b)(1), or a domestic partnership that              statement including the remaining entries for each such PFIC to 
satisfies the deemed election requirements of Regulations                 Schedule K-2, Part VII, and its corresponding Schedules K-3, 
section 1.1297-4(d)(5)(iv) with respect to a foreign corporation          Part VII, with the information contained in Table 4 and/or 
eligible to be treated as a QIC (and that is not treated as a PFIC        Table 5.
by reason of section 1298(b)(1)) is not required to complete              If the partnership has additional PFICs for which to report 
Schedules K-2 and K-3, Part VII with respect to such foreign              information that do not fit on single Schedules K-2 and K-3, Part 
corporation.                                                              VII, it can attach additional Parts VII of Schedules K-2 and K-3, 
• A partnership that knows that all of its direct and indirect            as needed.
partners that are U.S. persons are either (i) not subject to the 
PFIC rules with respect to the corporation under section 1297(d) 
because they are subject to the subpart F rules with respect to           Section 1. General Information on Passive Foreign 
the corporation, (ii) tax-exempt entities that are not subject to the     Investment Company (PFIC), Qualified Electing 
PFIC rules with respect to the corporation under Regulations              Fund (QEF), or Qualifying Insurance Corporation 
section 1.1291-1(e), or (iii) pass-through entities with no direct or 
                                                                          (QIC)
indirect U.S. taxable owners is not required to complete 
Schedules K-2 and K-3, Part VII with respect to the corporation.          Columns (a) through (c).   Enter the name, U.S. EIN or 
• A partnership that marks to market stock of a PFIC as                   reference ID number, and address of each PFIC held directly or 
described in Regulations section 1.1291-1(c)(4) does not need             indirectly by the partnership during its tax year. Do not enter 
to report information about the PFIC on Schedules K-2 and K-3,            “FOREIGNUS” or “APPLIED FOR.”
Part VII. The partnership should report its MTM gain or loss on           For basic information about reference ID numbers (including 
Schedule K (Form 1065) and report the partners’ shares of such            the requirements as to the characters permitted), see the 
amounts on Part III of Schedule K-1 (Form 1065). Note,                    Instructions for Form 8621.
however, there may be instances in which the partnership will 
need to provide its partners with additional information to meet          Columns (d) and (e).  Enter the beginning and end of the 
their tax obligations with respect to a PFIC the stock of which the       PFIC's tax year using the format YYYYMMDD.
partnership has marked to market as described in Regulations              Column (f).  Enter each class of shares in the PFIC owned by 
section 1.1291-1(c)(4), such as when the section 1291 rules               the partnership using the following codes.
apply because the stock was not marked in the first year of the 
partnership’s holding period. In such instances, the partnership 
may use Part VII to provide the needed information.                       Codes for Classes of PFIC Shares
  Use Schedule K-2, Part VII, to report certain information with          Code                       Class of PFIC Shares
respect to any PFIC owned, directly or indirectly, by the                 COM                        Common or Ordinary Shares
partnership for which reporting is required, including PFICs with         PRE                        Preferred Shares
respect to which no QEF or section 1296 MTM election has                  OTH                        Other Equity Interest
been made, and unpedigreed QEFs (section 1291 funds), and                 VAR                        Multiple Classes of Shares or Equity 
PFICs with respect to which pedigreed QEF, section 1296 MTM,                                         Interests
or other elections have been, or may be, made, and for which 
the partnership is not filing a Form 8621.
                                                                          Column (g).  If the partnership acquired any PFIC shares 
  Domestic partnerships must also use Schedule K-2, Part VII,             during its tax year, provide the date(s) of acquisition of such 
to report information for any PFIC with respect to which the              shares using the format YYYYMMDD. If the partnership acquired 
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no shares in a particular PFIC during its tax year, leave this QIC. See section 1297(f) and Regulations section 1.1297-4 for
column blank with respect to that PFIC. additional information on QICs.
Note. If the partnership acquired shares in a PFIC on multiple Column (l). Check the box if the PFIC has indicated that its
dates during the tax year, attach a statement with the information shares are “marketable stock” as defined in section 1296(e) and
contained in Table 4 to Schedule K-2, Part VII, and its Regulations section 1.1296-2.
corresponding Schedules K-3, Part VII, providing such dates. Column (m). Check the box if the PFIC also constitutes a CFC
within the meaning of section 957 (PFIC/CFC).
Table 4
Reminder. A partnership that knows that all of its direct and
Additional Information for Section 1, Part VII indirect partners that are U.S. persons are not subject to the
General Information Annual Information PFIC rules with respect to a PFIC/CFC under section 1297(d)
because they are subject to the subpart F rules with respect to
(a) (b) (g) the PFIC/CFC is not required to complete Schedules K-2 and
Name of PFIC EIN or reference ID Dates PFIC shares K-3, Part VII, with respect to the PFIC/CFC.
number acquired during tax year
(if applicable) Note. If the PFIC is a PFIC/CFC, a partner may need certain
additional information with respect to the PFIC/CFC’s E&P not
required to be reported on this Schedule K-2, Part VII, (or the
partner’s Schedule K-3, Part VII) from the partnership to aid the
partner in making certain elections under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3.
Column (n). Complete column (n) in the following manner.

Completing column (n), Section 1, Part VII
IF... THEN...
Column (h). Enter the total number of all classes of shares of
the PFIC the partnership owned at the end of its tax year. • this is the first year of the check the box.
partnership's holding period in stock
Column (i). Enter the total value of all shares in the PFIC held of the foreign corporation, and
by the partnership at the end of the tax year. If the PFIC shares • the partnership has determined
are not publicly traded, the partnership may rely upon periodic (directly or otherwise) that the foreign
account statements provided at least annually to determine the corporation is a PFIC under the
value of a PFIC unless the partnership has actual knowledge or income test or asset test of section
reason to know based on readily accessible information that the 1297(a)
statements do not reflect a reasonable estimate of the PFIC’s • the foreign corporation was a PFIC check the box.
value and the information provides a more reasonable estimate in a prior tax year of the partnership's
of the PFIC’s value. holding period, and
• the partnership has not determined
Note. A partner may need additional information not required to (directly or otherwise) the foreign
be reported on this Schedule K-2, Part VII, (or the partner’s corporation is a "former PFIC" within
Schedule K-3, Part VII) from the partnership with respect to the the meaning of Regulations section
value of the PFIC shares as of a particular date to aid the partner 1.1291-9(j)(2)(iv)
in making certain elections under Regulations section • the foreign corporation was a PFIC do not check the box.
1.1291-10, 1.1297-3, or 1.1298-3. in a prior tax year of the partnership's
holding period, and
Column (j). If the partnership is a domestic partnership and • the partnership has determined
has made any of the following elections with respect to the PFIC, (directly or otherwise) the foreign
indicate which election was made using the following codes. If corporation is a "former PFIC" within
the partnership has not made an election with respect to the the meaning of Regulations section
PFIC, leave this column blank with respect to that PFIC. 1.1291-9(j)(2)(iv)

Partnership Election Codes
Note. If the foreign corporation is a “former PFIC” within the
Code Partnership Election Type meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may
QEF Qualified Electing Fund Election need additional information not required to be reported on this
Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)
MTM Section 1296 Mark-to-Market Election
from the partnership with respect to the PFIC to aid the partner in
making certain elections under Regulations section 1.1298-3.
Reminder. If the partnership is a domestic partnership and has
made a pedigreed QEF election or section 1296 MTM election
(other than a non-initial section 1296 MTM election) with respect Section 2. Additional Information on PFIC or QEF
to a PFIC, and the partnership files Form 8621 for that PFIC, it is General Information
not required to report information regarding that PFIC on
Columns (a) and (b). Enter the name and U.S. EIN (or
Schedule K-2 or K-3, Part VII. If the partnership has marked
reference ID number) of each PFIC held directly or indirectly by
stock in a PFIC to market as described in Regulations section
the partnership during its tax year. Do not enter "FOREIGNUS"
1.1291-1(c)(4), it is not required to report information regarding
or "APPLIED FOR."
that PFIC on Schedule K-2 or K-3, Part VII.
Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a

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QEF Information PFIC (other than a non-initial section 1296 MTM election), and if
the partnership files Form 8621 for that PFIC, the partnership is
Columns (c) and (d). Enter the partnership's share of the total not required to report information regarding that PFIC on
ordinary earnings and net capital gain (as defined in Regulations Schedule K-2 or K-3, Part VII. The partnership should report its
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year section 1296(a) MTM gain or loss on Form 1065, Schedule K,
in which or with which the tax year of the PFIC ends in columns and report the partners’ shares of such amounts on
(c) and (d), respectively. The PFIC should provide the Schedule K-1, Part III.
partnership with a statement that provides information to assist If the partnership has marked stock in a PFIC to market as
the partnership in determining these amounts. See Regulations described in Regulations section 1.1291-1(c)(4), it is not
section 1.1295-1(g) for additional information on annual PFIC required to report information regarding that PFIC on
statements. Schedule K-2 or K-3, Part VII, though it may use Part VII to
A domestic partnership must provide this information for any provide its partners with additional information to meet their tax
PFIC with respect to which it has made a pedigreed QEF obligations with respect to the PFIC in certain instances, such as
election but for which it does not file Form 8621, and for any when the section 1291 rules apply because the partnership did
PFIC it has elected to treat as an unpedigreed QEF. A foreign not mark the stock to market in the first year of its holding period.
partnership must provide this information if it has received an
annual information statement with respect to the PFIC, unless Note. If the partnership is a domestic partnership that has made
the partnership knows that no direct or indirect partner has an MTM election under section 1296 with respect to a PFIC but
made, or intends to make, a QEF election with respect to the does not file Form 8621 for that PFIC, a partner may need
PFIC; the partnership may obtain this knowledge in any additional information not required to be reported on this
reasonable manner, provided it retains a written record in its Schedule K-2, Part VII, (or the partner’s Schedule K-3, Part VII)
books and records. regarding its share of the partnership’s adjusted tax basis in the
partnership’s MTM PFIC stock in order to complete Form 8621.
Reminder. If the partnership is a domestic partnership and has
made a pedigreed QEF election with respect to a PFIC, and if
Section 1291 and Other Information
the partnership files Form 8621 for that PFIC, the partnership is
not required to report information regarding that PFIC on Note. Generally, the information in columns (g) through (o) is to
Schedule K-2 or K-3, Part VII. The partnership should report its assist shareholders of section 1291 funds in satisfying any
inclusion of its share of the QEF’s ordinary earnings and net information reporting obligations and in computing income
capital gain on Form 1065, Schedule K, and report the partners’ inclusions with respect to section 1291 funds. However, this
shares of such amounts on Schedule K-1, Part III. However, information may be relevant to PFICs with respect to which a
certain partners which receive a distributive share of the pedigreed QEF election, section 1296 MTM election (including a
partnership’s QEF inclusions may be entitled to claim foreign tax non-initial section 1296 MTM election), or other election has
credits under section 960 with respect to such inclusions. See been made by the partnership, partner, or other indirect PFIC
the instructions for Schedules K-2 and K-3, Part VIII, regarding shareholder. Accordingly, the partnership must complete
deemed paid foreign tax credits under section 960, including for columns (g) through (o) with respect to each PFIC for which
inclusions with respect to a QEF under section 1293(f). reporting on Schedules K-2 and K-3, Part VII, is required.
However, note the instructions for column (k) regarding reporting
Note. Certain partners may need additional information not distributions from PFICs with respect to which the partnership
required to be reported on this Schedule K-2, Part VII, (or the has made a pedigreed QEF election or section 1296 MTM
partner’s Schedule K-3, Part VII) from the QEF with respect to its election (other than a non-initial section 1296 MTM election) and
computation of its net capital gain (as defined in Regulations for which the partnership does not file Form 8621.
section 1.1293-1(a)(2)) to perform certain computations under
Reminder. If the partnership has additional required information
section 1061 or the regulations thereunder. The partnership may
with respect to a PFIC for any of columns (g) through (j) or (l)
aid the partner in obtaining such information from the QEF,
through (m) (for example, if the partnership received multiple
though the QEF is not required to provide such information. See
distributions with respect to stock in a PFIC), it must complete
section 1061 and Regulations sections 1.1061-4 and 1.1061-6 such column with the first of such entries and attach a statement
for more information. including the remaining entries to Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII, with the information
MTM Information contained in Table 5.
Columns (e) and (f). Enter the fair market value of the PFIC Column (g). Enter the date(s) on which the partnership initially
stock at the beginning and end of the partnership’s tax year in acquired each block of stock in the PFIC using the format
columns (e) and (f), respectively. If any shares of the PFIC were YYYYMMDD.
acquired during the tax year for which the Form 1065 is being Column (h). Enter the amount of each distribution of cash
filed, the fair market value in column (e) should reflect the fair and/or the fair market value of any other property distributed to
market value of those shares as of the date of acquisition. A the partnership by the PFIC during the tax year, if any.
domestic partnership must provide this information for any PFIC
with respect to which it has made an MTM election under section Note. Deemed distributions by QEFs do not need to be
1296 but for which it does not file Form 8621 and for any PFIC reported on this Schedule K-2, Part VII (or the partner’s
with respect to which it is making a non-initial section 1296 MTM Schedule K-3, Part VII). However, partners which have made, or
election. A foreign partnership must provide this information intend to make, an election under section 1294, and which are
unless it knows that no direct or indirect partner has made, or deemed to have received a distribution from the QEF, may
intends to make, an MTM election under section 1296 with require this information to complete any computations under
respect to the PFIC; the partnership may obtain this knowledge section 1294 (including for Form 8621, if required). See section
in any reasonable manner, provided it retains a written record in 1294(f) and Regulations section 1.1294-1T for additional
its books and records. information.
Reminder. If the partnership is a domestic partnership and has Column (i). Enter the date(s) of distribution of the amounts
made an MTM election under section 1296 with respect to a entered in column (h) using the format YYYYMMDD.

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Table 5
Additional Information for Section 2, Part VII
General Information Section 1291 and Other Information
(a) (b) (g) (h) (i) (j) (l) (m) (n) (o)
Name of PFIC EIN or Dates PFIC Amount of Dates of Total Dates PFIC Amount Tax basis of Gain or (loss)
reference ID shares were cash and fair distribution creditable shares realized on PFIC shares on disposition
number acquired market value foreign taxes disposed of disposition of on date of of PFIC shares
of property attributable to during tax PFIC shares disposition
distributed by distribution by year (if
PFIC during PFIC applicable)
the current tax
year (if
applicable)

Column (j). Enter the total creditable foreign taxes attributable 1.1297-3, and 1.1298-3 for adjustments made under the PFIC
to a distribution from the PFIC. See section 1291(g) and the regime.
instructions for Form 8621, Part V, line 16d, for additional Column (o). Enter the partnership's gain or loss on the
information on creditable foreign taxes attributable to PFIC disposition of PFIC shares. This equals column (m) minus
distributions, including apportioning creditable foreign taxes to column (n).
the portion of a distribution which constitutes an excess
distribution and certain rules related to creditable foreign taxes Schedule K-2, Part VIII (Partnership’s Interest in
on a disposition of PFIC stock. Foreign Corporation Income (Section 960)), and
Note. Creditable foreign taxes entered in column (j) do not Schedule K-3, Part VIII (Partner’s Interest in
include taxes attributable to QEF inclusions under section Foreign Corporation Income (Section 960))
1293(f). Enter only creditable foreign taxes within the meaning of
section 1291(g) in column (j). See the instructions for Schedules Note. Certain partners will use the following information to
K-2 and K-3, Part VIII, regarding deemed paid foreign tax credits figure a deemed paid foreign tax credit on Form 1118.
under section 960, including for inclusions with respect to a QEF
under section 1293(f). Reporting currency. Report all amounts on Part VIII in
functional currency.
Column (k). Enter the total amount of distributions the
partnership received from the PFIC in the 3 preceding tax years, The partnership must complete a separate Schedule K-2,
or, if shorter, the total amount of distributions the partnership Part VIII, for each CFC with respect to which it has a direct or
received during its holding period of the PFIC stock. However, indirect interest, unless the partnership does not have a direct or
do not enter any amount in this column with respect to a PFIC for indirect partner that is a domestic corporation that is a U.S.
which the partnership has made a pedigreed QEF election or shareholder or that is eligible to make a section 962 election to
section 1296 MTM election (other than a non-initial section 1296 claim a deemed paid foreign tax credit with respect to such CFC.
MTM election) and for which the partnership does not file Form An indirect interest is one that the partnership owns through
8621. other pass-through entities. Indirect partners are partners who
Column (l). Enter the date(s) on which the partnership own the partnership through a foreign corporation or through a
disposed of any block of stock in the PFIC during the pass-through entity.
partnership's tax year, if any, using the format YYYYMMDD. Schedule K-3, Part VIII, must be completed and provided to
Column (m). If the partnership disposed of any block of stock in (a) direct partners that are domestic corporation U.S.
the PFIC during the partnership's tax year, enter the amount shareholders or that may be eligible to make a section 962
realized by the partnership on each disposition. election to claim a deemed paid foreign tax credit, and (b) direct
partners who may have direct or indirect partners who may be
Column (n). If the partnership disposed of any block of stock in eligible to claim the indirect credit.
the PFIC during the partnership's tax year, enter the
partnership's tax basis in the shares of the PFIC on the date of A partnership that does not have or receive sufficient
disposition. information or notice regarding a direct or indirect partner must
Schedule K-3. Enter the partner's share, through its presume the partner is eligible to claim the indirect credit and
ownership in the partnership, of the partnership's tax basis in the must complete the Schedules K-2 and K-3, accordingly.
PFIC shares. The partner's share of the basis in the PFIC shares Exception. Part VIII is not required to be completed with
should include any applicable adjustments specific to the respect to dormant foreign corporations (as defined in section 3
partner, such as section 743(b) adjustments or adjustments of Rev. Proc. 92-70).
made under the PFIC regime. See sections 1293(d) and
1296(b), and Regulations sections 1.1291-9, 1.1291-10, In general, a domestic corporate U.S. shareholder of a CFC is
deemed to pay all or a portion of the foreign income taxes paid

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or accrued by the CFC that are properly attributable to subpart F       in Regulations section 1.951A-2(c)(7); these amounts are 
income or tested income of the CFC that the U.S. shareholder            reported on line 4 (and on lines (1), (2), etc., under line 4).
includes in its gross income. See section 960(a) and (d). See           The PTEP groups are not reported on this Part VIII. Do not 
also section 1293(f) with respect to QEF inclusions from a PFIC.        report by unit with respect to the following subpart F income 
The domestic corporate U.S. shareholder may claim a credit for          groups: (i) international boycott income; (ii) bribes, kickbacks, 
such foreign taxes, subject to certain limitations. Individuals,        and other payments; and (iii) section 901(j) income. Also do not 
estates, and trusts may also claim a foreign tax credit for foreign     report by unit with respect to the recaptured subpart F income 
income taxes deemed paid with respect to a CFC if they make             group.
an election under section 962.
                                                                        Columns (i) and (ii).  On Schedule K-2, Part VIII, the 
To figure the foreign taxes deemed paid by a corporate U.S.             partnership reports in column (ii) its share of the CFC's net 
shareholder, the income, deductions, and taxes of the CFC must          income by income groups and by units as reported in column (xi) 
be assigned to separate categories of income and then included          of Schedule Q (Form 5471). In column (i), consistent with the 
in income groups within those separate categories using                 reporting requirement on Form 1118, enter the two-letter code 
Schedule Q (Form 5471). See Regulations section 1.960-1(c)              (from the list at IRS.gov/CountryCodes) of each foreign country 
(1). The applicable separate categories of income are general           and U.S. possession within which income is sourced and/or to 
category income, passive category income, and section 901(j)            which taxes were paid or accrued. Enter "US" for income 
income. The income groups include the subpart F income                  sourced in the United States. Do not enter “various” or “OC” for 
groups, the tested income group, and the residual income group.         the country code. Do not enter a country in column (i) of line 5. 
Each single item of foreign base company income (as defined in          See the instructions for line D for further information.
Regulations section 1.954-1(c)(1)(iii)) is a separate subpart F         On Schedule K-3, Part VIII, the partnership reports each 
income group. See Regulations section 1.960-1(d)(2)(ii)(B).             partner's share of the net income in the income group by unit 
                                                                        and country.
Note.  In tax year 2022, new line 1(f) is added to allow the 
partnership to report foreign personal holding company income           Enter "US" for income sourced in the United States.
under section 954(c)(1)(F) (income from notional principal              Line A.  On line A, enter the EIN or reference ID number of the 
contracts), section 954(c)(1)(G) (payments in lieu of dividends),       CFC as listed on Form 5471. Do not enter "FOREIGN US" or 
and section 954(c)(1)(H) (personal service contracts). A                "APPLIED FOR." The partnership must check box 8 on Part I 
partnership must report a separate line 1(f) for income in each of      and attach to the Schedules K-2 and K-3 a Form 5471, page 1, 
section 954(c)(1)(F), (G) and (H). Income within one of these           and Schedule Q (Form 5471) for each CFC with respect to 
income groups may need to be further subdivided on separate             which it has a direct or indirect interest. Form 5471, page 1, 
lines to the extent it is attributable to more than one country,        reports the functional currency of the CFC. The Form 5471 
source of income, or passive grouping, etc. See the instructions        page 1 and Schedule Q (Form 5471) information must be 
for Schedule Q (Form 5471).                                             attached even if the partnership meets an exception, such as the 
                                                                        multiple filer exception, to filing the Form 5471 with the IRS.
The tested income group consists of tested income within a 
section 904 category. See Regulations section 1.960-1(d)(2)(ii)         Line B.  The partnership must file separate Schedules K-2 and 
(C). The residual income group consists of any income not in the        K-3, Part VIII, to report the net income or loss of the CFC in each 
other income groups or in a PTEP group. See Regulations                 separate category. Use the applicable code from the table 
section 1.960-1(d)(2)(ii)(D). See Regulations section 1.960-3(c)        below.
(2) with respect to the PTEP groups. The PTEP groups are not 
reported on this Part VIII.                                             Category of Income Codes
Lines 1 through 4.  The partnership's share of the CFC's net 
income in each of the subpart F income groups, tested income            Code                   Category of Income
group, and residual income group by unit is reported on lines 1         PAS                    Passive Category Income
through 4. The CFC’s net income and taxes in each of these 
                                                                        901j                   Section 901(j) Income
groups is figured on Schedule Q (Form 5471), and the 
partnership need only report its share of the income on                 GEN                    General Category Income
Schedule K-2 and the partner’s share of such amounts on 
Schedule K-3. See the instructions for Schedule Q (Form 5471)           Line C.  With respect to passive category income, separate 
for the meaning of unit.                                                Schedules K-2 and K-3, Part VIII, must be completed for each 
                                                                        applicable grouping under Regulations section 1.904-4(c). This 
Note. If a partnership is reporting information with respect to a       includes the groups in Regulations section 1.904-4(c)(3) 
PFIC with a QEF inclusion on this Part VIII, and there are              reported on Schedule Q (Form 5471).
deemed paid taxes associated with the QEF inclusion, unless             The partnership should use the following codes to report 
the partnership knows that the partners are not claiming foreign        each of these groupings for each unit.
tax credits or that the partner does not need to complete Form 
1116 to claim a credit (section 904(j)), attach a statement that 
includes the information on Schedule Q (Form 5471), with 
respect to the PFIC, including the functional currency of the 
PFIC. See section 1293(f) with respect to QEF inclusions from a 
PFIC.
However, do not include on line 1 (or lines 1a through 1j, or 
lines (1), (2), etc., under line 1) any amounts excluded from 
subpart F income under the high-tax exception in section 954(b)
(4) (“subpart F high-tax exception”); these amounts are reported 
on line 4 (and on lines (1), (2), etc., under line 4).
Also, do not include on line 3 (or lines (1), (2), etc., under 
line 3) any amounts excluded under the GILTI high-tax exclusion 

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Passive Group Codes Example 15. In Year 1, USP, a domestic partnership, wholly
owns foreign corporation CFC, with reference ID number 1234,
Code Passive Group and the CFC owns a foreign disregarded entity organized in
i All passive income received during the tax year that is subject to a Country X. CFC has two separate units, the foreign disregarded
withholding tax of 15% or greater must be treated as one item of entity and the CFC itself. See Tables for Example 15.
income. See Regulations section 1.904-4(c)(3)(i).
ii All passive income received during the tax year that is subject to a
withholding tax of less than 15% (but greater than zero) must be
treated as one item of income. See Regulations section 1.904-4(c)(3)
(ii).
iii All passive income received during the tax year that is subject to no
withholding tax or other foreign tax must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(iii).
iv All passive income received during the tax year that is subject to no
withholding tax but is subject to foreign tax other than a withholding
tax must be treated as one item of income. See Regulations section
1.904-4(c)(3)(iv).

Tables for Examples 15
Example 15. Foreign Source Income

For the Year 1 tax year, the separate units have the following foreign source income.
Tax Country Code Net Income
Country X Foreign Disregarded Entity 20% withholding tax AA 100u
(FDE) Passive Interest Income
CFC Passive Rental Income 10% withholding tax YY 50u
CFC General Category Tested Income No tax ZZ 300u

Example 15. Partnership USP’s 1st Schedule K-2, Part VIII

USP completes Part VIII of Schedule K-2, as follows.
A 1234
B PAS
C i
(i) Country Code (ii) Partnership’s Share of Net Income
1 Subpart F Income Groups
a Dividends, interest, rents, royalties, & annuities (Total)
1 Country X FDE XX 100u

Example 15. Partnership USP’s 2nd Schedule K-2, Part VIII

USP completes another Part VIII of Schedule K-2, as follows.
A 1234
B PAS
C ii
(i) Country Code (ii) Partnership’s Share of Net Income
1 Subpart F Income Groups
a Dividends, interest, rents, royalties, & annuities (Total)
1 CFC YY 50u

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Example 15. Partnership USP’s 3rd Schedule K-2, Part VIII

USP completes a third Part VIII of Schedule K-2, as follows.
A 1234
B GEN
(i) Country Code (ii) Partnership’s Share of Net Income
3 Tested Income Group (Total)
1 CFC ZZ 300u
USP also completes Schedule K-3, Part VIII, with each income (FBCSI) sourced in Country A of 100u and general
partner's share of the partnership's net income in each income category foreign source FBCSI sourced in Country B of 50u and
group. general category foreign source FBCSI sourced in Country C of
30u. The country code for Country A is "AA," the country code
Line D. If net income in an income group is sourced from more
for Country B is "BB," and the country code for Country C is
than one country, check the box on line D, and attach a
“CC.” See Tables for Example 16.
statement to indicate that you have expanded Part VIII to report
these additional countries on both Schedules K-2 and K-3. Example 16 Attachment (Expansion). USP also completes
Schedule K-3, Part VIII, with each partner's share of the
Example 16. In Year 1, USP, a domestic partnership, wholly
partnership's net income in each subpart F income group. USP
owns foreign corporation CFC, with reference ID number 1234.
attaches to Schedule K-3 the same schedule it attaches to
USP has two domestic corporate partners. CFC has only one
Schedule K-2, however, with each partner’s share of the income
unit, the CFC itself, and no other separate units. CFC has
in each subpart F income group, by country.
general category foreign source foreign base company sales

Tables for Example 16
Example 16

USP completes Schedule K-2, Part VIII, as follows.
A 1234
B GEN
D
(i) Country Code (ii) Partnership’s Share of Net Income
1 Subpart F income groups
f Foreign base company sales income (total) 180u
(1) CFC AA 100u
(2) CFC BB 50u

Example 16 Attachment (Expansion)

USP attaches to Schedule K-2 the following schedule to expand line 1f to include another line under line 1f.
A 1234
B GEN
D
(i) Country Code (ii) Partnership’s Share of Net Income
1 Subpart F income groups
f Foreign base company sales income (total) 180u
(3) CFC CC 30u

Line E. The partnership should check the box and complete a Schedule K-2, Part IX (Partners' Information for
separate Part VIII for U.S. source income in each separate Base Erosion and Anti-Abuse Tax (Section
category. 59A)), and Schedule K-3, Part IX (Partner’s
Line F. If the foreign corporation has foreign oil and gas Information for Base Erosion and Anti-Abuse
extraction income (FOGEI) or foreign oil related income (FORI),
the partnership should check the box and complete a separate Tax (Section 59A))
Part VIII indicating the amount of FOGEI and FORI in each Note. Certain partners will use the following information to
grouping. The partnership should check box 2 on Part I and complete Form 8991. This Part IX of Schedules K-2 and K-3
complete Schedule I (Form 1118). See the instructions for Part I, must be completed by a partnership to assist its corporate
box 2. partners in determining if they are subject to the base erosion
and anti-abuse tax (BEAT), and to figure their BEAT, if any. This
information includes the partner's share of the partnership's

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gross receipts, the partner's amount of base erosion payments          partner(s) would take into account as ECI. If the foreign 
made through the partnership, and the partner's base erosion           partner(s) is subject to tax on a net basis pursuant to an 
tax benefits. The BEAT is generally levied on certain large            applicable income tax treaty of the United States, enter the gross 
corporations that have deductions and certain other items paid         receipts that would be attributable to transactions taken into 
or accrued to foreign related parties (a base erosion payment)         account in determining its net taxable income.
that are 3% of their total deductions or higher (2% in the case of 
                                                                       Lines 1c through 4c.  Complete lines 1c through 4c if the 
certain banks or registered securities dealers), a determination 
                                                                       partnership has a foreign partner or has reason to know it has a 
referred to as the “base erosion percentage test.” Partnerships 
                                                                       foreign partner through a partner that is a pass-through entity. 
are not subject to the BEAT; however, corporate partners of a 
                                                                       Enter the total non-ECI gross receipts as the difference between 
partnership that are applicable taxpayers under Regulations 
                                                                       column (a) and column (b).
section 1.59A-2 may be subject to the BEAT. Except for 
purposes of determining a partner's base erosion tax benefits             Schedule K-3.  For purposes of section 59A, each partner in 
under Regulations section 1.59A-7(d)(1), and whether a                 a partnership includes on its Schedule K-3, Part IX, the share of 
taxpayer is a registered securities dealer, BEAT determinations        partnership gross receipts in proportion to the partner's 
are made by the partner. See Regulations section 1.59A-7 for           distributive share (as determined under sections 704(b) and (c)) 
further information regarding the application of section 59A to        of items of gross income that were taken into account by the 
partnerships and the Instructions for Form 8991 for additional         partnership under section 703 or 704(c) (such as remedial or 
information on whether a corporate partner is an applicable            curative items under Regulations section 1.704-3(c) or (d)).
taxpayer subject to the BEAT.                                          Line 5a. Amounts included in the denominator of the base 
  For the partnership to complete Schedules K-2 and K-3, Part          erosion percentage as described in Regulations section 
IX, the foreign related parties of each partner must be identified,    1.59A-2(e)(3).  Enter the amount of deductions and other items 
subject to the exception for small partners. It is expected that the   allocated to the partners from the partnership that will be 
partnership will collaborate with its partners to identify the foreign included in the denominator of the partners' base erosion 
related parties of each partner. A foreign related party with          percentage. For a description of deductions that are not included 
respect to the partner is a foreign person that is:                    in the denominator, see Regulations section 1.59-2(e)(3)(ii).
• Any 25% owner of the applicable taxpayer (as defined in 
Regulations section 1.59A-1(b)(17)(ii)(A)),                            Section 2. Base Erosion Payments and Base 
• Any person who is related (within the meaning of section             Erosion Tax Benefits
267(b) or 707(b)(1)) to the applicable taxpayer or any 25% 
owner of the applicable taxpayer, or                                   Column (b). Base erosion payments.   For purposes of 
• Any other person who is related to the applicable taxpayer           determining whether a payment or accrual by a partnership is a 
within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).        base erosion payment, any amount paid or accrued by the 
  Exception for small partners.  Part IX of Schedule K-3 is            partnership is treated as paid or accrued by each partner based 
not required to be prepared by the partnership for small partners      on the partner's distributive share of the item of deduction with 
meeting the following three requirements.                              respect to that amount. A partner that is an applicable taxpayer 
  1. The partner's interest in the partnership represents less         has a base erosion payment for any amount paid or accrued by 
than 10% of the capital and profits of the partnership at all times    the partnership to a foreign person (as defined in Regulations 
during the tax year.                                                   section 1.59A-1(b)(10)) that is a related party to the partner (as 
                                                                       defined in Regulations section 1.59A-1(b)(12)) with respect to 
  2. The partner is allocated less than 10% of each                    which a deduction is allowable under chapter 1 and for certain 
partnership item of income, gain, loss, deduction, and credit for      other items on lines 13 and 15. See Regulations section 1.59A-3 
the tax year.                                                          and the Instructions for Form 8991 for more information on the 
  3. The partner's interest in the partnership has a fair market       definition of a base erosion payment.
value of less than $25 million on the last day of the partner's tax 
year, determined using a reasonable method.                            Column (c). Base erosion tax benefits.  A partner's 
                                                                       distributive share of any deduction or reduction in gross receipts 
See Regulations section 1.59A-7(d)(2) for further information          attributable to a base erosion payment is the partner's base 
regarding the application of the exception for small partners.         erosion tax benefit. A partner's base erosion tax benefits are 
  Exception for certain other partners.     The partnership does       determined separately for each asset, payment, or accrual, as 
not need to complete Schedule K-3, Part IX, for a partner that is      applicable, and are not netted with other items. A partner's base 
an individual.                                                         erosion tax benefit may be more than the partner's base erosion 
  The partnership does not need to complete Schedule K-3,              payment (for example, in the case of special allocations made by 
Part IX, for a corporate partner that is an S corporation.             the partnership). See the Instructions for Form 8991 and 
                                                                       Regulations section 1.59A-7(d) for further information 
  The partnership should complete Section 1, lines 1–4 of              concerning a partner's base erosion tax benefits.
Schedule K-3, Part IX, for partners that are RICs and REITs but 
does not need to complete Section 2 for these partners.                General. For line 8, columns (b) and (c); line 9, columns (b) and 
                                                                       (c); line 10(a), columns (b) and (c); line 11, columns (b) and (c); 
                                                                       line 12, columns (b) and (c); line 13, columns (b) and (c); 
Section 1. Applicable Taxpayer                                         line 14(a), columns (b) and (c); line 15, columns (b) and (c); and 
Lines 1a through 4a. Enter the partnership's total gross               line 16, columns (b) and (c), do not include amounts that a 
receipts for the current year and each of the 3 preceding tax          partner does not take into account pursuant to the exception for 
years. The determination of the partnership's gross receipts is        certain small partners. See Regulations section 1.59A-7(d)(2) 
made in accordance with Regulations section 1.448-1T(f)(2)(iv).        and Exception for small partners, earlier. For Schedule K-2, Part 
                                                                       IX, report the total allocated to all partners, and for 
Lines 1b through 4b.  Complete lines 1b through 4b if the              Schedule K-3, Part IX, report the amount allocated to each 
partnership has a foreign partner or has reason to know it has a       individual partner. Do not complete section 2 if the partnership 
foreign partner through a partner that is a pass-through entity.       has determined that no amounts were paid or accrued by the 
Enter the partnership’s total gross ECI receipts for the current       partnership to a foreign person (as defined in Regulations 
year and each of the 3 preceding tax years which the foreign           section 1.59A-1(b)(10)) that is a related party to any partner with 

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respect to which a deduction is allowable under chapter 1 and                    compensation or consideration for services, excluding any 
for certain other items on lines 13 and 15. The partnership’s                    amount that qualifies for the services cost method exception in 
determination that it has not made any base erosion payment                      section 59A(d)(5).
should be based on its collaboration with its partners to identify               Column (c).   Enter the amount of the partners’ base erosion 
any foreign related parties.                                                     tax benefits attributable to amounts paid or accrued to all foreign 
Line 8. Purchase or creation of property rights for intangi-                     persons that are related parties of any of the partners 
bles (patents, trademarks, etc.).                                                representing compensation or consideration paid for services, 
                                                                                 excluding amounts qualifying for the services cost method 
Column (a).       Enter the amount paid or accrued by the 
                                                                                 exception in section 59A(d)(5).
partnership in connection with the acquisition or creation of 
intangible property rights (patents, copyrights, trademarks, trade               Line 10b. Compensation/consideration paid for services 
secrets, etc.) that is subject to the allowance for depreciation (or             excepted by section 59A(d)(5). 
amortization in lieu of depreciation) for the tax year.                          Column (a).   Enter the amounts paid or accrued by the 
Column (b).       Enter the amount paid or accrued to all foreign                partnership to any foreign person that is a related party of any of 
persons that are a related party of any of the partners in                       the partners for services qualifying for the services cost method 
connection with the acquisition or creation of intangible property               exception in section 59A(d)(5).
rights (patents, copyrights, trademarks, trade secrets, etc.) that 
                                                                                 Line 11. Interest expense. 
is subject to the allowance for depreciation (or amortization in 
lieu of depreciation).                                                           Column (a).   Enter the amount of interest paid or accrued by 
                                                                                 the partnership for the tax year (excluding interest paid or 
Column (c).       Enter the amount of the partners' base erosion                 accrued in a prior year treated as paid or accrued in the current 
tax benefits attributable to deductions allowed under chapter 1 
                                                                                 year under section 163(j) or similar provisions).
for the tax year for depreciation (or amortization in lieu of 
depreciation) with respect to intangible property rights acquired                Column (b).   Enter the amount of interest expense paid or 
in the current or prior years from all foreign persons that are                  accrued to all foreign persons that are a related party of any of 
related parties of any of the partners.                                          the partners (excluding interest paid or accrued in a prior year 
                                                                                 treated as paid or accrued in the current year under section 
Line 9. Rents, royalties, and license fees.                                      163(j) or similar provisions).
Column (a).       Enter the amount paid or accrued by the                        Column (c).   Enter the amount of the partners’ base erosion 
partnership for the tax year for the use or right to use tangible or             tax benefits attributable to interest expense paid or accrued by 
intangible property resulting in rents, royalties, and/or license                the partnership that is allowed as a deduction in the current tax 
fees.                                                                            year. If the partner is a foreign person, include the individual 
Column (b).       Enter the amount paid or accrued to all foreign                lines from column (c) of Worksheet A on the applicable 
persons that are related parties of any of the partners for the use              Schedule K-3.
or right to use tangible or intangible property resulting in rents,              Schedule K-3.     When completing line 11 on the 
royalties, and/or license fees.                                                  Schedule K-3, if the partner is a foreign person, enter the total 
Column (c).       Enter the amount of the partners’ base erosion                 from column (a) of Worksheet A on the partner’s Schedule K-3 in 
tax benefits attributable to amounts paid or accrued to all foreign              column (a) of line 11, enter the total from column (b) of 
persons that are a related party of any of the partners for the use              Worksheet A on the Schedule K-3 in column (b) of line 11, and 
or right to use tangible or intangible property that results in rents,           enter the total from column (c) of Worksheet A on the 
royalties, and/or license fees.                                                  Schedule K-3 in column (c) of line 11.
Line 10a. Compensation/consideration paid for services                           The partnership is required to complete Worksheet A for all 
NOT excepted by section 59A(d)(5).                                               partnership related items and complete a Worksheet A for each 
Column (a).       Enter the amount paid or accrued by the                        foreign partner’s share of the amounts reported on the 
partnership for the tax year as compensation or consideration for                partnership Worksheet A and attach a statement containing the 
services, excluding any amount that qualifies for the services                   partner’s share of the information in Worksheet A to the partner’s 
cost method exception in section 59A(d)(5).                                      Schedule K-3.
Column (b).       Enter the amount paid or accrued to all foreign                Line 12. Payments for the purchase of tangible personal 
persons that are related parties of any of the partners as                       property. 
Worksheet A

Interest Paid or Accrued by the Partnership

                                            (a)                                            (b)                         (c)
                                           Total Interest Paid or Accrued in Interest Paid or Accrued to Foreign  Interest Expense Paid or Accrued to 
                                           the 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)

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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 does not
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 has not 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 has not otherwise been included on lines 8
832(b)(4)(A) (relating to amounts deducted from gross through 15 above.
premiums written on insurance contracts for return premiums Column (c). Enter the amount of the partners’ base erosion
and 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
Line 14a. Nonqualified derivative payments.
each type of payment, the attachment must identify the
Column (a). Enter the amount paid or accrued by the relationship of a partner to the foreign related party consistent
partnership for the tax year attributable to derivative contracts as with the categories and instructions for columns (b) and (c) of
defined in section 59A(h)(4). this schedule.
Column (b). Enter the amount paid or accrued to all foreign
persons that are related parties of any of the partners with Line 17(c)—Base erosion tax benefits related to payments
respect to derivative contracts that are not eligible for the reported on lines 6 through 16, on which tax is imposed by
qualified derivative payment exception under section 59A(h) and section 871 or 881, with respect to which tax has been
Regulations section 1.59A-6. Do not include any amount paid withheld under section 1441 or 1442 at 30% (0.30) statuto-
that is a qualified derivative payment on line 14a, column (b). ry withholding tax rate. Enter the aggregate amount of the
Column (c). Enter the amount of base erosion tax benefits partners’ base erosion tax benefits, reported on lines 8 through
attributable to nonqualified derivative payments paid or accrued 16, on which tax is imposed under section 871 or 881 and with
to any foreign person that is a related party of any of the respect to which tax has been deducted and withheld under
partners. section 1441 or 1442 at a 30% statutory withholding tax rate.
Line 14b. Qualified derivative payments excepted by sec- Line 18(c)—Portion of base erosion tax benefits reported
tion 59A(h). Enter the total amount of qualified derivative on lines 8 through 16, on which tax is imposed by section
payments paid or accrued by the partnership. Generally, a 871 or 881, with respect to which tax has been withheld
qualified derivative payment is any payment made by the under section 1441 or 1442 at a reduced withholding rate
taxpayer pursuant to a derivative contract, provided that the pursuant to an income tax treaty. Multiply ratio of percent-
taxpayer recognizes gain or loss on the derivative contract as if it age withheld divided by 30% (0.30) times base erosion tax
were sold for its fair market value on the last business day of the benefit. The partnership is required to provide the information
tax year; treats the gain or loss as ordinary; and treats the in Worksheet B for all partnership related items and attach a
character of all other items of income, deduction, gain, or loss statement containing the information in Worksheet B to the
with respect to a payment pursuant to the derivative as ordinary. Schedule K-3 for each partner’s share of the amounts reported
A payment is not a qualified derivative payment if the payment on the partnership Worksheet B.
would be treated as a base erosion payment if it were not made Complete Worksheet B to determine the portion of the base
pursuant to a derivative (such as interest, royalty, or services erosion tax benefits, reported on lines 8 through 16, on which tax
income). With respect to a contract with both derivative and is imposed under section 871 or 881 and with respect to which
nonderivative components, a payment is not a qualified tax has been deducted and withheld at a reduced withholding
derivative payment if it is properly allocable to the nonderivative tax rate (but not exempt from tax) pursuant to a U.S. income tax
component. treaty. Keep a copy of the completed Worksheet B for the
partnership’s records.
Line 15. Payments reducing gross receipts made to surro-
gate foreign corporation.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year to certain expatriated entities
described in section 59A(d)(4)(C)(i).
Column (b). Enter the amount paid or accrued to certain
expatriated entities that results in a reduction of the gross

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Worksheet B

Part IX, Section 2, Line 18, Column (c)

A B C D E
Type of base erosion Amount of base erosion tax Treaty—reduced Divide column C by 30% Multiply column B by
payment benefit withholding 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)
Schedule K-2, Part X (Foreign Partners' determination. Because the partnership cannot determine
whether a foreign person has a U.S. income tax reporting
Character and Source of Income and
obligation with respect to a partnership item, it must complete
Deductions), and Schedule K-3, Part X (Foreign Schedules K-2 and K-3, Part X, for the flow-through partner.
Partner’s Character and Source of Income and Any foreign person that earns ECI from U.S. or foreign
Deductions) sources or U.S. source FDAP income may have a U.S. tax
obligation for its applicable tax year. Furthermore, the applicable
Note. Certain partners will use the following information to tax rates and reporting requirements are different for ECI and
figure and report their U.S. tax liability on Forms 1040-NR and U.S. source FDAP income. The partnership's reporting on
1120-F, or other applicable forms. Schedules K-2 and K-3, Part X, is necessary for a foreign person
with a direct or indirect interest in the partnership to properly
In general, the Schedules K-2 and K-3, Part X, must be filed report and figure its U.S. income tax liability on any required U.S.
by every partnership that has a foreign partner, or if a foreign income tax returns (for example, Form 1120-F, Form 1040-NR,
person has a U.S. income tax reporting obligation with respect to and other applicable forms). Therefore, a partnership must
any item of partnership income, deduction, gain, or loss. report to its partners, as needed, on Schedule K-3, Part X, their
Exception. A domestic partnership that is required to file a distributive shares of any U.S. or foreign source partnership
partnership return is not required to complete Schedule K-3, Part effectively connected items, any U.S. source FDAP income, and
X, if it does not have any ECI and the partnership (or another any income that is not effectively connected or FDAP of the
withholding agent) has met its withholding and reporting partnership but that may be effectively connected to the foreign
obligations under chapters 3 and 4 with respect to its income. person's conduct of a U.S. trade or business.
A foreign partnership that is required to file a partnership In addition, unless otherwise noted, the partnership must
return is not required to complete Schedule K-3, Part X, if it complete Schedule K-3, Part X, to report each partner's
qualifies for the modified filing obligations under Regulations distributive share of the amounts reported on Schedule K-2, Part
section 1.6031(a)-1(b)(3)(iii) (foreign partnerships with U.S. X.
source income and U.S. partners), unless it has a domestic
pass-through partner that has a direct or indirect foreign owner, Note. Part X of Schedule K-3 need not be completed and
beneficiary, or partner. An indirect owner, beneficiary, or partner provided to partners who are United States persons (as defined
is one that owns an interest in the domestic pass-through partner in section 7701(a)(30)) and not pass-through partners. A
through a pass-through entity. The foreign partnership should pass-through partner is a partnership, estate, trust, S
presume that a domestic pass-through partner has a foreign corporation, nominee, or other similar person through whom
owner, partner, or beneficiary if it does not have sufficient other persons hold an interest in the partnership. See former
information or notice to make this determination. section 6231(a)(9). Therefore, a partnership with one partner
that is a nonresident alien (as defined in section 7701(b)(1)(B))
Note. A foreign partner does not include an individual who is and another partner that is a U.S. citizen need only provide the
treated as a U.S. resident under section 7701(b)(3). Schedule K-3 to the nonresident alien partner. However, a
partnership must complete Schedule K-2 with all of the
A partnership may rely on IRS Forms W-8 and W-9 from its
partnership’s information and not just the total of the information
partners to determine whether it has a foreign partner. If a
reported to the foreign partners on the Schedule K-3.
partner is a flow-through entity, the partner, or its authorized
representative, may notify the partnership as to whether or not
there is a foreign person with a U.S. income tax reporting Section 1. Gross Income
obligation with respect to a partnership item.
The partnership uses Section 1 of this Schedule K-2, Part X, to
A partnership that does not have or receive sufficient report each item of the partnership's gross income as one of the
information or notice regarding a partner should presume the following.
partner is foreign or that a foreign person has a U.S. income tax
reporting obligation with respect to a partnership item and 1. ECI derived from U.S. sources.
complete the Schedules K-2 and K-3, Part X, accordingly. 2. Foreign source ECI.
Example 17. A partnership does not receive notice from a 3. Income from U.S. sources that is FDAP and is not income
pass-through partner regarding whether or not the pass-through effectively connected with the partnership’s conduct of a U.S.
partner has any partners or owners that are foreign persons and trade or business (“non-ECI”).
does not otherwise have the information necessary to make this
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4. Other U.S. source non-ECI. • Interest income earned from the temporary investment of
5. Foreign source non-ECI. funds needed in the U.S. trade or business.
The partnership must generally report items of gross income as Business-activities test. FDAP income and capital gains are
either U.S. source ECI in column (c), foreign source ECI in ECI if the activities of the U.S. trade or business were a material
column (d), U.S. source non-ECI (FDAP) in column (e), U.S. factor in the realization of the passive income items.
source (Other) in column (f), or foreign source non-ECI in
column (g). Each line in this section of the schedule corresponds Other income treated as U.S. source ECI. If a partnership is
to a line on the Form 1065, Schedule K, lines 1 through 11. For a not engaged in a U.S. trade or business during the tax year, it
more detailed description of the types of income listed on each will report amounts in column (c) if the partnership:
line, see the instructions for Form 1065, Schedule K. • Had current year income or gain from a sale or exchange of
property or from performing services (or any other transaction) in
Column (a). Total. For each line in Section 1, enter in column any other tax year that would have been ECI if received by a
(a) the total amount of the applicable gross income. For foreign person in that other tax year (see section 864(c)(6)),
instance, if the partnership had $100 of Other income (loss) on • Had current year income or gain from a disposition of property
line 11 of Form 1065, Schedule K, enter $100 in column (a) of that is no longer used or held for use in conducting a U.S. trade
line 20. or business within the 10-year period before the disposition that
Column (b). Partner determination. For each line, enter in would have been ECI immediately before such cessation (see
column (b) the amount of the applicable gross income the section 864(c)(7)), or
source of which must be determined by each partner • Had gain or loss from disposing of a U.S. real property
individually. This includes income from the sale of most personal interest as defined in section 897(c).
property other than inventory, depreciable property, and certain
intangible property. Note. Such amounts are always U.S. source ECI and should
never be reported in any other column.
Note. The source of income is important in determining how to If income is reported in column (c), see the Instructions for
report income on Part X of the Schedules K-2 and K-3. Each Form 8804 for any Form 8804 filing obligations.
type of income has its own sourcing rules. For more information
on sourcing rules for particular items of income, see Pub. 514 Do not include gross rental real estate income in column
and section 865. ! (c) on the Schedule K-2, Part X, that is not ECI to the
Schedule K-3. For each line in Section 1, enter in column (b) CAUTION partnership. Even if a foreign partner elects to treat the
the partner's distributive share of the applicable gross income income as ECI, report these amounts in column (e) of
the source of which needs to be determined by the partner. For Schedule K-2, Part X. However, the partnership should report
each item of income in column (b), attach a statement identifying the income as ECI in column (c) of Schedule K-3, Part X.
the column [(c), (e), or (f)] in which the income would be reported Schedule K-3. In addition to the partner’s distributive share
by the partnership if it were U.S. source and the column [(d) or of the amounts reported in column (c) of Schedule K-2, Part X,
(g)] in which the income would be reported by the partnership if it report in column (c) of Schedule K-3, Part X, any U.S. source
were foreign source. For example, if you have income from the income that is subject to withholding under section 1446 based
sale of personal property the source of which is based on the tax on a partner’s Form W-8ECI including U.S. source gross rental
home of the partner under section 865, the statement should real estate income that the foreign partner elected to treat as
indicate both how the income should be characterized (as ECI, ECI.
FDAP, or other) if it were U.S. source, and how it should be
characterized (as ECI or non-ECI) if it were foreign source. Column (d). Foreign source ECI. Enter in this column the
amounts of the applicable gross income that are foreign source
Column (c). U.S. source ECI. For each line in Section 1, enter ECI. Foreign source income is ECI only in limited circumstances.
the amounts of the applicable U.S. source gross income, as If the partnership has an office or other fixed place of business in
determined by the partnership, that are, or are treated as, the United States, the following types of foreign source income it
effectively connected with the partnership's conduct of a U.S. receives from that U.S. office are ECI.
trade or business. • Rents or royalties received for the use outside the United
If the partnership conducts a U.S. trade or business, report in States of intangible personal property described in section
column (c) any U.S. source income other than FDAP or capital 862(a)(4) if derived from the active conduct of a U.S. trade or
gains. business.
Report U.S. source items of FDAP income or capital gains as • Gains or losses on the sale or exchange of intangible
ECI in column (c) only if the asset-use test, the personal property located outside the United States or from any
business-activities test, or both tests (explained below) are met. interest in such property if such gains or losses are derived in the
If neither test is met, such items are generally not ECI. For more active conduct of the trade or business in the United States.
information, see section 864(c)(2) and Regulations section • Dividends, interest, or amounts received for the provision of a
1.864-4(c). guarantee of indebtedness, issued after September 27, 2010, if
derived from the active conduct of a U.S. banking, financing, or
Note. See Regulations section 1.864-4(c)(5) for special rules similar business or if the principal business of the partnership is
relating to banking, financing, or similar business activities. Such trading in stocks or securities for its own account.
rules apply to certain stocks and securities of a banking, • Income from the sale or exchange of inventory outside the
financing, or similar business in lieu of the asset-use and United States through the U.S. office, unless the property is sold
business-activities test. or exchanged for use, consumption, or disposition outside the
United States and an office of the partnership in a foreign
Asset-use test. FDAP income and capital gains are ECI if such country materially participated in the sale. See section 865 for
items are derived from assets used in, or held for use in, the additional information regarding the source of this income.
conduct of U.S. trade or business. For example, the following • Any income or gain that is equivalent to any item of income or
items are ECI. gain listed above must be treated in the same manner as such
• Income earned on a trade or note receivable acquired in the item for purposes of determining whether that income is foreign
conduct of the U.S. trade or business. source ECI. See section 864(c)(5)(A) and Regulations section

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1.864-7 for the definition of office or other fixed place of business Column (f). U.S. source non-ECI (other). Include in this
in the United States. See sections 864(c)(5)(B) and (C) and column U.S. source gross income amounts that are not ECI and
Regulations section 1.864-6 for special rules for determining would not be subject to tax in the hands of a foreign corporation
when foreign source income is from an office or other fixed place under section 881 or in the hands of a nonresident alien under
of business in the United States. section 871(a). Such amounts include, for example, tax-exempt
If income is reported in column (d), see the Instructions for Form portfolio interest or municipal bond interest, U.S. source capital
8804 for any Form 8804 filing obligation. gains, and transportation income subject to tax under section
Column (e). U.S. source non-ECI (FDAP). For each line, 887.
enter in column (e) amounts of the applicable gross income if all Schedule K-3. Report the partner’s distributive share of the
of the following apply. amounts in column (f) of Schedule K-2, Part X. For any amount
• The amount is FDAP (described below). that is transportation income subject to tax under section 887,
• The amount is includible in gross income. Therefore, receipts also provide the partner the statement described in the
that are excluded from income (for example, interest income instructions for Form 1040-NR, line 23c. If you owe this tax, you
received on state and local bonds that is excluded under section must attach a statement to your return that includes the
103) would not be reported. information described in chapter 4 of Pub. 519.
• The amount is received from U.S. sources. Accrued OID reported on Form 1065. The amount of
• The amount received is non-ECI. Amounts that are ECI accrued OID reported on Schedule K (Form 1065) which is not
should be reported in column (c) or column (d). taxable to foreign partners should be reported as interest income
• The amount received is not exempt (by the Code) from in column (f) (U.S. source (other)) of Schedule K-2, Part X.
taxation. For example, interest on deposits that are exempted by Attach a statement to Form 1065 with respect to Part X clarifying
section 881(d) would not be included as income by a foreign that these amounts are not taxable to foreign partners and need
partner. In addition, certain portfolio interest is not taxable for not be reported on the foreign partner’s tax return. The
obligations issued after July 18, 1984. See section 881(c) for partnership should take a similar approach for reporting a foreign
more details. partner’s distributive share of OID amounts on Schedule K-3.
Amounts that are FDAP include the following.
• Interest (other than OID as defined in section 1273), OID payments or gains taxable on a gross basis to a for-
dividends, rents, royalties, salaries, wages, premiums, annuities, eign partner. When the partnership receives payments on the
compensation, and other passive gains, profits, and income. OID instrument or gain on the sale or exchange of the OID
• Gains described in section 631(b) or (c), relating to disposal instrument that are taxable on a gross basis to foreign partners
of timber, coal, or domestic iron ore with a retained economic under section 881(a(3)(8) or section 871(a)(1)(C)(ii) (as
interest. applicable), these amounts should be reported in column (e)
• Gains on a sale or exchange of an OID obligation, the amount (U.S. source (FDAP)) as interest income or gain, as appropriate.
of the OID accruing while the obligation was held unless this These amounts should also be entered as a negative adjustment
amount was taken into account on a payment. in column (f) to ensure that the total OID reported on Part X
• On a payment received on an OID obligation, the amount of reconciles with OID reported on Schedule K (Form 1065). Attach
the OID accruing while the obligation was held, if such OID was a statement explaining that the negative adjustment in column (f)
not previously taken into account and if the tax imposed on the is for reconciliation purposes only and is not relevant to the
OID does not exceed the payment received less the tax imposed foreign partner’s tax liability and therefore need not be reported
on any interest included in the payment received. This rule on the foreign partner’s tax return. The partnership should take a
applies to payments received for OID obligations issued after similar approach for reporting distributive share amounts to a
March 31, 1972. Certain OID is not taxable for OID obligations foreign partner on Schedule K-3.
issued after July 18, 1984. See section 881(c) for more details. Example 18. In addition to other income and expense items,
For rules that apply to other OID obligations, see Pub. 515. a partnership accrues $100 OID in Year 1 reported on
• Gains from the sale or exchange of patents, copyrights, and Schedule K (Form 1065). On Part X of Schedule K-2 for Year 1,
other intangible property if the gains are from payments that are the partnership should report this amount as interest in column
contingent on the productivity, use, or disposition of the property (f) (such amount is also included in column (a) for the total). In
or interest sold or exchanged. Year 2, the partnership receives a payment of $50 on the same
For more information, see section 881(a) and Regulations instrument taxable to its foreign partners under section 881(a)(3)
section 1.881-2. (B) or section 871(a)(1)(C)(ii) (as applicable). On Part X of its
Schedule K-2 for Year 2, the partnership should report $50 as
If the partnership had U.S. source rental real estate
interest in column (e) and ($50) as a reconciliation adjustment in
! income that was not ECI to the partnership, include such column (f). The partnership should take the same approach for
CAUTION amounts in column (e) on the Schedule K-2, Part X.
reporting a foreign partner’s distributive share of OID amounts
Foreign partners that have elected to treat any such amounts as
on Schedule K-3 in both Years 1 and 2.
ECI are required to report and figure their U.S. income tax
liabilities in accordance with their ECI elections. This income is Column (g). Foreign source non-ECI. For each line, enter
reported in column (c) on the Schedule K-3, Part X, for such amounts of gross income which are neither U.S. source nor ECI.
partners. Line 11. Net long-term capital gain. Do not include gains
If income is reported in column (e), see the instructions for reported on lines 12, 13, and 14 on line 11.
Forms 1042 and 1042-S for any filing obligation. Line 12. Collectibles (28%) gain. Report collectibles gain on
Schedule K-3. For each line in Section 1, enter in column (e) line 12 and not line 11.
the partner's distributive share of the applicable income that is
U.S source FDAP and not ECI. Do not include income subject to Line 13. Unrecaptured section 1250 gain. Report
withholding under section 1446 based on a partner’s Form unrecaptured section 1250 gain on line 13 and not on line 11. If
W-8ECI or rental real estate income which a foreign partner has gain is both unrecaptured section 1250 gain and net section
elected to treat as ECI. That income should instead be reported 1231 gain, report the gain on line 13 and not on line 14, but
in column (c). include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.

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Line 14. Net section 1231 gain. Report net section 1231 gain         Line 16. Charitable contributions.  Charitable contributions 
on line 14 and not on line 11 unless such amount is also             may be deducted whether or not they are effectively connected 
unrecaptured section 1250 gain. See the instructions for line 13.    with a U.S. trade or business. See sections 873(b)(2) and 882(c)
                                                                     (1)(B), and Regulations section 1.882-4(b) for more information. 
Section 2. Deductions, Losses, and Net Income                        Charitable contribution deductions are apportioned solely to U.S. 
                                                                     source gross income. See Regulations section 1.861-8(e)(12). 
In computing a foreign corporation's or nonresident alien's ECI,     Include amounts reported on line 16 in column (c).
deductions are allowed only if they are allocated and                Lines 17 and 18. Other deductions.  Enter other types of 
apportioned to income that is effectively connected with a U.S.      deductions not described in the prior line items. If the partnership 
trade or business. See sections 861(b), 873, and 882(c). To          has more than one other type of deduction, separately identify 
determine ECI, a foreign corporation and nonresident alien           each type of deduction on lines 17 and 18. If there are more than 
individual must allocate and apportion deductions and losses to      two types of other deductions, attach a statement to both 
gross income in the ECI statutory grouping and to gross income       Schedules K-2 and K-3 to expand the schedule to include 
in the non-ECI residual grouping. See Regulations section            information on Section 2 identifying the amount and type of 
1.861-8(f)(1)(iv). For additional guidance for foreign               deduction.
corporations, see Schedule H (Form 1120-F). See also 
Schedule I (Form 1120-F). For additional guidance for 
nonresident aliens, see the Instructions for Form 1040-NR.           Section 3. Allocation and Apportionment Methods 
                                                                     for Deductions
Use Section 2 to report the partnership's deductions and 
losses that will be utilized to determine the foreign partner's ECI. Section 3 provides information a partner may use to apportion 
The line items on Section 2 generally correspond to the              deductions to ECI or non-ECI. See, for example, Regulations 
deductions separately reported on Form 1065, Schedule K. On          sections 1.861-8 through 1.861-20 and Temporary Regulations 
Schedule K-3, Part X, report the partner's share of the amounts      sections 1.861-8T through -9T. The ratios listed below generally 
reported by the partnership on Schedule K-2, Part X.                 correspond to the ratios on Schedule H (Form 1120-F), Part III.
Column (b). Partner determination.   Certain deductions and               On Schedule K-3, Part X, report the partner’s share of the 
losses must be allocated and apportioned by the partner, for         amounts reported by the partnership on Schedule K-2, Part X.
example, R&E expenses and interest expense.
                                                                     Line 1a. Gross ECI.  Enter the partnership’s gross ECI from 
Columns (c) and (d). Partnership determination—ECI.                  Section 1, line 21, sum of columns (c) and (d).
Enter deductions definitely related and allocated to ECI under, 
for example, Regulations sections 1.861-8 through 1.861-20 and       Line 1b. Worldwide gross income.    Enter the partnership’s 
Temporary Regulations sections 1.861-8T and -9T.                     worldwide gross income from Section 1, line 21, column (a).
        Do not include deductions attributable to gross rental       Line 2a. Average U.S. assets (inside basis).   Report the 
                                                                     partnership’s basis in its average U.S. assets for purposes of 
!       real estate income in column (c) on the Schedule K-2,        applying the asset method as defined in Regulations section 
CAUTION Part X, that is not ECI to the partnership. Even if a 
foreign partner elects to treat the income as ECI, report these      1.884-1(d)(3)(ii) to calculate interest expense under Regulations 
deductions in column (e) of Schedule K-2, Part X. However, the       section 1.882-5(b).
partnership should report the deductions in column (c) of            Line 2b. Worldwide assets.  Report the partnership’s basis in 
Schedule K-3, Part X.                                                its average worldwide assets for purposes of Regulations 
                                                                     section 1.882-5(b) and the asset method as defined in 
Columns (e) through (g). Partnership determina-                      Regulations section 1.884-1(d)(3)(ii). If the partnership does not 
tion—non-ECI.  Enter deductions definitely related and               report an amount on line 2a because there are no U.S. assets, 
allocated to non-ECI under, for example, Regulations sections        then the partnership need not report an amount on line 2b.
1.861-8 through 1.861-20 and Temporary Regulations sections 
1.861-8T and -9T.                                                    Line 3a. U.S.-booked liabilities of the partnership.  Enter 
                                                                     the partnership's average U.S.-booked liabilities as defined in 
Line 2. R&E expense.  In general, R&E expenses are allocated         Regulations section 1.882-5(d)(2) using the average defined in 
and apportioned by the partner and reported in column (b).           Regulations section 1.882-5(d)(3).
Line 7. Interest expense on U.S.-booked liabilities.    The          Line 3b. Directly allocated partnership indebtedness. 
partnership reports its interest expense on U.S.-booked liabilities  Enter the portion of the principal amount of the partnership’s 
as described in Regulations section 1.882-5(d)(2)(vii). This is      indebtedness outstanding at year end that meets the 
relevant for determining the foreign corporation’s interest          requirements of Regulations section 1.861-10T(b) or (c), as 
expense allocable to ECI.                                            limited by Regulations section 1.861-10T(d)(1), as described in 
Line 10. Section 59(e)(2) expenditures.  Do not include R&E          Regulations section 1.882-5(a)(1)(ii)(B). See Regulations 
expenses on this line. Rather, include R&E expenses that are         section 1.861-10T(d)(2).
also section 59(e)(2) expenditures on line 2.                        Line 4a. Personnel of U.S. trade or business.     Enter on 
Line 12. Net long-term capital loss. Do not include losses           line 4a the number of personnel who worked in the partnership's 
reported on line 13.                                                 U.S. trade or business during the tax year. The partnership may 
                                                                     use any reasonable method to determine the number of 
Line 13. Collectibles loss. Report collectibles loss on line 12      personnel, including data that is already prepared and used by 
and not on line 13.                                                  the partnership for a non-tax business purpose. For example, if 
Line 15. Other losses. If there are more than two other losses       the partnership maintains headcount data (such as weighted 
during the year, attach a statement to both Schedules K-2 and        average headcount data) in its personnel records or for other 
K-3 to expand the lines to report the amount of each additional      purposes such as budgeting, planning, and control, such 
loss. Do not report the total of the other losses on line 15.        numbers may be used in the numerator.

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Line 5. A partnership is not required to complete this line 5 Line 1. If the partnership is a PTP and (1) a covered
unless either (1) the partnership incurs R&E expense; or (2) the partnership or (2) directly or indirectly holds an interest in a
partner is expected to license, sell, or transfer its intangible lower-tier partnership that is a covered partnership, check the
property to the partnership (as provided in Regulations section box on Part XI, line 1, of both Schedules K-2 and K-3. A covered
1.861-17(f)(3)). For purposes of determining ECI, R&E expenses partnership is a partnership that carries on a trade or business of
are definitely related to gross intangible income reasonably dealing or trading in securities or holds significant investments in
connected with relevant broad product categories of the securities. A partnership holds a significant investment in
taxpayer and are allocable to gross intangible income as a class securities for this purpose if either (a) 25% or more of the value
related to such product categories. The product categories are of the partnership's assets consist of underlying securities or
determined by reference to the three-digit classification of the potential section 871(m) transactions, or (b) the value of the
SIC code. In general, the R&E expenses are apportioned based underlying securities or potential section 871(m) transactions
on gross receipts. See Regulations section 1.861-17. Because equals or exceeds $25 million. Generally, an underlying security
R&E expenses are allocated and apportioned by the partner, the is any interest in an entity that could give rise to a U.S. source
partnership reports to its partners the gross receipts generating dividend (such as shares of stock of a domestic corporation),
ECI by SIC code. and a potential section 871(m) transaction is a securities lending
For each SIC code, in line 5, column (ii), enter the gross or sale-repurchase transaction, a notional principal contract, or
receipts that resulted in ECI, and in line 5, column (iii), enter the any other financial transaction that references one or more
worldwide gross receipts. Such gross receipts include both the underlying securities. See Regulations section 1.871-15 for
partnership's gross receipts and certain other controlled or additional information, including the definitions of underlying
uncontrolled parties' gross receipts. See Regulations section securities and potential section 871(m) transactions.
1.861-17(d)(3) and (d)(4). Line 2. On Schedule K-2, specify the total number of units the
If there are more than two SIC codes, attach a statement to partnership has issued and outstanding. On Schedule K-3,
Schedules K-2 and K-3 to expand the schedule to include specify the number of units of the partnership held by the
information on line 5 for the additional SIC codes. partner.
Lines 7 and 8. Report other apportionment keys than those Line 3. On both Schedules K-2 and K-3, for each allocation
identified on lines 1 through 5, as applicable. See, for example, period, specify when the allocation period begins and ends, as
Regulations section 1.861-8 through -20 and Temporary well as the dividends, the dividend equivalents, and the total of
Regulations section 1.861-8T and -9T. the dividends and dividend equivalents for the applicable period.
For example, a partnership might enter ECI COGS in column On Schedule K-2, the information is for all the issued and
(i), line a, and total COGS in column (i), line b. If ECI COGS is outstanding units of the partnership. On Schedule K-3, the
$100, the partnership would enter $100 in column (ii), line a, and information is for the units of the partner to which the
if COGS is $200, the partnership would enter $200 in column (ii), Schedule K-3 relates. The allocation period should be
line b. As another example, a partnership might enter average determined in accordance with section 706 and the regulations
ECI assets in column (i), line a, and the average total assets in thereunder. The value of a partnership's assets is equal to their
column (i), line b. The average ECI assets are the partnership’s fair market value, except that the value of any notional principal
basis in its assets that generate ECI for purposes of Regulations contract, futures contract, forward contract, option, and any
section 1.861-9T(e)(7) using the average tax book value as similar financial instrument held by the partnership is deemed to
defined in Regulations section 1.861-9(g). The average total be the value of the notional securities referenced by the
assets are the partnership’s basis in all of its assets for purposes transaction. See Regulations section 1.871-15 for additional
of Regulations section 1.861-9T(e) using the average tax book information regarding dividend equivalents. You can add
value as defined in Regulations section 1.861-9(g). If the additional lines if needed. The amounts for the dividends,
partnership does not have assets that generate ECI, then a dividend equivalents, and total in columns (iii), (iv), and (v)
partnership need not report an amount on line 7b, unless the should be reported to the fourth decimal point, rounding up for
partner has requested this amount. If there are more than two any excess amount. For example, if the amount of a dividend
other types of apportionment keys, attach a statement to was 0.12344, the reported amount should be 0.1235.
Schedules K-2 and K-3 to expand the schedule to include all of
the information for those apportionment keys. Schedule K-3, Part XIII (Foreign Partner's
Distributive Share of Deemed Sale Items on
Section 4. Reserved Transfer of Partnership Interest)
Note. Certain partners will use the following information to
Schedule K-2, Part XI (Section 871(m) Covered complete Form 4797, Form 6252, and Form 8949.
Partnerships), and Schedule K-3, Part XI Note. There is not a corresponding part on Schedule K-2 with
(Section 871(m) Covered Partnerships) respect to Schedule K-3, Part XIII. This part provides the
information for a foreign partner to use to determine the gain or
Note. Certain partners that enter into section 871(m) loss it reports on its return from the transfer of an interest in the
transactions referencing units in the partnership will use the partnership.
information in this part to determine their U.S. withholding tax This part generally applies to a partnership that is directly or
and reporting obligations with respect to those transactions indirectly engaged in the conduct of a trade or business in the
under section 871(m) and related rules. United States (U.S. trade or business) and had a foreign partner
if either:
Schedules K-2 and K-3, Part XI, must be completed if you are
a PTP that (1) is a covered partnership as defined in Regulations 1. The foreign partner transferred an interest in the
section 1.871-15(m)(1) (a "covered partnership"); or (2) directly partnership (including a distribution that results in the recognition
or indirectly holds an interest in a lower-tier partnership that is a of gain or loss to a partner (see Regulations section 1.731-1(a)),
covered partnership, in each case regardless of whether your or
partners are domestic or foreign.

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2. The partnership directly or indirectly transferred an Line 1. Total ordinary gain or (loss) that would be recog-
interest in a partnership that engaged in a U.S. trade or nized on the deemed sale of section 751 property. Enter
business. the amount of income or loss from section 751(a) property that
The partnership must complete lines 1 through line 3 of this part would have been allocated to the foreign partner with respect to
if it is notified or otherwise knows that a transfer subject to the interest transferred if the partnership had sold all of its
section 864(c)(8) has occurred. A partnership that makes a property in a fully taxable transaction for cash in an amount
distribution is treated as having actual knowledge of the transfer. equal to the fair market value of the property immediately before
See Regulations section 1.864(c)(8)-2(a)(1) and Pub. 541 for the the partner's transfer of the interest in the partnership. See
rules regarding foreign transferor notifications. Regulations section 1.751-1(a).
If the transfer was a section 751(a) exchange, the partnership Lines 2 and 3. Aggregate effectively connected ordinary
must also file a Form 8308, Report of a Sale or Exchange of gain or (loss) that would be recognized on the deemed
Certain Partnership Interests. See Regulations section sale of section 751 property, and Aggregate effectively
1.6050K-1. connected capital gain or (loss) that would be recognized
on the deemed sale of non-section 751 property.
Tiered partnerships. If a foreign transferor transferred an Determining the amount to report on line 2 and line 3 requires a
interest in an upper-tier partnership that holds, directly or three-step process. These instructions provide an overview of
indirectly through one or more partnerships, an interest in a that process. For more information, see Regulations section
lower-tier partnership engaged in a U.S. trade or business, then 1.864(c)(8)-1. First, with respect to each asset the partnership
the upper-tier partnership must include in the foreign transferor’s holds, determine the amount of gain or loss that the partnership
aggregate deemed sale ECI items the items derived from the would recognize in connection with a deemed sale to an
lower-tier partnership. See Regulations section 1.864(c)(8)-2(b) unrelated party in a fully taxable transaction for cash equal to the
(2)(i). Therefore, to complete this part, the upper-tier partnership asset’s fair market value immediately before the partner’s
will need to obtain the amount of the upper-tier partnership’s transfer of its partnership interest. Second, determine the
distributive share of deemed sale effectively connected gain or amount of that gain or loss that would be treated as effectively
loss from the lower-tier partnership. Under these circumstances, connected gain or loss (“deemed sale effectively connected
the lower-tier partnership may provide that information to the gain” and “deemed sale effectively connected loss”). Third,
upper-tier partnership using Part XIII even though the upper-tier determine the partner’s distributive share of these deemed sale
partnership did not actually transfer its interest in the lower-tier gain or loss amounts.
partnership. A lower-tier partnership that uses Part XIII should • Enter on line 2 the foreign transferor’s distributive share of
complete it as though the upper-tier partnership transferred its deemed sale effectively connected ordinary gain or loss
entire interest in the lower-tier partnership. Part XIII may be used recognized on the transfer of section 751(a) property.
by each tier of partnerships until it reaches the uppermost tier • Enter on line 3 the foreign transferor’s distributive share of
whose interest was transferred. To indicate that there was no deemed sale effectively connected capital gain or loss
actual transfer by an upper-tier partnership of its interest in a recognized on the transfer of non-section 751(a) property.
lower-tier partnership, the lower-tier partnership should leave
item A blank. When the upper-tier partnership receives the Line 4. Gain or (loss) that would be recognized under sec-
information from the lower-tier partnership, whether reported on tion 897(g) on the deemed sale of U.S. real property inter-
Part XIII or in some other manner, it should use this information ests. Section 897(a) treats gain or loss from the disposition of a
to complete the Part XIII it issues to its foreign transferor. U.S. real property interest (as defined in section 897(c)) by a
nonresident alien or foreign corporation as gain or loss that is
Item A. Date of transfer of the partnership interest. Enter effectively connected to a trade or business within the United
the date that the foreign partner transferred an interest in the States. Section 897(g) generally provides that, under regulations
partnership or the date that the partnership transferred an prescribed by the Secretary, the amount of any money, and the
interest in a partnership that engaged in a U.S. trade or fair market value of any property, received by a nonresident alien
business. The partner's notification should provide this date to individual or foreign corporation in exchange for all or part of its
you. If there are multiple transfers during the tax year with interest in a partnership, trust, or estate shall, to the extent
respect to a foreign partner, complete a separate schedule for attributable to U.S. real property interests, be considered as an
each transfer. amount received from the sale or exchange in the United States
Item B. Identify the number of units or the percentage in- of such property. A partnership must complete line 4 if it holds
terest in the partnership transferred. Enter either the U.S. real property interests and the transfer of an interest in the
percentage interest in the partnership or the number of units in partnership is not subject to section 864(c)(8). Under these
the partnership that the partner transferred in item B1 or B2, circumstances, the partnership must enter on line 4 for purposes
respectively. of section 897(g) the foreign transferor’s distributive share of the
partnership’s gain or loss on the deemed sale of the U.S. real
Enter zero for item B if a partnership is completing this part for property interests.
a partner that is treated as transferring an interest in the
partnership because it received a distribution but whose Line 5. Check this box if the amount provided on line 2 or 3
ownership interest in the partnership remains unchanged. is determined (in whole or in part) under Regulations sec-
tion 1.864(c)(8)-1(c)(2)(ii)(E) (material change in circum-
Item C. Check the box in item C that identifies the type of stances rule for a deemed sale of the partnership's inven-
interest the partner transferred in the partnership. Complete a tory property or intangibles). As part of the three-step
separate schedule for each type of partnership interest (such as process for determining the amount to report on lines 2 and 3,
capital or preferred) transferred, and complete each schedule Regulations section 1.864(c)(8)-1 provides certain look-back
based on the portion of the type of interest transferred. If there rules that apply for purposes of sourcing the deemed sale gain
are multiple classes of the same type of partnership interest, or loss with respect to inventory property and intangibles held by
complete a separate schedule for each class of interest a partnership. However, if a material change in circumstances
transferred. If the categories in Item C are not narrow enough to during the look-back period causes these rules to reach an
distinguish between different classes, then check other and inappropriate sourcing result, Regulations section 1.864(c)
explain. (8)-1(c)(2)(ii)(E) allows, in certain cases, the relevant look-back
rule for inventory property or intangibles to be applied by

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reference to the date on which the material change in         provided on line 5 if the material change in circumstances rule is 
circumstances occurs. The partnership must check the box      used to determine the amount provided on line 2 or line 3.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022) -43-

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Index
 
                                     Excluded foreign source income   31
A                                                                            P
Allocation and apportionment         F                                       Part applicability 6
  methods for deductions  40         FDII deduction apportionment            Partner determination  13
                                       factors 17                            Partner loan transactions 9
B                                    Foreign branch category income   12     Partners eligible to claim credit             10
Base erosion and anti-abuse tax      Foreign oil and gas taxes   6           Partnership determination 12
  (Section 59A) 33                   Foreign partner’s distributive share of Partnership election codes                  28
Base erosion payments and base         deemed sale items   41                Partnership QBAI   21
  erosion tax benefits 34            Foreign partners’ character and         Partnership’s interest in foreign 
BEAT example  3                        source of income and                   corporation  30
                                       deductions    37                      Partnerships with no foreign partners 
C                                    Foreign tax translation 7                and limited or no foreign 
                                     Foreign taxes   15                       activity 10
Capital gains and losses 14          Foreign taxes deductible but not        Parts of Sch. K-2 and Sch. K-3, in 
Category of income codes  31           creditable  18                         general  5
Charitable contributions 15 40,      Foreign taxes paid or accrued to        Passive group codes  32
Codes for categories of income  26     sanctioned countries   18             PFIC, QEF general information                 27
Codes for classes of PFIC shares  27 Foreign taxes related to PTEP           Purchase or creation of property 
Codes for types of tax 18              resourced by treaty   18               rights for intangibles 35
COGS  22                             Foreign-derived DEI on Form 8993    22
Compensation/consideration paid for  Foreign-derived gross receipts   22     Q
  services excepted by section       Form 1116 exemption exception    10
                                                                             Qualified derivatives dealer                5
  59A(d)(5) 35                       Form 5471 information   9
Compensation/consideration paid for  Form 8621, information for  27
                                                                             R
  services NOT excepted by section   Form 8858 information   9
  59A(d)(5) 35                                                               R&E expense apportionment 
                                     Form 8990 9
Computer-generated Schedules                                                  factors  15
  K-2 4                                                                      R&E expenses  15
Country codes 7 13,                  G
                                                                             Rental income 13
Currency 5                           Gains on sales personal property 6      Rents, royalties, and license fees              35
                                     General filing instructions 12
D                                    General property   22                   S
Deductions 14                        Gross income    13
Deductions, other 15                 Gross receipts   22                     Section 1291 and other 
                                                                              Information  29
DEI and QBAI on Form 8993   21                                               Section 250 deduction re FDII                 20
Distributions from foreign corps. to H
                                                                             Section 267A disallowed deduction               7
  partnership 23                     High-taxed income   7                   Section 59(e)(2) expenditures                 40
Dividends, ordinary and qualified 13 How to complete Sch. K-2 and K-3    5   Section 871(m) covered 
Domestic filing exception 3                                                   partnerships 41
Downstream loans  9                  I                                       Section 901(j) income  12
Dual consolidated loss 10            Identifying info., partners 6           Section 951(a) inclusions 14
                                     Identifying info., partnership 5        Section 951(a)(1) and section 951A 
E                                    Income resourced by treaty    12         inclusions 25
EIN 5                                Interest expense apportionment          Section 951A category income                  12
Example 01 3                           factors 16                            Section 986(c) gain and loss                14
Example 02 4                         Interest expense on U.S. booked         Section 987 gain and loss 14
Example 03 4                           liabilities 40                        Section 988 gain and loss 14
Example 04 4                         Interest expense specifically           Splitter arrangements  6
Example 05 7                           allocable under Reg. 1.861–10         Stewardship expenses   16
                                       and -10T    15
Example 06 10
                                                                             T
Example 07 11                        N
Example 08 11                                                                Table 1. Information on Personal 
Example 09 13                        Name of partnership   5                  Property Sold     6
Example 10 14                        Net income (or loss)  40                Table 4. Additional Information for 
Example 11 16                                                                 Section 1, Part VII 28
Example 12 18                        O                                       Table 5. Additional Information for 
Example 13 20                        Other forms   9                          Section 2, Part VII 30
Example 14 22                        Other income  14                        Taxes assigned to section 951A 
                                                                              category  18
Example 15 32                        Other information for preparation of 
Example 16 33                          Form 8993   22                        Tiered partnerships  42
Example 17 37                        Other international transactions 6 10,  Total deductions   33
Example 18 39                        Other tax information 19                Total gross income   14
Exception for Form 8621  9

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                 Where to file 4                                   Worksheets 1 and 2 for Sch. K-2                       8
U                Withholding foreign partnership                 5 Worksheets 3 and 4 for Sch. K-2 and 
Upstream loans 9 Worksheet A, Interest Paid or                     Sch. K-3 24
                 Accrued by the Partnership                      35
W                Worksheet B, Part IX, Sec. 2, line 18, 
                 col. (c) 37
When to file 4

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