Changes to the 2021 Instructions for Schedules K-2 and K-3 (Form 8865)

 

The following changes are applicable for the 2021 Instructions for Schedules K-2 and K-3 (Form 8865)PDF:

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 1. Gain on personal property sale," on page 3 (column 2) are amended as follows:

Box 1. Gain on personal property sale. In general, income from the sale of personal property is sourced according to the residence of the seller. See section 865. For sourcing purposes, personal property sold by the partnership is treated as sold by the partners. See section 865(i) (5). A U.S. citizen or resident alien individual with a tax home (as defined in section 911(d)(3)) in a foreign country is treated as a nonresident with respect to the sale of personal property only if an income tax of at least 10% of the gain derived from the sale is actually paid to a foreign country with respect to that gain. See section 865(g). In addition, if a U.S. resident maintains an office or other fixed place of business in a foreign country, income from the sale of personal property attributable to such office or other fixed place of business is foreign source only if an income tax of at least 10% of the income from the sale is actually paid to a foreign country with respect to such income.

If the partnership has income from the sale of personal property (other than inventory, depreciable personal property, and certain intangible property excepted from the general rule of section 865(a)) and the partnership pays income tax to a foreign country with respect to income from the sale or the income is eligible for resourcing under an applicable treaty, check box 1 and attach a statement to Schedules K-2 and K-3 (for distributive share) with Table 1.

Information on Personal Property Sold. Do not combine sales of property. Each item of property sold must be listed separately with Table 1 completed. For column (g), enter the two-letter code from the list at IRS.gov/countrycodes. Do not enter "various" or "OC" for the country code. If the property sale is taxed by more than one country, complete a separate line for that country, but indicate in some manner (for example, a footnote) that the property entered on both lines is the same property.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 7. Form 8858 information," on page 5 (column 3) are amended as follows:

Box 7. Form 8858 information. If applicable, check box 7 and attach to Schedules K-2 any Forms 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), filed by the filer or another person who filed the Form(s) 8858 on your behalf. With respect to Schedule K-3, check box 7 if box 7 was checked on the Schedule K-2. Form 8858 does not need to be attached to the Schedule K-3.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 8. Form 5471 information," on page 5 (column 3) are amended as follows:

Box 8. Form 5471 information. If applicable, check box 9 and attach to the Schedules K-2 and K-3 any Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, attach the form(s). See Instructions to Form 1065, Schedules K-2 and K-3 for applicability.

The instructions for the section entitled "Schedule K-2, Part I (Partnership's Other Current Year International Information), and Schedule K-3, Part I (Partner's Share of Partnership's Other Current Year International Information)," with respect to the heading "Box 9. Other forms," on page 5 (column 3) are amended as follows:

Box 9. Other forms. If any other international tax forms are applicable, check box 9 and attach the form(s) to Schedules K-2 and K-3. See Instructions to Form 1065, Schedules K-2 and K-3 for applicability.

The instructions for the section entitled "Schedule K-2, Part II, and Schedule K-3, Part II (Foreign Tax Credit Limitation)," with respect to the paragraph "Country code" under the heading "Section 1. Gross Income, lines 1 through 24," on page 7 (column 2) are amended as follows:

Country code. Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. possession with respect to which the gross income is sourced. On lines 1 through 24, for each gross income item, enter on a separate line (A, B, or C) the two-letter code from the list at IRS.gov/countrycodes for the foreign country or U.S. possession within which the gross income is sourced. If a type of income is sourced from more than three countries, attach a statement to expand Schedules K-2 and K-3, Part II, for that type of income to report the additional countries.

If income is U.S. source, enter "US." Do not enter "various" or "OC" for the country code.

Each gross income item (e.g., sales vs. interest income) may have different countries listed on "A, B, C, etc." given that the partnership might not have, for example, sales income and interest income from the same country. Line 24 should sum each country's total income reported on Part II, regardless of the line on which such income is reported, whether A, B, C, etc.

The instructions for the section "Schedule K-2, Part V, and Schedule K-3, Part V (Distributions From Foreign Corporations to Partnership)," are amended to add the following paragraphs on page 15 (column 2) before the instructions for Rows A-O:

Exception. Part V of the Schedule K-2 is not required to be completed with respect to distributions by a foreign corporation if the U.S. person filing Form 8865 knows that (i) none of the distributions by the foreign corporation are attributable to PTEP in annual PTEP accounts of any direct or indirect partner; and (ii) none of the partnership's direct or indirect partners are eligible to claim a deduction under section 245A with respect to any distribution by the foreign corporation. Nevertheless, the filer may be required to append Attachment 3 to the Schedule K-2 (discussed below).

Exception. Part V of the Schedule K-3 for a partner does not need to be completed with respect to distributions by a foreign corporation if the filer of Form 8865 knows that (i) none of the distributions by the foreign corporation are attributable to PTEP in annual PTEP accounts of the partner or any U.S. person that is treated as indirectly owning stock of the foreign corporation through the partner ("relevant indirect partners"); and (ii) the partner and relevant indirect partners are not eligible to claim a deduction under section 245A with respect to any distributions by the foreign corporation. Nevertheless, the filer may be required to append Attachment 4 to the Schedule K-3 for the partner (discussed below). If this exception is applicable with respect to a foreign corporation, the sum of the amounts reported on Part V of the Schedules K-3 with respect to the foreign corporation may not equal the amounts reported on Part V of the Schedule K-2 with respect to the foreign corporation.

The instructions for the section entitled "Schedule K-2, Part VI (Information on Partners' Section 951(a)(1) and Section 951A Inclusions), and Schedule K-3, Part VI (Information on Partner's Section 951(a)(1) and Section 951A Inclusions)," with respect to the heading "Exception," on page 16 (column 2) are amended as follows:

Exception. Part VI of Schedule K-2 does not need to be completed with respect to a CFC if the partnership does not have a direct or indirect partner (through pass-through entities only) that is a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or calculate section 951A inclusions by taking into account GILTI items (defined below) of the CFC.

Part VI of Schedule K-3 for a partner does not need to be completed with respect to a CFC if the filer of Form 8865 knows that (i) the partner is not a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or figure section 951A inclusions by taking into account GILTI items (defined below) of the CFC; and (ii) no U.S. person that indirectly owns (through pass-through entities only) an interest in the CFC through the partner is a U.S. shareholder of the CFC required to include in gross income a subpart F income inclusion and/or section 951(a)(1)(B) inclusion with respect to the CFC, or figure section 951A inclusions by taking into account GILTI items (defined below) of the CFC. If the filer does not complete Part VI of Schedule K-3 for a partner with respect to a CFC, the sum of each partner's share of the CFC's subpart F income, section 951(a)(1)(B) inclusion with respect to the CFC, and share of the CFC's GILTI items (defined below) reported on all Schedules K-3 may not equal the aggregate share of subpart F income of the CFC, the aggregate section 951(a)(1)(B) inclusion with respect to the CFC, and the aggregate share of the CFC's GILTI items (defined below), respectively, reported on the Schedule K-2.

The instructions for the section entitled "Schedule K-2, Part VII, and Schedule K-3, Part VII (Information to Complete Form  8621)" include the following new paragraph after the second paragraph in that part on page 17 (column 2):

However, the U.S. person filing the Form 8865 is not required to complete Schedules K-2 and K-3, Part VII for a foreign corporation if the U.S. person knows that all of the foreign partnership's direct and indirect partners that are U.S. persons (including itself) 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 the corporation; (ii) tax-exempt entities that are not subject to the PFIC rules with respect to the corporation under Regulations section 1.1291-1(e); or (iii) pass-through entities with no indirect U.S. taxable partners.