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

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

Section references are to the Internal Revenue Code unless otherwise noted.

2021


Instructions for Schedules K-2 and K-3 (Form 8865) - Introductory Material

Future Developments

For the latest information about developments related to Schedule K-2 (Form 8865) and Schedule K-3 (Form 8865), and their instructions, such as legislation enacted after they were published, go to IRS.gov/Form8865.

What’s New

Schedules K-2 and K-3 are new for the 2021 tax year. These schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, Schedule K, Partners’ Distributive Share Items, line 16, Foreign Transactions; and Schedule K-1 (Form 8865), Partner’s Share of Income, Deductions, Credits, etc., Part III, Partner’s Share of Current Year Income, Deductions, Credits, and Other Items, line 16, Foreign Transactions. Schedules K-2 and K-3 also replace, supplement, and clarify the reporting of certain amounts formerly reported on Form 8865, Schedule K, line 20c, Other items and amounts; and Schedule K-1 (Form 8865), Part III, line 20, Other information. The new format assists certain U.S. persons with interests in foreign partnerships in reporting the necessary information with respect to the international tax aspects of the Internal Revenue Code. For example, the new format reports to the IRS information corporate and individual partners use to figure their foreign tax credit on Form 1118, Foreign Tax Credit—Corporations; and Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), respectively.

General Instructions

See the Instructions for Form 8865. Such instructions generally apply to the Schedules K-2 and K-3. This document provides additional instructions with respect to the Schedules K-2 and K-3.

Purpose of Schedules K-2 and K-3

Schedule K-2 is an extension of Schedule K of the Form 8865 and is used to report items of international tax relevance from the operation of a partnership.

Schedule K-3 is an extension of Schedule K-1 (Form 8865) and is generally used to report the share of the items reported on Schedule K-2. The information reported on Schedule K-3 is used to report information on a partner’s tax or information returns.

Who Must File

Any person that is required to file Form 8865, Schedule K, with respect to a partnership that has items relevant to the determination of U.S. tax under the international provisions of the Internal Revenue Code must complete the relevant parts of Schedules K-2 and K-3. See each part and section for a more detailed description of who must file each part and section. Penalties may apply for filing Form 8865 without all required information. The penalties that apply with respect to the Form 8865 and the Schedule K-1 apply with respect to the Schedules K-2 and K-3, respectively. See Penalties in the Instructions for Form 8865.

Category 1 and Category 2 filers must complete Schedule K-1 for any direct interest they hold in the partnership. Category 1 filers are also required to complete Schedule K-1 for each U.S. person that directly owns a 10% or greater direct interest in the partnership. These partners that are required to complete a Schedule K-1 must also complete a Schedule K-3 if the partnership has items relevant to the determination of U.S. tax under the international provisions. Partners may also receive Schedule K-3 from Category 1 filers who complete a Schedule K-3 on their behalf. Partners should review the Partner’s Instructions for Schedule K-3 (Form 1065) for how to complete partner tax forms with respect to items reported on Schedule K-3 (Form 8865).

Note.

Except as otherwise required by statute, regulations, or other IRS guidance, a U.S. person is not required to obtain information from direct or indirect partners of the partnership to determine if it needs to file each of these parts.

Note.

A U.S. person is only required to complete the relevant portions of the Schedules K-2 and K-3, as applicable. For example, if the partnership does not own an interest in a foreign corporation, the following parts are not required: Schedules K-2 and K-3, Part V, and Part VI.

Note.

Schedules K-2 and K-3 consist of the most common international tax provisions of the Internal Revenue Code. However, not all provisions are specifically identified on these schedules. To the extent that an international provision is impacted and is not otherwise specifically identified, check box 12 on Schedule K-2, Part I, and Schedule K-3, Part I, and attach a statement to both Schedules K-2 and K-3 (for distributive share).

When and Where To File

Attach Schedule K-2, and Schedule K-3, if applicable, to Form 8865 with your income tax return and file by the due date (including extensions) for that return. See the Instructions for Form 8865 for further information.

See the Instructions for Form 8865 for instructions concerning amendments or adjustments to Schedules K-2 and K-3.

Computer-Generated Schedules K-2 and K-3

Generally, all computer-generated forms must receive prior approval from the IRS and are subject to an annual review. However, see the Exception below.

Requests for approval may be submitted electronically to substituteforms@irs.gov or requests may be mailed to:

Internal Revenue Service
Attention: Substitute Forms Program
SE:W:CAR:MP:P:TP
1111 Constitution Ave. NW
Room 6554
Washington, DC 20224

Exception.

If computer-generated Schedules K-2 and K-3 conform to and do not deviate from the official form and schedules, they may be filed without prior approval from the IRS.

Important.

Be sure to attach the approval letter to computer-generated Schedule K-2 or K-3. However, if the computer-generated form is identical to the IRS-prescribed form, it does not need to go through the approval process, and an attachment is not necessary.

Every year, the IRS issues a revenue procedure to provide guidance for filers of computer-generated forms. In addition, every year the IRS issues Pub. 1167, General Rules and Specifications for Substitute Forms and Schedules, which reprints the most recent applicable revenue procedure. Pub. 1167 is available at IRS.gov/irb/2020-53_IRB#REV-PROC-2020-55. The procedures relevant to Form 8865 and Schedule K-1 (Form 8865) apply for purposes of Schedules K-2 and K-3.

How To Complete Schedules K-2 and K-3

Reporting currency.

Report all amounts in U.S. dollars except where specified otherwise.

Form references.

These instructions refer to other forms. If the referenced form has been succeeded by another form, the references to those prior forms encompass any successor forms.

References to Forms 1040, U.S. Individual Income Tax Return, also include Forms 1040-SR, U.S. Tax Return for Seniors. Also, when Form 1040 is referenced, the part may be relevant for other tax returns for noncorporate partners such as Form 1041, U.S. Income Tax Return for Estates and Trusts.

When Form 1120 is referenced, the part may be relevant for other tax returns for corporate partners such as Form 1120-L, U.S. Life Insurance Company Income Tax Return.

Uses of the parts of Schedules K-2 and K-3, in general.

Part I of Schedule K-2 (and Part I of Schedule K-3).

Used to report international tax items not reported elsewhere on Schedule K-2 or K-3.

Part II of Schedule K-2 (and Part II of Schedule K-3).

Used to figure the partnership’s income or loss by source and separate category of income and to report the partner’s distributive share of such income or loss. Partners use the information to figure and claim a foreign tax credit on Form 1116 or 1118.

Part III of Schedule K-2 (and Part III of Schedule K-3).

Used to report information necessary for the partner to determine the allocation and apportionment of research and experimental (R&E) expense, interest expense, and the foreign-derived intangible income (FDII) deduction for the foreign tax credit limitation. Also used to report foreign taxes paid or accrued by the partnership and the partner's distributive share of such taxes. Also used to report income adjustments under section 743(b) by source and separate category. Partners use the information to figure and claim a foreign tax credit on Form 1116 or 1118.

Part IV of Schedule K-2 (and Part IV of Schedule K-3).

Used to report the information necessary for the partner to determine its section 250 deduction with respect to FDII. Partners use the information to claim and figure a section 250 deduction with respect to FDII on Form 8993, Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI).

Part V of Schedule K-2 (and Part V of Schedule K-3).

Used to report information the partner needs, in combination with other information known to the partner, to determine the amount of each distribution from a foreign corporation that is treated as a dividend or excluded from gross income because the distribution is attributable to previously taxed earnings and profits (PTEP) in the partner’s annual PTEP accounts with respect to the foreign corporation, and the amount of foreign currency gain or loss on the PTEP that the partner is required to recognize under section 986(c).

Partners report the dividends and foreign currency gain or loss on Forms 1040 or 1120, U.S. Corporation Income Tax Return. If eligible, partners also use this information to figure and claim a dividends received deduction under section 245A on Form 1120.

Part VI of Schedule K-2 (and Part VI of Schedule K-3).

Used to provide information the partner needs to determine any inclusions under sections 951(a)(1) and 951A. Partners use the information to complete Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), and Forms 1040 and 1120 with respect to subpart F income inclusions, section 951(a)(1)(B) inclusions, and section 951A inclusions.

Part VII of Schedule K-2 (and Part VII of Schedule K-3).

Used to provide information needed by partners to complete Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, and to provide partners with information to determine income inclusions with respect to the passive foreign investment company (PFIC).

Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).

Used to provide information for the partner to figure its base erosion and anti-abuse tax (BEAT). Partners will use the information to complete Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts.

Specific Instructions

.This is an Image: caution.gifIf the information required in a given section exceeds the space provided within that section, do not write “See attached” in the section, leave the section otherwise blank, and then attach all of the information on additional sheets. Instead, if the information required in a given section exceeds the space provided within that section, complete all entry spaces in the section and attach the remaining information on additional sheets. For all attachments, include the part, section, line number, and column of the relevant portion of the Schedules K-2 and K-3. The additional sheets must conform with the IRS version of that section..

Schedule K-2, Identifying Information

At the top of each new page, enter the name of the partnership as it appears on Form 8865.

At the top of each new page, enter the employer identification number (EIN) of the partnership as it appears on the Form 8865. If there is an EIN for the foreign partnership, enter the EIN of the foreign partnership; do not enter FOREIGNUS or APPLIED FOR. If there is no EIN, enter a reference ID number. Do not enter FOREIGNUS or APPLIED FOR with respect to the reference ID number.

Item A—Part Applicability.

Check the “Yes” box to indicate the applicable parts of Schedules K-2 and K-3. Complete and attach each applicable part to the Form 8865 and the Schedule K-1 (Form 8865), respectively.

Check the “No” box to indicate the inapplicable parts of Schedules K-2 and K-3. Do not complete and attach the inapplicable parts to the Form 8865 and the Schedule K-1 (Form 8865), respectively.

Schedule K-3, Identifying Information

Items A and B.

Items A and B should be the same as reported on Schedule K-1, Part I, items A1 or A2 and B. Enter the information reported on Schedule K-1, Part I, item A1. If there is no entry in item A1, then enter the information in item A2.

Items C and D.

Items C and D should be the same as reported on Schedule K-1, Part II, items C and D1.

Item E.

Item E should correspond to Schedule K-2, Identifying Information, item A.

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)

This part is used to report information for international tax items not reported elsewhere on the Schedule K-2. Check the box to indicate whether any of the following international tax items are applicable in the tax year. If applicable, attach statements, as described below, to the Schedule K-2.

If applicable, also complete Schedule K-3, Part I, and include with the Schedule K-3 the attachment(s) as described below with the partner's distributive share of the amounts.

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)), 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.

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

(a) Property description (b) Date of sale (c) Proceeds (d) Basis (e) Amount of tax paid in local currency (f) Amount of tax paid in U.S. dollars (g) Taxing country (enter two-letter country code)
             
             
 

Box 2. Foreign oil and gas taxes.

A separate foreign tax credit limitation is applied with respect to foreign oil and gas taxes. See section 907(a) and Regulations section 1.907(a)-1 for details. If the partnership has such taxes, check box 2 and attach a completed Form 1118, Schedule I, to the Schedules K-2 and K-3 (with the partner’s distributive share). Do not complete Form 1118, Schedule I, Part I, column 12; Part II, lines 2 through 4; or Part III, lines 1 and 3. Attach Form 1118, Schedule I, even if there are no corporate partners because the limitation applies to individuals eligible to claim a foreign tax credit.

Box 3. Splitter arrangements.

Foreign taxes with respect to a foreign tax credit splitting event are suspended until the related income is taken into account by the taxpayer. See section 909. There is a foreign tax credit splitting event with respect to foreign taxes of a payor if in connection with a splitter arrangement the income is or will be taken into account by a covered person. See Regulations section 1.909-2(a). A covered person, as defined in Regulations section 1.909-1(a)(4), includes, for example, any entity in which the payor holds, directly or indirectly, at least a 10% ownership interest (determined by vote or value). A payor, as defined in Regulations section 1.909-1(a)(3), includes, for example, a person that takes foreign income taxes paid or accrued by a partnership into account pursuant to section 702(a)(6).

Report foreign taxes that are potentially suspended on Schedule K-2, Part III, Section 4, line 2E, and each partner's share of such taxes on Schedule K-3, Part III, Section 4, line 2E. It may not be possible to determine whether taxes are suspended and whether related income is taken into account. However, where it is possible to determine that taxes are potentially suspended, or potentially unsuspended, it must report such taxes and the information requested in these instructions for box 3.

For example, where a partnership owns a reverse hybrid and the foreign country assesses tax on the partnership for income earned by the reverse hybrid, such taxes as potentially suspended taxes.

Report foreign taxes that are potentially suspended on Schedule K-2, Part III, Section 4, line 2E, and each partner's share of such taxes on Schedule K-3, Part III, Section 4, line 2E.

Check box 3 and attach a statement to Schedules K-2 and K-3 that includes the following for each splitter arrangement in which the partnership participates that would qualify as a splitter arrangement under section 909 if one or more partners are covered persons with respect to an entity that took into account related income from the arrangement.

Section 1 of attached statement—Potentially suspended taxes.

  1. Explanation of the splitter arrangement (for example, reverse hybrid owned by partnership).

  2. Amount of taxes paid or accrued by the partnership in connection with the splitter arrangement.

  3. Amount of related income on which such taxes were paid or accrued.

  4. The two-letter code for the country to which the taxes were paid or accrued from the list at IRS.gov/CountryCodes. Do not enter “various” or “OC” for the country code.

  5. The separate category and source of income to which the taxes are assigned.

Section 2 of attached statement—Potentially unsuspended taxes.

Include a separate section that reports the following with respect to each splitter arrangement for which the partnership has taken into account any related income.

  1. Origin year of the splitter arrangement.

  2. Explanation of the splitter arrangement (for example, reverse hybrid owned by partnership).

  3. Amount of taxes paid or accrued by the partnership in connection with the splitter arrangement in the origin year of the splitter arrangement.

  4. Amount of related income on which such taxes were paid or accrued in the origin year of the splitter arrangement.

  5. The two-letter code for the country to which the taxes were paid or accrued from the list at IRS.gov/CountryCodes. Do not enter “various” or “OC” for the country code.

  6. The separate category and source of income to which the taxes are assigned.

  7. Amount of related income taken into account in the current tax year and the amount of taxes originally paid that relate to that portion of the related income.

Box 4. Foreign tax translation.

If any foreign taxes are reported on Schedules K-2 and K-3, Part III, Section 4, check the box for item 4 and attach to Schedules K-2 and K-3 the statement described in the instructions for those sections.

Box 5. High-taxed income.

If the partnership has passive income, check the box for item 5 and attach a statement to Schedules K-2 and K-3 with Attachment 1 or 2, or both, completed. This information helps to determine whether a partner’s passive income is high-taxed passive income.

Income received or accrued by a U.S. person that would otherwise be passive income is not treated as passive income if the income is determined to be high-taxed income. See section 904(d)(2)(B)(iii)(II). To determine if income is high-taxed income, a partner must group its shares of items of passive income from a partnership according to the rules in Regulations section 1.904-4(c)(3) and (4).The grouping rules of paragraph (c)(3) apply separately to income attributable to each foreign qualified business unit (QBU) as defined in section 989(a) of a foreign partnership.

Note.

Passive income is not treated as subject to a withholding tax or other foreign tax when a credit is disallowed in full for such foreign tax, for example, under section 901(k).

Attachment 1

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

Attachment 2

Reference: Regulations section 1.904-4(c)(4)
A Name of foreign QBU
  (Complete a separate Attachment 2 for each foreign QBU) I. Passive Income Net of Allocable Expenses II. Taxes
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    
 

Example 1.

In Year 1, FP, a foreign partnership, has two domestic corporate partners with equal interests in the partnership. In Year 1, FP receives $100 of passive dividend income from a noncontrolled 10%-owned foreign corporation subject to a 15% withholding tax. FP also receives $150 of passive interest income from an unrelated person subject to a 30% withholding tax. FP incurs $80 of expenses that are allocable to the interest income. FP also receives $50 of passive dividend income from a controlled foreign corporation (CFC) which is not subject to tax. No expenses are allocable to the dividend income. FP's branch operation in Country X that is treated as a QBU under section 989(a) receives $100 of passive dividend income subject to a 15% withholding tax. Finally, FP earns $400 of passive income with respect to its branch operation in Country X that is treated as a QBU under section 989(a). Such income is subject to foreign tax (but not withholding tax) of $40. Expenses of $120 are allocable to the distributive share of branch income. No expenses are allocable to the dividend income.

For Year 1, the U.S. person filing Form 8865 checks box 5 on Part I of Schedule K-2 (Form 8865) and attaches Attachments 1 and 2 to Schedule K-2.

Attachment 1 for Example 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 $170 $60
B Passive income subject to withholding tax of less than 15% but greater than zero 0 0
C Passive income not subject to any foreign tax 50 0
D Passive income subject to no withholding tax, but subject to other foreign tax 0 0
 

Attachment 2 for Example 1

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

FP’s owner completes the same attachments with the distributive shares and attaches those attachments to each Schedule K-3.

Box 6. Section 267A disallowed deduction.

Check box 6 if the partnership paid or accrued any interest or royalty for which the U.S. person filing the Form 8865 knows, or has reason to know, that one or more of the partnership’s partners is not allowed a deduction under section 267A. In addition, on Schedule K-3 filed for such partners, the U.S. person filing Form 8865 should check box 6 in Part I and attach to the Schedule K-3 a statement titled "Section 267A Disallowed Deduction" that separately lists the following information.

A. The amount of interest paid or accrued by the partnership for which the partner is not allowed a deduction under section 267A.

B. The amount of royalty paid or accrued by the partnership for which the partner is not allowed a deduction under section 267A.

C. The extent to which information reported on other parts of the Schedule K-3 (for example, a line in Part II, Section 2) reflects interest or royalty for which the partner is not allowed a deduction under section 267A.

.This is an Image: caution.gifWhen completing other parts of Schedules K-2 and K-3 (for example, a line in Part II, Section 2), list an amount without regard to whether the partner is disallowed a deduction under section 267A for the amount..

Box 7. Form 8858 information.

If applicable, check box 7 and attach to Schedules K-2 and K-3 any Forms 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).

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).

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.

Box 10. Partner loan transactions.

Check this box and append the completed attachment to Schedules K-2 and K-3 if either the partnership (a) received a loan from its partner (or a member of the partner’s affiliated group) (“downstream loan”), as described in Regulations section 1.861-9(e)(8); or (b) loaned an amount to its partner (or a member of the partner’s affiliated group) (“upstream loan”), as described in Regulations section 1.861-9(e)(9).

Downstream loans.

On an attached statement, provide the details with respect to any downstream loans from a partner or a member of the partner’s affiliated group, including the amount of interest expense paid or accrued by the partnership. Report the information separately for each separate loan. The reporting should be as follows in Table 2. Downstream Loans.

Table 2. Downstream Loans

Name of
Lender
Lender’s
TIN
Date
of
Loan
Amount
of
Loan
Interest
Expense
for the
Year
         
         

If there are any partners in the same affiliated group as the lender, attach a statement to each of the Schedules K-2 and K-3 to expand the columns in the table to include the information requested in the first two columns for each such partner.

Upstream loans.

On the attached statement, provide the details with respect to any upstream loans to its partner or a member of the partner’s affiliated group, including the amount of interest income received or accrued by the partnership. Report the information separately for each separate loan. The reporting should be as follows in Table 3. Upstream Loans.

Table 3. Upstream Loans

Name of
Borrower
Borrower’s
TIN
Date
of
Loan
Amount
of
Loan
Interest
Expense
for the
Year
         
         

If there are any partners in the same affiliated group as the borrower, attach a statement to each of the Schedules K-2 and K-3 to expand the columns in the table to include the information requested in the first two columns for each such partner.

Box 11. Dual consolidated loss.

Check box 11 if either (a) the partnership directly or indirectly owns a foreign branch (as defined in Regulations section 1.367(a)-6T(g)) or an interest in a hybrid entity (as defined in Regulations section 1.1503(d)-1(b)(3)), or (b) the partnership is a hybrid entity (as defined in Regulations section 1.1503(d)-1(b)(3)). However, box 11 should not be checked if neither the U.S. person filing Form 8865 nor any partner for which a Schedule K-3 is filed is a domestic corporation (other than a regulated investment company, a real estate investment trust, or an S corporation). A domestic corporate partner’s interest in the partnership or its indirect interest in a foreign branch or hybrid entity may be treated as a separate unit and subject to the dual consolidated loss (DCL) rules pursuant to Regulations section 1.1503(d)-1 through 1.1503(d)-8.

Box 12. Other international items.

If the partnership has transactions, income, deductions, payments, or anything else that is impacted by the international tax provisions of the Internal Revenue Code and such events are not otherwise reported on this part or other parts of Schedules K-2 and K-3, report that information on a statement attached to Schedules K-2 and K-3 and check box 12.

Schedule K-2, Parts II and III, and Schedule K-3, Parts II and III

Note.

This information is relevant to partners computing a foreign tax credit on Form 1116 or 1118. Schedules K-2 and K-3, Parts II and III, must be completed unless the partnership does not have a direct or indirect partner that is eligible to claim a foreign tax credit and such partner would have to file a Form 1116 or Form 1118 to claim a credit. This requirement applies regardless of whether the partnership pays or accrues foreign taxes because other information, such as the source of the partnership’s income and the value of its assets, are relevant in determining the partner’s foreign tax credit. A partner that is eligible to claim a foreign tax credit includes a domestic corporation, a U.S. citizen or resident, certain U.S. trusts and estates, certain foreign corporations, and certain nonresident individuals. See sections 901 and 906. An indirect partner includes a partner that owns the partnership through a pass-through entity (for example, a partnership, S corporation, or a trust (see Regulations section 1.904-5(a)(4)(iv) for the definition of pass-through entity). An indirect partner also includes a partner that owns the partnership through a foreign corporation. If there is insufficient information, a direct or indirect partner must presume such partner is eligible to claim a foreign tax credit and such partner would have to file a Form 1116 or Form 1118 to claim a credit. As such, the Schedules K-2 and K-3 must be completed, accordingly.

On Schedule K-2, Parts II and III, report the partnership’s gross income, gross receipts, cost of goods sold, certain deductions, and taxes by source and separate category. Also report information that the partner uses to allocate and apportion expenses and determine the source of certain items of gross income. Unless specifically noted below, report on Schedule K-3, Parts II and III, the partner's share of the partnership's gross receipts, gross income, cost of goods sold, certain deductions, and taxes by source and separate category. The partner adds its share of the partnership's foreign source gross receipts, gross income, cost of goods sold, certain deductions, and taxes by separate category to its other foreign source gross receipts, gross income, cost of goods sold, certain deductions, and taxes in that separate category to figure its foreign tax credit. Also report on the Schedule K-3 the distributive share of expenses and the allocation and apportionment factors the partner uses to determine expenses allocated and apportioned to foreign source income.

Partnership determination.

The source and separate category of certain gross income, gross receipts, and cost of goods sold, as well as the allocation and apportionment of certain deductions, can be determined with respect to the partnership. This includes deductions that are definitely related to certain gross income of the partnership. See Regulations section 1.861-8(b)(1). See Schedule K-2, Part II, columns (a) through (e); Part III, Section 1, columns (a) through (e); Part III, Section 3, columns (a) through (d); and Part III, Section 5, columns (a) through (f). In Part III, Section 2, columns (a) through (e), some partnership assets may be characterized by source and separate category according to the partnership. This includes certain assets that attract directly allocated interest expense under Temporary Regulations section 1.861-10T(b) and (c). See Temporary Regulations section 1.861-10T(d)(2).

In Part III, Section 4, in the U.S. and Foreign columns, assign foreign taxes paid or accrued to a separate category and source.

The partner's distributive share of the amounts reported on Schedule K-2 is reported on equivalent columns in Schedule K-3, Parts II and III.

Certain gross receipts, gross income, cost of goods sold, assets, deductions, and taxes are not assigned to a source or separate category with respect to the partnership. See Partner determination, later.

Foreign branch category income.

Report all gross receipts, gross income, cost of goods sold, and deductions that are foreign branch category income. See Regulations section 1.904-4(f). Report all income that would be foreign branch category income of its partners as if all partners were U.S. persons that are not pass-through entities. See Schedule K-2, Part II, column (b); Part III, Sections 1 and 2, column (b); and Part III, Sections 4 and 5, column (c). The partner's distributive share of the amounts reported on the Schedule K-2 are reported on equivalent columns in Schedule K-3, Parts II and III.

Schedule K-3.

Any amounts reported on Schedule K-2 as foreign branch category income should be reported as general category income on the Schedule K-3, Parts II and III, provided to foreign individuals and foreign corporations.

Section 901(j) income.

Income derived from each sanctioned country is subject to a separate foreign tax credit limitation. If the partnership derives such income, enter code "901j" on the line after “category code.” See Schedule K-2, Part II, Sections 1 and 2, column (e), Part III, Sections 1 and 2, column (e), Part III, Section 3, column (d), and Part III, Sections 4 and 5, column (f). The partner's distributive share of the amounts reported on Schedule K-2 are reported on equivalent columns in Schedule K-3, Parts II and III. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Note.

As of the date of these instructions, section 901(j) is the only category reported on Part II, Sections 1 and 2, column (e); Part III, Sections 1 and 2, column (e); and Part III, Section 5, column (f).

Section 951A category income.

Section 951A category income is any amount of global intangible low-taxed income (GILTI) includible in gross income under section 951A (other than passive category income). (Section 951A category income does not include passive category income.) If the partnership pays or accrues tax on the receipt of a distribution of PTEP assigned to the reclassified section 951A PTEP group or section 951A PTEP group, these taxes must be assigned to section 951A category income.

The U.S. person completing Form 8865 will enter code "951A" on Part III, Section 4, column (b). This code is not utilized in other portions of Parts II and III.

Income resourced by treaty.

If a sourcing rule in an applicable income tax treaty characterizes any U.S. source income as foreign source, and there is an election to apply the treaty, the income will be treated as foreign source. This category applies if the partnership pays or accrues foreign taxes on receipt of a distribution of PTEP that is sourced from an annual PTEP account of the partnership that corresponds to the separate category relating to U.S. source income included under section 951(a)(1) and resourced as foreign source income under a treaty.

The designations below are only relevant for Part III, Section 4, column (f).

Code “RBT PAS.”

If an applicable income tax treaty characterizes any U.S. source passive category income as foreign source passive category income, and there is an election to apply the treaty, enter code “RBT PAS.”

Code “RBT GEN.”

If an applicable income tax treaty characterizes any U.S. source general category income as foreign source general category income, and there is an election to apply the treaty, enter code “RBT GEN.”

Code “RBT 951A.”

If an applicable income tax treaty characterizes any U.S. source section 951A category income as foreign source section 951A category income, and there is an election to apply the treaty, enter code “RBT 951A.”

Partner determination.

In Schedule K-2, Part II, column (f); Part III, Section 1, column (f); Part III, Section 3, lines 1 and 2, column (e); and Part III, Section 5, column (g), enter the gross income, income adjustments, and gross receipts of the partnership that are required to be sourced by the partner. This includes income from the sale of most personal property other than inventory, depreciable property, and certain intangible property sourced under section 865. This also includes certain foreign currency gain on section 988 transactions. See the instructions for Forms 1116 and 1118 and Pub. 514, Foreign Tax Credit for Individuals, for additional details. In Schedule K-2, Part II, column (f); and Part III, section 3, lines 3 and 4, column (e), include deductions that are allocated and apportioned by the partner. This includes most interest expense and R&E expense. See Regulations sections 1.861-9(e) and 1.861-17(f). In Schedule K-2, Part III, Section 2, column (f), enter the assets that are assigned to a source and separate category by the partner. In Schedule K-2, Part III, Section 4, in the Partner column, enter the foreign taxes that are assigned to a source of income by the partner. This includes taxes imposed on certain sales income. The partner's distributive share of the amounts reported on Schedule K-2 are reported on equivalent columns in Schedule K-3, Parts II and III.

Schedule K-2, Part II and Schedule K-3, Part II (Foreign Tax Credit Limitation)

Section 1. Lines 1 Through 24. Total Gross Income

Form 1118, Schedule A, requires a corporation to separately report certain types of gross income by source and separate category. Separate reporting is required because each type of gross income has a different sourcing rule. See sections 861 through 865 (and section 904(h) and, in some cases, U.S. income tax treaties). Schedules K-2 and K-3, Part II, Section 1, generally follow the separately reported types of gross income on Schedule A. Individuals must follow the same sourcing rules, but Form 1116 only requires reporting of total gross income from foreign sources by separate category.

Therefore, those required to file Form 1116 will report line 24 by country on their Form 1116, Part I, line 1a. Section 1 also generally follows the types of gross income separately reported on Form 8865, Schedule K.

For each line, report the total for each country in column (g).

Country code.

Forms 1116 and 1118 require the taxpayer to report the foreign country or U.S. 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.

Note.

Do not enter “various” for the country code. If the country code is U.S. or sourced at the partner level, enter "OC."

Example 2.

In Year 1, FP, a foreign partnership, has employees who perform services in Country X and Country Y. FP earns $25,000 of general category services income, $10,000 with respect to Country X and $15,000 with respect to Country Y. The two-letter code for Country X is XX and the two-letter country code for Country Y is YY. The U.S. person filing Form 8865 makes the following entries on the first two lines of Schedule K-2, Part II, under line 2.

Example 2 Table
  Description (d)
A XX $10,000
B YY $15,000

Exceptions.

Taxpayers are not required to report all gross income by foreign country or U.S. possession. See exceptions in the instructions for Forms 1116 and 1118 with respect to regulated investment companies and section 863(b). There is no need to enter a foreign country or U.S. possession (to report on a country-by-country basis) for lines 16 through 18.

Lines 3 and 4. Rental income.

These lines are reported separately because they are reported separately on Form 8865, Schedule K. The sourcing rule may be the same for both types of rental income.

Lines 7 and 8. Ordinary dividends and qualified dividends.

Enter only ordinary dividends on line 7 and only qualified dividends on line 8. Do not include as ordinary dividends or qualified dividends the amount of any distributions received to the extent that they are attributable to PTEP in annual PTEP accounts of the partnership. See the instructions for line 19 for when a partnership might have an income inclusion with respect to a foreign corporation.

Note.

The amount by which distributions are attributable to PTEP in annual PTEP accounts of a direct or indirect partner is not determined with respect to the partnership and therefore is not taken into account for purposes of determining the ordinary dividends to be entered on line 7 or the qualified dividends to be entered on line 8.

Lines 11 through 15 and 27 through 30. Capital gains and losses.

These lines generally match the types of gains and losses reported separately on Form 8865, Schedule K. Further, section 904(b)(2)(B) contains rules regarding adjustments to account for capital gain rate differentials (as defined in section 904(b)(3)(D)) for any tax year.

Lines 16 and 46. Section 986(c) gain and loss.

Include the partnership’s share of a lower-tier pass-through entity’s section 986(c) gain or loss.

Note.

Only figure and report foreign currency gain or loss under section 986(c) with respect to distributed PTEP sourced from an annual PTEP account of the partnership. Do not figure or report foreign currency gain or loss under section 986(c) with respect to distributed PTEP sourced from an annual PTEP account of a person other than the partnership (for example, a partner).

Lines 17 and 47. Section 987 gain and loss.

The source of section 987 gain or loss is generally determined by reference to the source of the income or asset giving rise to such gain or loss. It is also possible to obtain section 987 gain or loss information from Form 8858.

Lines 18 and 48. Section 988 gain and loss.

The source of foreign currency gain or loss on section 988 transactions is generally determined by reference to the residence of the taxpayer or QBU on whose books the asset, liability, or item of income or expense is properly reflected. If the source is determined by reference to the residence of the taxpayer partner, the section 988 gain and loss would be reported in column (f).

Line 20. Other income.

Attach a statement to both Schedules K-2 and K-3 describing the amount and type of other income. The statement must conform to the format of Part II.

Line 24. Total gross income.

Enter the total gross income received from all sources on line 24. Then add the gross income on lines 1 through 23 by country or possession and enter the total by country in rows A, B, and C (and additional rows if more than three countries).

Section 2. Lines 25 through 54. Total deductions.

Form 1118, Schedule A, requires a corporation to separately report certain types of deductions and losses by source and separate category. Separate reporting is required because each type of deduction may be allocated and apportioned according to a different methodology. See, for example, Regulations sections 1.861-8 through -20 and Temporary Regulations sections 1.861-8T and -9T. For purposes of allocating and apportioning expenses, in general, a partner adds the distributive share of the partnership's deductions to its other deductions incurred directly by the partner. See Regulations section 1.861-8(e)(15). Generally, Section 2 follows the separately reported types of deductions and losses on Form 1118, Schedule A. Individuals must generally follow the same expense allocation and apportionment rules, but Form 1116 only requires separate reporting of certain deductions by separate category. See Form 1116, Part I, lines 2 through 5. Generally, Section 2 also corresponds to the deductions separately reported on Form 8865, Schedule K.

Line 32. R&E expenses.

In general, R&E expenses are allocated and apportioned by the partner and reported in column (f). See Regulations section 1.861-17(f). R&E expenses, as described in section 174, are ordinarily definitely related to gross intangible income reasonably connected with relevant broad product categories of the taxpayer and are allocable to gross intangible income as a class related to such product categories. The product categories are determined by reference to the three-digit classification of the Standard Industrial Classification Manual (SIC code).

Line 38. Charitable contributions.

Charitable contribution deductions are apportioned solely to U.S. source gross income. See Regulations section 1.861-8(e)(12). Therefore, this deduction should be reported in column (a).

Lines 39 and 40. Interest expense specifically allocable under Regulations sections 1.861-10 and -10T.

Apart from interest expense entered on line 39, enter on line 40 interest expense that is directly allocable under Temporary Regulations section 1.861-10T to income from specific partnership property. Such interest expense is treated as directly allocable to income generated by such partnership property. See Temporary Regulations section 1.861-9T(e)(1).

Lines 41 through 43. Other interest expense.

A partner's distributive share of a partnership's interest expense that is not directly allocable to income from specific partnership property is generally allocated and apportioned by the partner, subject to certain exceptions, and included in column (f). See Temporary Regulations section 1.861-9T(e)(1).

Interest expense incurred by certain individuals, estates, and trusts is characterized based on the categories of interest expense in sections 163 and 469: active trade or business interest, investment interest, or passive activity interest, adjusted for any interest expense directly allocated under Temporary Regulations section 1.861-10T. See Regulations section 1.861-9T(d). The amounts in each category of interest expense are reported on lines 41 through 43. If the partnership's only partners are corporate partners, do not report the partnership’s interest expense by the categories of interest expense in sections 163 and 469. All such interest expense may be reported as business interest expense on line 41.

Exception.

See Regulations section 1.861-9(e)(8) and (9) for a special rule for partnership loans. See also the instructions for box 10 of Part I.

Line 45. Foreign taxes not creditable but deductible.

See the instructions for Forms 1116 and 1118 for examples of foreign taxes that are deductible, but not creditable.

Note.

Foreign taxes that are creditable (even if a partner chooses to deduct such taxes) are not reported as expenses on Part II. Creditable taxes are reported on Part III, Section 4.

Lines 49 and 50. Other deductions.

Attach to the Schedules K-2 and K-3 a statement describing the amount and type of other deductions. The statement must conform to the format of Part II.

Schedule K-2, Part III, and Schedule K-3, Part III (Other Information for Preparation of Form 1116 or 1118)

Section 1. R&E Expenses Apportionment Factors

This information is relevant to partners to allocate and apportion its R&E expense for foreign tax credit limitation purposes.

Deductible R&E expenses, as described in section 174, are ordinarily definitely related to gross intangible income reasonably connected with relevant broad product categories of the taxpayer and are allocable to gross intangible income as a class related to such product categories. The product categories are determined by reference to the three-digit classification of the SIC code. In general, R&E expenses are apportioned based on gross receipts.

R&E expenses are allocated and apportioned by the partner. See Regulations section 1.861-17(f)(1). This requires that Form 8865 reports to its partners the gross receipts by SIC code according to source and separate category of income. This also requires that the Form 8865 reports the amount of R&E expense performed in the United States and outside the United States to apply exclusive apportionment. See Regulations section 1.861-17(f)(2).

Column (e).

As of the date of these instructions, the only separate category that could be included in column (e) is the section 901(j) category of income. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Line 1.

Enter the gross receipts by SIC code for each grouping. Such gross receipts include both the partnership's gross receipts and certain other parties' gross receipts. See Regulations section 1.861-17(d)(3) and (4). Sales of parties controlled by the partnership should be included in line 1 if such controlled parties can reasonably be expected to benefit from the R&E expense connected with the product categories. This includes sales that benefit from the partner's R&E expenses if licensed through the partnership. Sales of uncontrolled parties are also taken into account if such sales involve intangible property that was licensed or sold to the uncontrolled party if the uncontrolled party can reasonably be expected to benefit from the R&E expense.

Line 2.

Report the amount of R&E expense related to activity performed in the United States and the amount of R&E expense related to activity performed outside the United States by SIC code. The total of the amounts on Schedule K-2, Part III, Section 1, line 2, must equal Schedule K-2, Part II, line 32. Similarly, the total of the amounts on Schedule K-3, Part III, Section 1, line 2, must equal Schedule K-3, Part II, line 32.

Note.

Line 2 is not reported according to source or separate category.

Note.

The SIC code for line 2Bi does not need to be the same SIC code for line 2Ai.

Section 2. Interest Expense Apportionment Factors

This information is relevant to a partner to allocate and apportion interest expense for foreign tax credit limitation purposes.

With respect to corporate partners with an interest in the partnership of 10% or more, interest expense, including the partner's distributive share of partnership interest expense, is apportioned by reference to the partner's assets, including the partner's pro rata share of partnership assets. See Regulations section 1.861-9(e)(2). Interest expense is apportioned based on the average value of assets. See Regulations section 1.861-9(g)(2)(i)(A). A taxpayer can use either the tax book value or the alternative book value of its assets. See Regulations section 1.861-9(i). Under both methods, the partner uses the partnership's inside basis in its assets, including adjustments 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 is the basis of stock in nonaffiliated 10%-owned corporations, adjust such amount for earnings and profits (E&P). See Regulations section 1.861-12(c)(2)(i)(A).

Column (b).

Characterize the pro rata share of the partnership assets that give rise to foreign branch category income as assets in the foreign branch category. See Regulations section 1.861-9(e)(10).

Column (e).

As of the date of these instructions, the only separate category that could be included in column (e) is the section 901(j) category of income. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Line 1.

Report the average of the beginning-of-year and end-of-year inside basis in the partnership's assets. See Regulations section 1.861-9(g)(2)(i)(A).

Line 2.

Report the average of the beginning-of-year and end-of-year inside basis adjustments under sections 734(b) and 743(b).

Lines 3 and 4.

Report reductions in the partnership's asset values to reflect the partnership's directly allocable interest under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. See also Temporary Regulations section 1.861-9T(e)(1).

Line 5.

Report the average value of assets excluded from the apportionment formula. See section 864(e)(3).

Line 6.

Individual partners who are general partners or who are limited partners with an interest in the partnership of 10% or more follow the same rules as corporate partners whose interest in the partnership is 10% or more except that their interest expense must be apportioned according to the interest expense classifications under sections 163 and 469. This includes reporting the assets according to such classifications. If the partnership has no such partners, do not complete Schedule K-2, Part III, Section 2, lines 6(b) through (d); or Schedule K-3, Part III, Section 2, lines 6(b) through (d). Include the total amount on line 6(a).

Schedule K-3.

If the partnership's partners are not limited to corporate partners, when completing Schedule K-3, Part III, Section 2, for the corporate partners with an interest of 10% or more in the partnership, do not complete lines 6(b) through (d). Include the total distributive share on line 6(a).

Lines 7 and 8.

The amounts reported on lines 7 and 8 are subsets of the amounts reported on line 6 representing the value of stock held by the partnership in certain foreign corporations. In determining its foreign tax credit limitation, a partner should disregard interest expense that is “properly allocable'' to stock of a 10%-owned foreign corporation that has been characterized as a section 245A asset. See section 904(b)(4) and Regulations section 1.904(b)-3(a)(1)(ii). The amount of properly allocable deductions is determined by treating the section 245A subgroup for each separate category as a statutory grouping for purposes of allocating and apportioning interest deductions on the basis of assets. Assets in a section 245A subgroup only include stock of a specified 10%-owned foreign corporation that has been characterized as a section 245A asset.

The stock is characterized as a section 245A asset to the extent it generates income that would generate a dividends received deduction under section 245A if distributed. This does not include income that is included as GILTI, subpart F income, or a section 951(a)(1)(B) inclusion or income described in section 245(a)(5) (which gives rise to a dividends received deduction under section 245 instead of section 245A).

In the case of a specified 10%-owned foreign corporation that is not a CFC, all of the value of its stock is potentially in a section 245A subgroup because the stock generally generates dividends eligible for the section 245A deduction (and cannot generate an inclusion under section 951(a)(1) or 951A(a)), if the partner meets the requirements for eligibility. See Regulations section 1.904(b)-3(c)(2). However, because there may not be information to determine if a partner is eligible for a section 245A deduction (for example, due to tiered ownership), the partner must determine to what extent the stock is treated as an asset in a section 245A subgroup.

With respect to a partnership-owned specified 10% foreign corporation that is not a CFC, report on line 7, columns (a) through (e), the total value of the stock in all such foreign corporations. The value of the stock is the partnership's basis in the stock adjusted to take into account the E&P of the foreign corporations as explained in Regulations section 1.861-12(c)(2). Attach to the Schedules K-2 and K-3 a statement with the following information for each foreign corporation for which adjusted basis is reported on line 7.

  • Name of foreign corporation.

  • EIN or reference ID number. Do not enter FOREIGNUS or APPLIED FOR.

  • Percentage of voting and value of stock owned by partnership in such foreign corporation.

  • Value of the stock in such corporation included in each of the groupings in 6(b) through (d) (identify separately each of those groupings).

If the specified 10%-owned foreign corporation is a CFC, a portion of the value of stock in each separate category and in the residual grouping for U.S. source income is subdivided between a section 245A and non-section 245A subgroup under the rules described in Regulations section 1.861-13(a)(5). However, because there will generally not be information to apply the stock characterization rules described in Regulations section 1.861-13(a)(5), the partner must apply those rules to characterize the stock.

With respect to partnership-owned CFCs, report on line 8, column (f), the total value of its stock in all such foreign corporations. The value of the stock is the partnership's inside basis in the stock adjusted to take into account the E&P of the foreign corporations as explained in Regulations section 1.861-12(c)(2). Attach to the Schedules K-2 and K-3 a statement with the following information for each foreign corporation for which basis is reported on line 8.

  • Name of foreign corporation.

  • EIN or reference ID number. Do not enter FOREIGNUS or APPLIED FOR.

  • Percentage of voting and value of stock owned by partnership in such foreign corporation.

  • Value of the stock in such corporation.

Section 3. Foreign-Derived Intangible Income (FDII) Deduction Apportionment Factors

This information is relevant to partners to allocate and apportion their FDII deduction under section 250(a)(1)(A) for foreign tax credit limitation purposes. The deduction is definitely related and allocable to the class of gross income included in the partner’s foreign-derived deduction eligible income (FDDEI) (as defined in section 250(b)(4)) and is apportioned within the class, if necessary, ratably between the statutory grouping (or among the statutory groupings) of gross income and the residual grouping of gross income based on the relative amounts of FDDEI in each grouping. See Regulations section 1.861-8(e)(13). If the partner is a member of a consolidated group, see Regulations section 1.861-14(e)(4). Accordingly, this section requires information that its partners use to determine the source and separate category of its income such that partners may allocate and apportion the FDII deduction under section 250(a)(1)(A) for purposes of the foreign tax credit limitation.

Lines 1 and 2.

Report the partnership’s foreign-derived gross receipts and cost of goods sold, respectively, by source and separate category.

Lines 3 and 4.

Report the partnership’s deductions allocable to foreign-derived gross receipts and other partnership deductions apportioned to foreign-derived gross receipts, respectively. See Part IV, Section 2, lines 11 and 12. Although these deduction amounts are necessary to figure the partner’s FDII deduction, once this amount is determined, the actual FDII deduction itself is allocated and apportioned as described in Regulations section 1.861-8(e)(13).

Column (d).

As of the date of these instructions, the only separate category that could be included in column (d) is the section 901(j) category of income. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Section 4. Foreign Taxes

In Part III, Section 4, assign foreign taxes paid or accrued (including on U.S. source income) to a separate category and source. Include taxes paid or accrued to foreign countries or to U.S. possessions.

Attachment.

As previously mentioned in the instructions for Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for distributive share), for each of the amounts listed in lines 1 through 3, attach to the Schedules K-2 and K-3 a statement reporting the following information.

  • The dates on which the taxes were paid or accrued.

  • The exchange rates used.

  • The amounts in both foreign currency and U.S. dollars. See section 986(a).

Column (a).

Enter the code for the type of tax.

Codes for Types of Tax

Code Type of Tax
WHTD Withholding tax on dividends
WHTP Withholding tax on distributions of PTEP
WHTB Withholding tax on branch remittances
WHTR Withholding tax on rents, royalties, and license fees
WHTI Withholding tax on interest
ECI Taxes paid or accrued to foreign countries or possessions on certain effectively connected income
OTHS Other foreign taxes paid or accrued on sales income
OTHR Other foreign taxes paid or accrued on services income
OTH Other foreign taxes paid or accrued
 

Column (b). Taxes assigned to section 951A category.

Taxes assigned to section 951A category income are taxes paid or accrued on distributions of PTEP assigned to the reclassified section 951A PTEP and section 951A PTEP groups. This might not be able to complete due to lack of information regarding the treatment of the current year distributions.

Note.

Do not report as taxes assigned to section 951A category income taxes on a distribution that is assigned by a partner to the reclassified section 951A PTEP or section 951A PTEP groups as a result of the partner’s prior section 951A inclusion.

Column (f). Other category.

Foreign taxes paid or accrued to sanctioned countries.

No credit is allowed for foreign taxes paid or accrued to certain sanctioned countries.

Foreign taxes related to PTEP resourced by treaty.

If the partnership pays or accrues foreign taxes on receipt of a distribution of PTEP that is sourced from an annual PTEP account of the partnership that corresponds to the separate category relating to U.S. source income included under section 951(a)(1) and resourced as foreign source income under a treaty, such taxes are included in column (f).

On the line after "category code," enter one of the following codes.

Code “RBT PAS.”

If an applicable income tax treaty treats any U.S. source passive category income as foreign source passive category income, and the partner elected to apply the treaty, enter code “RBT PAS.”

Code “RBT GEN.”

If an applicable income tax treaty treats any U.S. source general category income as foreign source general category income, and the partner elected to apply the treaty, enter code “RBT GEN.”

Code “RBT 951A.”

If an applicable income tax treaty treats any U.S. source section 951A category income as foreign source section 951A category income, and the partner elected to apply the treaty, enter code “RBT 951A.”

Line 1.

Enter in U.S. dollars the total foreign taxes (described in section 901 or section 903) that were paid or accrued by the partnership (according to its method of accounting for such taxes). Do not reduce the amount that you report on line 1 by the reductions reported on line 2. Do not report redetermined taxes on line 1. Report such taxes on line 3.

If the partnership uses the cash method of accounting, check the "Paid" box and enter foreign taxes paid during the tax year on line 1. Report each partner's share on Schedule K-3, Part III, Section 3, line 1.

If the partnership uses the accrual method of accounting, check the "Accrued" box and enter foreign taxes accrued on line 1. Report each partner's share on Schedule K-3, Part III, Section 4, line 1.

Note.

Check only one box “Paid” or “Accrued” depending on the method of accounting the partnership has to take into account foreign taxes.

Enter on a separate line (that is, after A, B, and C), taxes paid or accrued to each country. Enter the two-letter code from the list at IRS.gov/CountryCodes. Do not enter “various” or “OC” for country code.

Example 3.

The facts are the same as in Example 2, earlier. FP uses the cash method of accounting and pays taxes of $1,000 and $3,000 to Countries XX and YY, respectively. The U.S. person completes Part III, Section 4, line 1, as follows.

Example 3 Table

      (a) (e)
  Direct (901/903) foreign taxes ☑ Paid Type of tax Foreign
A XX   OTHR 1,000
B YY   OTHR 3,000
 

Line 2.

Enter on line 2 a negative number for the sum of the taxes in the following categories.

A. Taxes on foreign mineral income (section 901(e)).

B. Reserved.

C. Taxes attributable to boycott operations (section 908).

D. Reduction in taxes for failure to timely file (or furnish all of the information required on) Form 8865 (section 6038(c)).

E. Foreign income taxes paid or accrued during the current tax year with respect to splitter arrangements under section 909.

F. Foreign taxes on foreign corporate distributions. For example, report taxes on dividends eligible for a deduction under section 245A and ineligible for credit under section 245A(d). Also, include taxes on a distribution of PTEP assigned to the following PTEP groups: reclassified section 965(a) PTEP, reclassified section 965(b) PTEP, section 965(a), section 965(b) PTEP, a portion of which is not creditable. It may not be possible to determine the amount of a distribution that is attributable to non-previously taxed E&P or PTEP for which a foreign tax credit may be partially or entirely disallowed. However, it is important to track this amount as a tax on a distribution.

G. Other. Attach a statement to the Schedules K-2 and K-3 indicating the reason for the reduction.

There is no need to report the amounts on line 2 by country.

Line 3.

Enter in U.S. dollars the change in foreign tax as a result of a foreign tax redetermination. See section 905(c) and Regulations section 1.905-3 through -5. If the amount is less than the original foreign tax, report the change as a negative amount. If the amount is more than the original foreign tax, report the change as a positive amount.

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 Regulation section 1.905-3(a). Such amounts should be reported on line 1 as foreign taxes paid by the partnership in the current year. Report the U.S. tax year to which the foreign tax relates. This would be the U.S. tax year that includes the close of the foreign tax year to which the tax relates. Report the date on which the tax was paid. If there is more than one date tax is paid, enter one of the dates paid on the schedule itself and then attach to the Schedules K-2 and K-3 a statement including all of the information reported on the schedule with the other dates paid.

If there is more than one redetermination in a year with respect to different countries, report such redeterminations on separate lines. Enter the two-letter code from the list at IRS.gov/CountryCodes. Similarly, if there is more than one redetermination in a year with respect to the same country, but the redeterminations are related to different years, report such redeterminations on separate lines. Do not enter “various” or “OC” for the country code.

Example 4.

The facts are the same as in Example 3, earlier. In Year 3, FP resolves a contest with the Country YY taxing authorities and reduces the Country YY tax to $2,000. FP pays the tax liability on April 30 of Year 3. In Year 3, the U.S. person filing Form 8865 reports on its Schedule K-2, Part III, Section 4, line 3, as follows.

Example 4 Table

      (a) (e)
  Foreign tax redeter-
minations
  Type of tax Foreign
A YY   OTHR (1,000)
  Related tax year Year 1
  Date tax paid 4/30/Year 3
 

Section 5. Other Tax Information

This information is relevant to partners computing a foreign tax credit.

Column (b).

Do not report any amounts in this column.

Column (f).

As of the date of these instructions, this column will only include the section 901(j) category and the countries relevant to that category. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.

Line 1.

For partnerships other than publicly traded partnerships, report the total of all partners’ shares of the net positive income adjustments resulting from all section 743(b) basis adjustments. Net positive income adjustments from all section 743(b) basis adjustments means the excess of all section 743(b) adjustments allocated to the partner that increase the partner's taxable income over all section 743(b) adjustments that decrease the partner's taxable income. Attach to the Schedules K-2 and K-3 a statement showing each section 743(b) basis adjustment making up the total and identify the assets to which it relates and the separate category and source of the income generated by the assets. Make sure to include the class of gross income or deduction, for example, sales income, interest income, or depreciation deduction. You may group these section 743(b) basis adjustments by asset category or description in cases where multiple assets are affected if the assets generate the same separate category and source of income. The section 743(b) positive income adjustments should be included as relevant in other parts of the Schedule K-2. For example, the section 743(b) income adjustments should be reflected as part of the total depreciation reported on Part II, Section 2.

Line 2.

For partnerships other than publicly traded partnerships, report the total of all partners' shares of the net negative income adjustment resulting from all section 743(b) basis adjustments. Net negative income adjustments from all section 743(b) basis adjustments means the excess sum of all section 743(b) adjustments allocated to the partner that decrease partner taxable income over all section 743(b) adjustments that increase partner taxable income. Attach to the Schedules K-2 and K-3 a statement showing each section 743(b) basis adjustment making up the total and identify the assets to which it relates and the separate category and source of the income generated by the assets. Make sure to include the class of gross income or deduction, for example, sales income, interest income, or depreciation deduction. You may group these section 743(b) basis adjustments by asset category or description in cases where multiple assets are affected if the assets generate the same separate category and source of income. The section 743(b) negative income adjustments should be included as relevant in other parts of the Schedule K-2. For example, the section 743(b) income adjustments should be reflected as part of the total depreciation reported on Part II, Section 2.

Schedule K-2, Part IV (Information on Partners’ Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)), and Schedule K-3, Part IV (Information on Partner’s Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII))

Note.

This information is relevant to partners that figure a section 250 deduction with respect to FDII on Form 8993. This part is relevant for a direct domestic corporate partner (other than real estate investment trusts, regulated investment companies, and S corporations) or a partner which is a partnership that has a direct or indirect domestic corporate partner (other than real estate investment trusts, regulated investment companies, and S corporations) that determines the domestic corporate partner's FDII. If there is insufficient information, a partner must presume the indirect partner is a domestic corporate partner or a partnership that has a direct or indirect domestic corporate partner and the partner must complete the Schedules K-2 and K-3, Part IV, accordingly. These schedules are required to be completed if the foreign partnership has direct or indirect domestic corporate partners, though the partnership does not have foreign-derived gross receipts. Even if a partnership has no foreign activities, and therefore has no foreign derived deduction eligible income as reported in Section 2 of this part, still report the information required by Sections 1 and 3 of this part so that any domestic corporate partner can correctly determine its section 250 deduction. For example, a domestic corporate partner would still need information about the partnership’s qualified business asset investment (see instructions to line 7 of this part) in such a case to determine its deemed tangible income return and deemed intangible income. See section 250(b)(2).

Section 250 allows a domestic corporation a deduction for its FDII, and a direct or indirect domestic corporate partner must take into account certain activities of a partnership in computing the domestic corporation's FDII. For the treatment of a domestic corporation that is a partner in a partnership, see Regulations sections 1.250(b)-1(e), 1.250(b)-2(g), and 1.250(b)-3(e). These instructions generally indicate how to complete Part IV (of both Schedules K-2 and K-3). However, Schedule K-2 includes the total of all partners’ amounts and Schedule K-3 includes each partner’s share.

Enter each amount and total amounts in U.S. dollars. Determine and report the partner's share of each item of the partnership contained on this form in accordance with the partner's distributive share of the underlying item of income, gain, deduction, and loss of the partnership. Report these amounts based on the best information available about how its partners might use this information to determine their FDII deduction. Certain information may be reported differently to each partner depending on federal income tax determinations that the partner makes. Each partner must then calculate its FDII deduction using Form 8993 including the information reported on Schedule K-3, Part IV. A partner must obtain any further necessary information from the partnership to correctly determine its FDII deduction.

Special rules for determining foreign use apply to transactions that involve property or services provided to related parties (see section 250(b)(5)(C) and Regulations section 1.250(b)-6).

For special substantiation requirements under the Regulations, see sections 1.250(b)-3(f), 1.250(b)-4(d)(3), and 1.250(b)-5(e)(4). In all other cases, a taxpayer claiming a deduction under section 250 will still be required to substantiate that it is entitled to the deduction even if it is not subject to the specific substantiation requirements contained in the Regulations. See section 6001 and Regulations section 1.6001-1(a). Therefore, the partner must be able to satisfy the general or special substantiation requirements to be eligible for the deduction.

As described above, determine the partner's share of each item below in accordance with the partner's distributive share of the underlying item of income, gain, deduction, and loss of the partnership.

Section 1. Information To Determine Deduction Eligible Income (DEI) and Qualified Business Asset Investment (QBAI) on Form 8993

Line 2(a). DEI gross receipts.

Enter all gross receipts from whatever source derived except for amounts included on lines 3 through 7.

Line 2(b). DEI cost of goods sold.

Enter the amount of cost of goods sold attributable to the amount on line 2(a).

Line 2(c). DEI properly allocated and apportioned deductions.

Enter the amount of deductions (including taxes) properly allocable to the amount on line 2(a). See Regulations section 1.250(b)-1(d)(2) for more details. Deductions properly allocable to gross DEI are determined without regard to sections 163(j), 170(b)(2), 172, 246(b), and 250.

Lines 3 through 7 are exclusions from DEI used to determine the partner’s DEI.

Line 3. Section 951(a) inclusions.

Enter any amounts considered included in gross income under section 951(a)(1) for FDII purposes

Line 4. CFC dividends.

Enter the amount of any dividend received from a CFC with respect to which the partner is a U.S. shareholder as defined under section 951(b). Do not include as a dividend any amount received from a CFC to the extent that such amount is attributable to PTEP in the annual PTEP accounts of the partnership.

Line 5. Financial services income.

Enter the amount of net financial services income (as defined in section 904(d)(2)(D)) before interest and R&E deductions.

Line 6. Domestic oil and gas extraction income.

Enter the amount of net domestic oil and gas extraction income before interest and R&E deductions. The term “domestic oil and gas extraction income” means income described in section 907(c)(1) determined by substituting “within the United States” for “without the United States.”

Line 7. Foreign branch income.

Enter the amount of net foreign branch income before interest and R&E deductions (as defined in section 904(d)(2)(J)). Report all income that would be foreign branch income of its partners as if all partners were U.S. persons.

Line 8. Partnership QBAI.

Enter the amount, if any, of the partnership QBAI.

A domestic corporation’s QBAI is its share of the average of the aggregate adjusted bases, determined as of the close of each quarter of the tax year, in certain specified tangible property. See Regulations section 1.250(b)-2(b). The adjusted basis is determined by using the alternative depreciation system under section 168(g) and allocating depreciation deductions with respect to such property ratably to each day during the period in the tax year to which such depreciation relates. See Regulations section 1.250(b)-2(e). The specified tangible property is that which is used in the trade or business of the corporation in the production of gross income included in the domestic corporation’s gross DEI and is of a type with respect to which a deduction is allowable under section 167. See Regulations section 1.250(b)-2(b). If a domestic corporation holds an interest in one or more partnerships during a tax year (including indirectly through one or more partnerships that are partners in a lower-tier partnership), the QBAI of the domestic corporation for the tax year is increased by the sum of the domestic corporation’s partnership QBAI with respect to each partnership for the tax year. See Regulations section 1.250(b)-2(g)(1). Partnership QBAI is the sum of the domestic corporation’s proportionate share of the partnership’s adjusted basis in the property and the domestic corporation’s partner specific QBAI basis in the property for the partnership tax year that ends with or within the tax year. See Regulations section 1.250(b)-2(g)(2). Partnership specified tangible property means, with respect to a domestic corporation, tangible property that is used in the trade or business of the partnership, of a type with respect to which a deduction is allowable under section 167, and used in the production of gross income included in the domestic corporation’s gross DEI. See Regulations section 1.250(b)-2(g)(5).

If the portion of partnership specified tangible property cannot be determined (for example, if it is not known if property gives rise to the production of gross income in one of the excluded categories from DEI that is determined by the partner, which would cause such property to not be classified as partnership specified tangible property), then in reporting the amount of a partner's share of the partnership QBAI, separately state any information so a direct or indirect domestic corporate partner can distinguish between the amount of the adjusted bases in a partnership's tangible property that the domestic corporation would include in its adjusted bases in the partnership specified tangible property and the amount of the adjusted bases in the partnership's tangible property that the domestic corporation would not include in its adjusted bases in the partnership specified tangible property.

If tangible property was used in the production of DEI and in the production of income that is non-DEI, then it is considered dual-use property and treated as specified tangible property in the same proportion that the amount of the gross income included in DEI produced with respect to the property bears to the total amount of gross income produced with respect to the property. See Example 2 of Regulations section 1.250(b)-2(g)(8) for guidance on how to calculate the partner adjusted basis. If specified tangible property is only partially depreciable then only the depreciable portion is QBAI.

Example 5.

X and Y are both domestic corporations which are partners in FP, a partnership that holds three types of assets—A, B, and C. All types of assets are tangible property used in the trade or business of FP and with respect to which a deduction is allowable under section 167. The production of income from A assets is DEI with respect to X and Y. Thus, the A assets are partnership specified tangible property with respect to X and Y, and FP includes a proportionate amount of the adjusted bases of all A assets in calculating each partner’s partnership QBAI. The production of income from B assets is DEI with respect to X. However, with respect to Y, the production of income from B assets is non-DEI. Thus, the B assets are partnership specified tangible property with respect to X only, and FP includes a proportionate amount of the adjusted bases of all B assets only in calculating X’s partnership QBAI. The C assets are dual-use property because the production of only part of the income from the C assets is DEI with respect to X and Y. Thus, the C assets are partnership specified tangible property with respect to both X and Y, but FP includes a proportionate amount of the adjusted bases of all C assets in calculating each partner’s partnership QBAI only in the proportion that the amount of the gross income included in DEI produced with respect to the C assets bears to the total amount of gross income produced with respect to the C assets.

Section 2. Information To Determine Foreign-Derived Deduction Eligible Income on Form 8993

Foreign-derived gross receipts means, with respect to a partnership, gross receipts of the partnership for the partnership's tax year that are used to figure gross FDDEI as defined in Regulations section 1.250(b)-1.

Each place where general property is listed refers to amounts connected to the sale, lease, exchange, or other disposition of general property to a foreign person and, as established to the satisfaction of the Secretary, is for a foreign use as defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d). The term "general property" means any property other than intangible property; a security (as defined in section 475(c)(2)); an interest in a partnership, trust, or estate; or a commodity described in section 475(e)(2)(A) that is not a physical commodity or a commodity described in section 475(e)(2)(B) through (D).

Each place where intangible property is listed refers to amounts connected to the sale, license, exchange, or other disposition of intangible property to a foreign person and, as established to the satisfaction of the Secretary, is for a foreign use as defined in Regulations sections 1.250(b)-3 and 1.250(b)-4(d)(2).

Each place where services is listed refers to amounts connected to services that, as established to the satisfaction of the Secretary, are provided to any person, or with respect to property, located outside the United States as defined in Regulations section 1.250(b)-5.

If a transaction includes both a sales component and a service component, the transaction is classified as either a sale or as a service according to the overall predominant character of the transaction. See Regulations section 1.250(b)-3(d).

For purposes of determining a domestic corporation’s deductions that are properly allocable to gross FDDEI, the corporation’s deductions are allocated and apportioned to gross FDDEI under the rules of Regulations sections 1.861-8 through 1.861-14T and 1.861-17 by treating section 250(b) as an operative section described in Regulations section 1.861-8(f). See Regulations section 1.250(b)-1(d)(2).

Line 9. Gross receipts.

Enter the amount, if any, of the partnership's foreign-derived gross receipts separately for aggregate sales of general property, aggregate sales of intangible property, and aggregate services. Foreign-derived gross receipts means gross receipts that are used to figure gross FDDEI as defined in Regulations section 1.250(b)-1(c)(16).

Line 10. COGS.

Enter the amount of cost of goods sold attributable to the amount(s) on line 9.

For purposes of this form, when figuring FDDEI, cost of goods sold includes the cost of goods sold to customers, and adjusted basis of non-inventory property sold or otherwise disposed of in trade or business.

In making that determination, attribute costs of goods sold to gross receipts using a reasonable method in accordance with Regulations section 1.250(b)-1(d)(1).

Cost of goods sold must be attributed to gross receipts with respect to gross DEI or gross FDDEI regardless of whether certain costs included in cost of goods sold can be associated with activities undertaken in an earlier tax year (including a year before the effective date of section 250).

Line 11. Allocable deductions.

Enter the amount of the allocable deductions. See Regulations section 1.250(b)-1(d)(2) for more details. Enter the amounts of interest and R&E expenses on lines 13 and 16, respectively. Deductions are determined without regard to sections 163(j),170(b)(2), 172, 246(b), and 250.

Column (a). General property.

Enter the amount of the deductions that are allocated and apportioned to gross FDDEI from all sales of general property.

Column (b). Intangible property.

Enter the amount of the deductions that are allocated and apportioned to gross FDDEI from all sales of intangible property.

Column (c). Services.

Enter the amount of the deductions that are allocated and apportioned to gross FDDEI from all services.

Line 12. Other apportioned deductions.

Enter all other apportioned deductions that relate to gross FDDEI that are not otherwise included on lines 11, 13, and 16. If a deduction does not bear a definite relationship to a class of gross income constituting less than all of gross income, it shall ordinarily be treated as definitely related and allocable to all of the taxpayer's gross income, including gross DEI and gross FDDEI, except where otherwise directed in the Regulations.

Section 3. Other Information for Preparation of Form 8993

Line 13. Interest deduction.

The term "interest" refers to the gross amount of interest expense incurred by a partnership in a given year. Interest expense includes any expense that is currently deductible under section 163 (including original issue discount), and interest equivalents. See Temporary Regulations sections 1.861-9T(b) for the definition of interest equivalents and 1.861-9T(c) for sections that disallow, suspend, or require the capitalization of interest deductions.

Lines 13A and 13B. Interest expense specifically allocable under Regulations sections 1.861-10(e) and -10T.

Apart from interest expense entered on line 13A, enter on line 13B interest expense that is directly allocable under Temporary Regulations section 1.861-10T to income from specific partnership property. Such interest expense is treated as directly allocable to income generated by such partnership property. See Temporary Regulations section 1.861-9T(e)(1).

Line 13C.

Enter all interest deductions not otherwise included on lines 13A and 13B.

Line 14. Interest expense apportionment factors.

Report information that a partner will use to allocate and apportion its interest expense for FDII purposes.

Interest deductions are apportioned to gross DEI and FDDEI based ordinarily on the tax book value of the taxpayer’s assets. See Regulations section 1.861-9T(g)(1)(i). A taxpayer can use either the tax book value or the alternative tax book value of its assets. See Regulations section 1.861-9(i). Under both methods, the partner uses the partnership's inside basis in its assets, including adjustments required under sections 734(b) and 743(b). See Regulations sections 1.861-9(e)(2) and -9(e)(3). When reporting the asset that is the basis of stock in nonaffiliated 10%-owned corporations, adjust such amount for E&P. See Regulations section 1.861-12(c)(2)(i)(A).

The total interest deductions for the members of the corporation's affiliated group are allocated and apportioned to the statutory and residual groupings under proposed, final, and Temporary Regulations sections 1.861-8 through 1.861-14.

Note.

The Total column is not a sum of DEI and FDDEI but rather refers to the partnership’s specific line totals (that is, that would also include non-DEI).

Line 14A.

Enter the amount of the average of the beginning-of-year and end-of-year inside basis in the partnership's assets. See Regulations section 1.861-9(g)(2)(i)(A).

Line 14B.

Enter the amount of the average of the beginning-of-year and end-of-year inside basis adjustments under sections 734(b) and 743(b).

Lines 14C and 14D.

Enter the amount of the reductions in the partnership's asset values to reflect the partnership's directly allocable interest under Regulations section 1.861-10(e) and Temporary Regulations section 1.861-10T. See also Temporary Regulations section 1.861-9T(e)(1).

Line 14E.

Enter the amount of the average value of assets excluded from the apportionment formula. See section 864(e)(3).

Lines 15 and 16. R&E expenses apportionment factors.

These lines require information that a partner will use to allocate and apportion its R&E expense for FDII purposes.

R&E expenses deducted under section 174 are definitely related to all income reasonably connected with relevant broad product categories of the taxpayer and are allocable to all items of gross income as a class related to such product categories. The product categories are generally determined by reference to the three-digit SIC code. R&E expenses are apportioned between the statutory and residual groupings based on an analysis of the taxpayer’s gross receipts from certain sales, leases, licenses, and services. See Regulations section 1.861-17. The exclusive apportionment rule in Regulations section 1.861-17(c) does not apply for purposes of apportioning R&E to gross DEI and gross FDDEI.

R&E expenses are allocated and apportioned by the partner. This requires that the reporting to the partners of the gross receipts related to certain income within the statutory and residual groupings within a SIC code and the partner’s distributive share of the partnership’s R&E deductions, if any, connected with the SIC codes.

Line 15. R&E gross receipts by SIC code.

Enter the gross receipts that resulted in gross income for each category, DEI, FDDEI, and then Total Gross Receipts. Note that the Total column is not a sum of DEI and FDDEI but rather refers to all the partnership’s gross receipts. Such gross receipts include both the partnership's sales and certain other parties' sales. See Regulations section 1.861-17(d). Gross receipts from certain transactions of parties both controlled or uncontrolled by the partnership may be included on line 15. See generally Regulations section 1.861-17(d).

Line 16.

Enter the amount of R&E expense by SIC code.

Schedule K-2, Part V, and Schedule K-3, Part V (Distributions From Foreign Corporations to Partnership)

Note.

The following information, in combination with other information known to the partners, including Form 5471, Schedule P, is relevant for certain partners to exclude from gross income distributions to the extent that they are attributable to PTEP in their annual PTEP accounts and report foreign currency gain or loss with respect to the PTEP on Forms 1040 and 1120. If eligible, partners use this information for purposes of a dividends received deduction under section 245A on Form 1120.

Use Part V of the Schedule K-2 to report the distributions made by foreign corporations to the partnership.

Use Part V of the Schedule K-3 to report the partner's share of the amounts reported on Part V of the Schedule K-2.

Rows A–O.

Use rows A–O to report information with respect to each distribution by a foreign corporation with respect to its stock that the partnership (directly or through pass-through entities) owns (within the meaning of section 958) other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b).

Each row should relate to the partnership’s direct ownership of stock in the foreign corporation or direct ownership of the ownership interests in a pass-through entity that (directly or through other pass-through entities) owns (within the meaning of section 958) stock in the foreign corporation other than solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b). For example, if a partnership (upper-tier partnership) directly owns 50% of the foreign corporation's stock and owns 50% of the foreign corporation's stock through another partnership (lower-tier partnership), then distributions by the foreign corporation to each of the upper-tier partnership and the lower-tier partnership are to be reported on separate rows on the upper-tier partnership's Part V (Form 8865). If the partnership owns stock of a foreign corporation through another partnership (lower-tier partnership) from which it receives a Part V of Schedule K-3 (Form 1065 or 8865), the partnership must replicate each line of the Part V, Schedule K-3 (Form 1065 or 8865) on its Part V (Form 8865). Rows for distributions with respect to a partnership's direct ownership of foreign corporation stock should be listed before rows for distributions with respect to a partnership's ownership through a pass-through entity of foreign corporation stock.

If the partnership received a Schedule K-3 from another partnership with an attachment related to net investment income PTEP (NII PTEP), append Attachment 3 to Schedule K-2 and Attachment 4 to each Schedule K-3 in the following format, adding additional rows as necessary for each distribution by a foreign corporation. For more information about net investment income and net investment income tax relating to CFCs and QEFs, see Regulations section 1.1411-10.

Attachment 3 (Schedule K-2)

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

Attachment 4 (Schedule K-3)

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

Note.

If additional rows are required, attach statements to Schedules K-2 and K-3 that look like the current version of Part V.

Column (b).

Enter the EIN or reference ID number of the distributing foreign corporation. Do not enter "FOREIGNUS or APPLIED FOR." For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 1118.

Column (c).

Enter the year, month, and day on which the distribution was made using the format YYYYMMDD.

Column (d).

Enter the applicable three-character alphabet code for the foreign corporation’s functional currency using the ISO 4217 standard. These codes are available at iso.org/iso-4217-currency-codes.html.

Note.

Columns (e) and (f) are reported in functional currency.

Column (e).

This represents the partnership's share of the amount distributed in functional currency. See Schedule R (Form 5471), column (c).

Column (f).

This represents the partnership's share of the amount of E&P distributed in functional currency. See Form 5471, Schedule R, column (d). The total of the amounts reported in column (f) with respect to a distributing foreign corporation should equal the partnership’s share of the total of the amounts reported on line 9, column (f) of Schedules J (Form 5471) on a separate category of income basis filed with respect to the distributing foreign corporation, as reported on line 9, column (f) of the Schedule J (Form 5471) with code "TOTAL" entered on line a that is filed with respect to the distributing foreign corporation. If a Schedule J (Form 5471) with code "TOTAL" entered on line a is not filed with respect to the distributing foreign corporation, then the total of the amounts reported in column (f) with respect to a distributing foreign corporation should equal the partnership's share of the amount reported on line 9, column (f) of the Schedule J (Form 5471) filed with respect to the distributing foreign corporation.

Column (g).

Enter the exchange rate on the date of distribution used to translate the amount of the distribution in functional currency to U.S. dollars. See section 989(b)(1). Report the exchange rate using the "divide-by convention" specified under Reporting exchange rates on Form 5471 in the Instructions for Form 5471.

Column (h).

Enter the amount of the distribution in U.S. dollars. Translate column (e) using the spot rate reported in column (g).

Column (i).

Enter the amount of E&P distributed in U.S. dollars. Translate column (f) using the spot rate reported in column (g).

Column (j).

If the distributing foreign corporation is a qualified foreign corporation, determined without regard to section 1(h)(11)(C)(iii)(I), check the box. See section 1(h)(11)(C).

Schedule K-2, Part VI (Information on Partners' Section 951(a)(1) and Section 951A Inclusions), and Schedule K-3, Part VI (Information on Partner's Section 951(a)(1) and Section 951A Inclusions)

Note.

This information is relevant to partners completing Form 8992 and Forms 1040 and 1120 with respect to income inclusions under section 951(a) (subpart F inclusions), section 951(a)(1)(B) inclusions, and section 951A inclusions.

Schedules K-2 and K-3, Part VI, must be completed with respect to a CFC if the partnership owns (within the meaning of section 958) stock of the CFC, unless the partnership owns stock of the CFC solely by reason of applying section 318(a)(3) (providing for downward attribution) as provided in section 958(b).

Generally, a foreign corporation is a CFC if more than 50% of either the total combined voting power of all classes of stock entitled to vote or the total value of the stock of the corporation is owned (within the meaning of section 958(a)) or is considered as owned by applying the rules of section 958(b) by U.S. shareholders. For this purpose, a U.S. shareholder is a U.S. person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote, or 10% or more of the total value of shares of all classes of stock of such foreign corporation.

Exception.

Schedules K-2 and K-3, Part VI, do 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.

Use Schedule K-2, Part VI, to report the information on the partnership’s share of the amounts its partners will need to figure their subpart F income inclusions, section 951(a)(1)(B) inclusions, and GILTI inclusions, with respect to CFCs owned (within the meaning of section 958) by the partnership. Use Schedule K-3, Part VI, to report the partner’s share of the amounts needed to determine its subpart F income inclusions, section 951(a)(1)(B) inclusions, and GILTI inclusion, with respect to CFCs owned (within the meaning of section 958) by the partnership.

The U.S. person completing Form 8865 must complete Part VI of Schedules K-2 and K-3 by assuming that each partner in the partnership is a U.S. shareholder of the CFC and is required to include in gross income its share of the CFC's subpart F income, section 951(a)(1)(B) inclusion, and its GILTI.

A partner's GILTI is calculated based upon its share of the following amounts for each CFC with respect to which it is a U.S. shareholder: tested income, tested loss, QBAI, tested loss QBAI amount, tested interest income, and tested interest expense (collectively, GILTI items) (a CFC's subpart F income and GILTI items, CFC items).

A partner's share of a CFC's subpart F income, amounts used to determine its section 956 amount with respect to a CFC, and a CFC's GILTI items may not be limited to the partner's share of such income, amounts, or items through its ownership in the partnership. However, for purposes of completing Part VI of Schedules K-2 and K-3, use only the partner's share of a CFC's subpart F income, amounts used to determine its section 956 amount with respect to a CFC, and a CFC's GILTI items through the partner's ownership in the partnership.

A partner's share through its ownership in the partnership of subpart F income and GILTI items is generally anticipated to be calculated by multiplying the percentage in column (d) by the amount of subpart F income or GILTI item, respectively. For example, in general, a partner's share through its ownership interest in the partnership of tested income in column (i) is anticipated to be calculated by multiplying the percentage in column (d) by the amount of tested income in column (g). If the partner’s share through its ownership in the partnership of subpart F income or GILTI items is not calculated by multiplying the percentage in column (d) by the amount of subpart F income or GILTI item, respectively (for example, because of special allocations), then, instead of entering a percentage in column (d) for that CFC, attach a statement to the Schedules K-2 and K-3 explaining the partner’s share through its ownership in the partnership of the CFC’s subpart F and GILTI items.

Line a.

Complete a separate Part VI for each applicable separate category of income. However, all GILTI items must be reported on only one Part VI. If GILTI items include passive category income, report all GILTI items on the Part VI completed for passive category income; otherwise, report all GILTI items on the Part VI completed for general category income. Enter the appropriate code on line a.

Note.

The other reporting requirements with respect to reporting income by separate category do not change by reason of reporting GILTI items that include general category income on a Part VI completed for passive category income.

Codes for Categories of Income

Code Category of Income
PAS Passive Category Income
901j Section 901(j) Income
GEN General Category Income
 

Line b.

If any portion of a CFC item is U.S. sourced, complete a separate Part VI for U.S.-sourced CFC items, and check the box on line b on such separate Part VI.

Line 1.

Use lines A through K to report information with respect to CFCs owned (within the meaning of section 958) by the partnership, and for which Part VI of Schedules K-2 and K-3 must be completed. If the partnership owns a CFC through another partnership (lower-tier partnership) from which it receives a Form 1065 or 8865, Schedule K-3, Part VI, replicate each line of the Form 1065 or 8865, Schedule K-3, Part VI, that is related to the CFC on Form 8865, Schedule K-2, Part VI. For example, if a partnership directly owns 50% of the CFC's stock and owns 50% of the CFC's stock through a lower-tier partnership, the CFC should be listed on two lines with one line related to the partnership's direct ownership and the other line related to the partnership's ownership through the lower-tier partnership. Lines related to a partnership's direct ownership of CFCs should be listed before lines related to a partnership's non-direct ownership of CFCs. If additional lines are required, attach to the Schedules K-2 and K-3 a schedule that looks like the current version of Part VI.

Column (a).

Enter the name of each CFC for which Part VI must be completed.

Column (b).

Enter the EIN or reference ID number of the CFC. Do not enter FOREIGNUS or APPLIED FOR. For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 1118.

Column (c).

Enter the end of the CFC’s tax year using the format YYYYMMDD.

Column (d).

Enter the partners' share of CFC items through the partners' ownership in the partnership (aggregate share). See Regulations sections 1.951-1(b), 1.951-1(e), and 1.951A-1(d)(1) for rules on determining the partners' share.

Column (e).

Enter the aggregate share of the amount of the CFC's subpart F income, if any. Note that an amount determined under section 956(a) is not considered subpart F income. For guidance on computing a CFC's subpart F income and the partners' share of a CFC's subpart F income, see Worksheet A in the Instructions for Form 5471.

Column (f).

Enter the amount determined under section 956 with respect to the partners that relates to the partners' ownership in the partnership. Thus, in determining the section 956 amount, use only the partners' share through their ownership in the partnership of:

  • The average of the amounts of U.S. property held (directly or indirectly) by the CFC as of the close of each quarter of the CFC’s tax year, and

  • The applicable earnings of the CFC.

Do not reduce the amount reported in column (f) for any reduction to the partners' section 956 amount under Regulations section 1.956-1(a)(2). For guidance on computing the partners' share of a CFC's earnings invested in U.S. property,see Worksheet B in the Instructions for Form 5471.

Column (g).

Enter the CFC's tested income, if any, from line 6 of Schedule I-1 (Form 5471) for each CFC.

Column (h).

Enter the CFC's tested loss, if any, from line 6 of Schedule I-1 (Form 5471) for each CFC.

Column (i).

Enter the aggregate share of the tested income listed in column (g) for each CFC with tested income.

Column (j).

Enter the aggregate share of the tested loss listed in column (h) for each CFC with tested loss.

Column (k).

If the CFC has a tested loss in column (h), enter zero. If the CFC has tested income in column (g), enter the aggregate share of QBAI. A CFC's QBAI is reported on Schedule I-1 (Form 5471), line 8.

Column (l).

If the CFC has tested income in column (g), enter zero. If the CFC has a tested loss in column (h), enter the aggregate share of the CFC's tested loss QBAI amount. See Regulations section 1.951A-4(b)(1)(iv). A CFC's tested loss QBAI amount is reported on Schedule I-1 (Form 5471), line 9c, which must be translated to U.S. dollars.

Column (m).

Enter the aggregate share of the CFC's tested interest income. A CFC's tested interest income is reported of Schedule I-1 (Form 5471), line 10c.

Column (n).

Enter the aggregate share of the CFC's tested interest expense. A CFC's tested interest expense is reported on Schedule I-1 (Form 5471), line 9d.

Schedule K-2, Part VII, and Schedule K-3, Part VII (Information To Complete Form 8621)

Note.

This information is relevant to partners completing Form 8621 and/or that determine income inclusions with respect to the PFICs reported on Schedule K-2, Part VII, and Schedule K-3, Part VII.

Except as otherwise provided, Schedules K-2 and K-3, Part VII, must be filed with respect to every partnership that owns PFIC stock directly or indirectly.

Use Schedule K-2, Part VII, to report certain information with respect to any PFIC owned, directly or indirectly, by the partnership for which reporting is required, including PFICs with respect to which no qualified electing fund (QEF) or mark-to-market (MTM) election has been made and unpedigreed QEFs (section 1291 funds), and PFICs with respect to which pedigreed QEF, MTM, qualifying insurance corporation (QIC), or other elections have been, or may be, made. Use Schedule K-3, Part VII, to report the partner's share, through its ownership in the partnership, of the amounts reported on Schedule K-2, Part VII.

Complete only one line on both Sections 1 and 2 for each PFIC for which reporting on Schedules K-2 and K-3, Part VII, is required. Each line completed for a PFIC in Section 1 should correspond to the same line on Section 2. If there is no information to report with respect to a PFIC in Section 2, columns (c) through (o), only complete the name and EIN of the PFIC in Section 2, columns (a) and (b), and leave columns (c) through (o) blank for that PFIC. For additional information on determining indirect ownership of PFICs, see Regulations section 1.1291-1(b)(8).

The partnership may have additional required information with respect to a PFIC for certain columns (for example, scenarios where the partnership may have multiple different events with respect to the PFIC in the same tax year, such as multiple dates of acquisitions of, or distributions with respect to, the PFIC stock). In that case, complete Schedules K-2, and K-3, Part VII, with the first of such entries for a PFIC and attach a statement including the remaining entries for each such PFIC to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, with Attachments 5 and/or 6 completed.

If the partnership has additional PFICs for which to report information that do not fit on single Schedules K-2 and K-3, Part VII, attach additional Parts VII of Schedules K-2 and K-3, as needed.

Section 1. General Information on Passive Foreign Investment Company (PFIC), Qualified Electing Fund (QEF), or Qualifying Insurance Corporation (QIC)

Columns (a) through (c).

Enter the name, U.S. EIN or reference ID number, and address of each PFIC held directly or indirectly by the partnership during its tax year. Do not enter FOREIGNUS or APPLIED FOR.

For basic information about reference ID numbers (including the requirements as to the characters permitted), see the Instructions for Form 8621.

Columns (d) and (e).

Enter the beginning and end of the PFIC's tax year using the format YYYYMMDD.

Column (f).

Enter each class of shares in the PFIC owned by the partnership using the following codes.

Codes for Classes of PFIC Shares

Code Class of PFIC Shares
COM Common or Ordinary Shares
PRE Preferred Shares
OTH Other Equity Interest
VAR Multiple Classes of Shares or Equity Interests
 

Column (g).

If the partnership acquired any PFIC shares during its tax year, provide the date(s) of acquisition of such shares using the format YYYYMMDD. If the partnership acquired no shares in a particular PFIC during its tax year, leave this column blank with respect to that PFIC.

Reminder.

If the partnership acquired shares in a PFIC on multiple dates during the tax year, append a completed Attachment 5 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing such dates.

Attachment 5
Additional Information for Section 1
General Information Annual Information
(a)
Name of PFIC
(b)
EIN or reference ID number
(g)
Dates PFIC shares acquired during tax year (if applicable)
     
     
     
     
     
     

Column (h).

Enter the total number of all classes of shares of the PFIC the partnership owned at the end of its tax year.

Column (i).

Enter the total value of all shares in the PFIC held by the partnership at the end of its tax year. If the PFIC shares are not publicly traded, it is possible to rely upon periodic account statements provided at least annually to determine the value of a PFIC unless there is actual knowledge or reason to know based on readily accessible information that the statements do not reflect a reasonable estimate of the PFIC's value and the information provides a more reasonable estimate of the PFIC's value.

Note.

A partner may need additional information not required to be reported on this Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII) from the partnership with respect to the value of the PFIC shares as of a particular date to aid the partner in making certain elections under Regulations section 1.1291-10, 1.1297-3, or 1.1298-3.

Column (j).

Check the box if the foreign corporation has indicated that it has documented eligibility to be treated as a QIC. See section 1297(f) and Regulations section 1.1297-4 for additional information on QICs.

Column (k).

Check the box if the PFIC has indicated that its shares are "marketable stock." See section 1296(e) and Regulations section 1.1296-2 for additional information on "marketable stock."

Column (l).

Check the box if the PFIC also constitutes a CFC within the meaning of section 957 (PFIC/CFC).

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 (m).

Complete column (m) in the following manner.

IF... THEN...
• this is the first year of the partnership's holding period in stock of the foreign corporation, and
• the foreign corporation is a PFIC under the income test or asset test of section 1297(a)
check the box.
• the foreign corporation was a PFIC in a prior tax year of the partnership's holding period, and
• the foreign corporation is not a "former PFIC" within the meaning of Regulations section 1.1291-9(j)(2)(iv)
check the box.
• the foreign corporation was a PFIC in a prior tax year of the partnership's holding period, and
• the foreign corporation is a "former PFIC" within the meaning of Regulations section 1.1291-9(j)(2)(iv)
do not check the box.

Note.

If the foreign corporation is a “former PFIC” within the meaning of Regulations section 1.1291-9(j)(2)(iv), a partner may need additional information not required to be reported on this Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII) from the partnership with respect to the PFIC to aid the partner in making certain elections under Regulations section 1.1298-3.

Section 2. Additional Information on PFIC or QEF

General Information

Columns (a) and (b).

Enter the name and U.S. EIN (or reference ID number) of each PFIC held directly or indirectly by the partnership during its tax year. Do not enter FOREIGNUS or APPLIED FOR.

QEF Information

Columns (c) and (d).

Enter the partnership's share of the total ordinary earnings and net capital gain (as defined in Regulations section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year in which or with which the tax year of the PFIC ends in columns (c) and (d), respectively. The PFIC should provide a statement that provides information to assist in determining these amounts. See Regulations section 1.1295-1(g) for additional information on annual PFIC statements.

Provide the information received in an annual information statement with respect to the PFIC, unless the U.S. person filing the Form 8865 has not made, or does not intend to make, a QEF election with respect to the PFIC.

Note.

Certain partners may need additional information not required to be reported on this Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII) from the QEF with respect to its computation of its net capital gain (as defined in Regulations section 1.1293-1(a)(2)) to make certain computations under section 1061 or the regulations thereunder. The U.S. person preparing the Form 8865 may request, or the foreign partnership for which the Form 8865 is filed may aid in obtaining, such information from the QEF, though the QEF is not required to provide such information. See section 1061 and Regulations sections 1.1061-4 and 1.1061-6 for more information.

MTM Information

Columns (e) and (f).

Enter the fair market value of the PFIC stock at the beginning and end of the partnership’s tax year in columns (e) and (f), respectively. If any shares of the PFIC were acquired during the tax year for which the Form 8865 is being filed, the fair market value in column (e) should reflect the fair market value of those shares as of the date of acquisition. This information must be provided unless the U.S. person filing the Form 8865 has not made, or does not intend to make, an MTM election with respect to the PFIC.

Section 1291 and Other Information

Note.

Generally, this information is to assist shareholders of section 1291 funds in satisfying any information reporting obligations and in computing income inclusions with respect to section 1291 funds. However, this information may be relevant to PFICs with respect to which a pedigreed QEF, MTM, or other election has been made by a partner or other indirect PFIC shareholder. Accordingly, complete columns (g) through (o) with respect to each PFIC for which reporting on Schedule K-2, Part VII, and Schedule K-3, Part VII, is required. However, note the instructions for column (k) regarding reporting distributions from PFICs with respect to which the U.S. person filing the Form 8865 has made a pedigreed QEF or MTM election.

Column (g).

Enter the date(s) on which the partnership initially acquired each block of stock in the PFIC using the format YYYYMMDD.

Reminder.

If the partnership initially acquired various blocks of stock in a PFIC on multiple dates, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing such dates.

Attachment 6

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

Column (h).

Enter the amount of each distribution of cash and/or the fair market value of any other property distributed to the partnership by the PFIC during the tax year, if any.

Note.

Deemed distributions by QEFs do not need to be reported on this Schedule K-2, Part VII (or the partner’s Schedule K-3, Part VII). However, partners which have made, or intend to make, an election under section 1294, and which are deemed to have received a distribution from the QEF, may require this information to complete any computations under section 1294 (including for Form 8621, if required). See section 1294(f) and Regulations section 1.1294-1T for additional information.

Note.

If the partnership received distributions from a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the amount and/or fair market value of each distribution.

Column (i).

Enter the date(s) of distribution of the amounts entered in column (h) using the format YYYYMMDD.

Note.

If the partnership received distributions from a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the dates of each distribution.

Column (j).

Enter the total creditable foreign taxes attributable to a distribution from the PFIC. See section 1291(g) and the instructions for Form 8621, Part V, line 16d, for additional information on creditable foreign taxes attributable to PFIC distributions, including apportioning creditable foreign taxes to the portion of a distribution which constitutes an excess distribution and certain rules related to creditable foreign taxes on a disposition of PFIC stock.

Note.

If the partnership received distributions from a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the amount of any foreign taxes attributable to each distribution.

Column (k).

Enter the total amount of distributions the partnership received from the PFIC in the 3 preceding tax years, or, if shorter, the total amount of distributions the partnership received during its holding period of the PFIC stock. However, do not enter any amount in this column with respect to a PFIC for which the U.S. person filing the Form 8865 has made a pedigreed QEF or MTM election.

Column (l).

Enter the date(s) on which the partnership disposed of any block of stock in the PFIC during the partnership's tax year, if any, using the format YYYYMMDD.

Note.

If the partnership disposed of stock in a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the dates of each disposition.

Column (m).

If the partnership disposed of any block of stock in the PFIC during the partnership's tax year, enter the amount realized by the partnership on each disposition.

Note.

If the partnership disposed of stock in a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the amount realized by the partnership on each disposition.

Column (n).

If the partnership disposed of any block of stock in the PFIC during the partnership's tax year, enter the partnership's tax basis in the shares of the PFIC on the date of disposition.

Schedule K-3.

Enter the partner's share, through its ownership in the partnership, of the partnership's tax basis in the PFIC shares. The partner's share of the basis in the PFIC shares should include any applicable adjustments specific to the partner, such as section 743(b) adjustments or adjustments made under the PFIC regime. See sections 1293(d) and 1296(b), and Regulations sections 1.1297-3 and 1.1298-3 for adjustments made under the PFIC regime.

Note.

If the partnership disposed of stock in a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the tax bases to the partnership and partner with respect to each disposition.

Column (o).

Enter the partnership's gain or loss on the disposition of PFIC shares. This equals column (m) minus column (n).

Note.

If the partnership disposed of stock in a PFIC on multiple dates during the tax year, attach a statement with the information contained in Attachment 6 to Schedule K-2, Part VII, and its corresponding Schedules K-3, Part VII, providing the gain or loss to the partnership and partner on each disposition.

Schedule K-2, Part VIII (Partners’ Information for Base Erosion and Anti-Abuse Tax (Section 59A)), and Schedule K-3, Part VIII (Partner’s Information for Base Erosion and Anti-Abuse Tax (Section 59A))

Note.

This information is relevant for partners completing Form 8991.

This Part VIII of Schedules K-2 and K-3 must be completed for corporate partners who are determining if they are subject to the Base Erosion and Anti-Abuse Tax (BEAT), and to figure their base erosion and anti-abuse tax, if any. This information includes the partner's share of the partnership's gross receipts, the partner's amount of base erosion payments made through the partnership, and the partner's base erosion tax benefits. The BEAT is generally levied on certain large corporations that have deductions and certain other items paid or accrued to foreign related parties (a base erosion payment) that are 3% of their total deductions or higher (2% in the case of certain banks or registered securities dealers), a determination referred to as the base erosion percentage test. Partnerships are not subject to the BEAT; however, corporate partners of a partnership that are applicable taxpayers under Regulations section 1.59A-2 may be subject to the BEAT. Except for purposes of determining a partner's base erosion tax benefits under Regulations section 1.59A-7(d)(1), and whether a taxpayer is a registered securities dealer, BEAT determinations are made by the partner. See Regulations section 1.59A-7 for further information regarding the application of section 59A to partnerships and the Instructions for Form 8991 for additional information on whether a corporate partner is an applicable taxpayer subject to the BEAT.

To complete Schedules K-2 and K-3, Part VIII, the foreign related parties of each partner must be identified, subject to the exception for small partners. It is expected that the partners will collaborate to identify the foreign related parties of each partner. A foreign related party with respect to the partner is a foreign person that is:

  • Any 25% owner of the applicable taxpayer (as defined in Regulations section 1.59A-1(b)(17)(ii)(A)),

  • Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the applicable taxpayer or any 25% owner of the applicable taxpayer, or

  • Any other person who is related to the applicable taxpayer within the meaning of Regulations section 1.59A-1(b)(17)(i)(C).

Exception for small partners.

Part VIII of Schedule K-3 is not required to be prepared for small partners meeting the following 3 requirements.

  1. The partner's interest in the partnership represents less than 10% of the capital and profits of the partnership at all times during the tax year.

  2. The partner is allocated less than 10% of each partnership item of income, gain, loss, deduction, and credit for the tax year.

  3. The partner's interest in the partnership has a fair market value of less than $25 million on the last day of the partner's tax year, determined using a reasonable method.

See Regulations section 1.59A-7(d)(2) for further information regarding the application of the exception for small partners.

Exception for certain other partners.

Do not complete Schedule K-3, Part Vlll, for a partner that is an individual.

Do not complete Schedule K-3, Part VIII, for a partner that is an S corporation.

Complete Section 1, lines 1–4, of Schedule K-3, Part VIII, for partners that are RICs and REITs but do not complete Section 2 for these partners.

Section 1. Applicable Taxpayer

Lines 1a through 4a.

Enter the partnership's total gross receipts for the current year and each of the 3 preceding tax years. The determination of the partnership's gross receipts is made in accordance with Regulations section 1.448-1T(f)(2)(iv).

Lines 1b through 4b.

Complete lines 1b through 4b if the partnership has a foreign partner or there is reason to know it has a foreign partner through a partner that is a pass-through entity. Enter the partnership’s total gross receipts on income effectively connected with a U.S. trade or business (ECI) for the current year and each of the 3 preceding tax years which the foreign partner(s) would take into account as income that is ECI. If the foreign partner(s) is subject to tax on a net basis pursuant to an applicable income tax treaty of the United States, enter the gross receipts that would be attributable to transactions taken into account in determining its net taxable income.

Lines 1c through 4c.

Enter the total non-ECI gross receipts as the difference between column A and column B.

Schedule K-3.

For purposes of section 59A, each partner in a partnership includes on its Schedule K-3, Part VIII, the share of partnership gross receipts in proportion to the partner's distributive share (as determined under sections 704(b) and (c)) of items of gross income that were taken into account by the partnership under section 703 or 704(c) (such as remedial or curative items under Regulations sections 1.704-3(c) or (d)).

Line 5. Amounts included in the denominator of the base erosion percentage as described in Regulations section 1.59A-2(e)(3).

Enter the amount of deductions and other items allocated to the partners from the partnership that will be included in the denominator of the partners' base erosion percentage. For a description of deductions that are not included in the denominator, see Regulations section 1.59-2(e)(3)(ii).

Section 2. In General Base Erosion Payments and Base Erosion Tax Benefits

Column (b). Base erosion payments.

For purposes of determining whether a payment or accrual by a partnership is a base erosion payment, any amount paid or accrued by the partnership is treated as paid or accrued by each partner based on the partner's distributive share of the item of deduction with respect to that amount. A partner that is an applicable taxpayer has a base erosion payment for any amount paid or accrued by the partnership to a foreign person (as defined in Regulations section 1.59A-1(b)(10)) that is a related party to the partner (as defined in Regulations section 1.59A-1(b)(12)) with respect to which a deduction is allowable under chapter 1 and for certain other items in lines 13 and 15. See Regulations section 1.59A-3 and the Instructions for Form 8991 for more information on the definition of a base erosion payment.

Column (c). Base erosion tax benefits.

A partner's distributive share of any deduction or reduction in gross receipts attributable to a base erosion payment is the partner's base erosion tax benefit. A partner's base erosion tax benefits are determined separately for each asset, payment, or accrual, as applicable, and are not netted with other items. A partner's base erosion tax benefit may be more than the partner's base erosion payment (for example, in the case of special allocations made by the partnership). See the Instructions for Form 8991 and Regulations section 1.59A-7(d) for further information concerning a partner's base erosion tax benefits.

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); line 14(a), columns (b) and (c); line 15, columns (b) and (c); and line 16, columns (b) and (c), do not include amounts that a partner does not take into account pursuant to the exception for certain small partners. See Regulations section 1.59A-7(d)(2) and Exception for small partners, earlier. For Schedule K-2, Part VIII, report the total allocated to all partners, and for Schedule K-3, Part VIII, report the amount allocated to each individual partner.

Line 8. Purchase or creation of property rights for intangibles (patents, trademarks, etc.).

Column (a).

Enter the amount paid or accrued by the partnership in connection with the acquisition or creation of intangible property rights (patents, copyrights, trademarks, trade secrets, etc.) that is subject to the allowance for depreciation (or amortization in lieu of depreciation) for the tax year.

Column (b).

Enter the amount paid or accrued to all foreign persons that are a related party of any of the partners in connection with the acquisition or creation of intangible property rights (patents, copyrights, trademarks, trade secrets, etc.) that is subject to the allowance for depreciation (or amortization in lieu of depreciation).

Column (c).

Enter the amount of the partners' base erosion tax benefits attributable to deductions allowed under chapter 1 for the tax year for depreciation (or amortization in lieu of depreciation) with respect to intangible property rights acquired in the current or prior years from all foreign persons that are a related party of any of the partners.

Line 9. Rents, royalties, and license fees.

Column (a).

Enter the amount paid or accrued by the partnership for the tax year for the use or right to use tangible or intangible property resulting in rents, royalties, and/or license fees.

Column (b).

Enter the amount paid or accrued to all foreign persons that are a related party of any of the partners for the use or right to use tangible or intangible property resulting in rents, royalties, and/or license fees.

Column (c).

Enter the amount of the partners' base erosion tax benefits attributable to amounts paid or accrued to all foreign persons that are a related party of any of the partners for the use or right to use tangible or intangible property that results in rents, royalties, and/or license fees.

Line 10a. Compensation/consideration paid for services NOT excepted by section 59A(d)(5).

Column (a).

Enter the amount paid or accrued by the partnership for the tax year as compensation or consideration for services, excluding any amount that qualifies for the services cost method exception in section 59A(d)(5).

Column (b).

Enter the amount paid or accrued to all foreign persons that are a related party of any of the partners as compensation or consideration for services, excluding any amount that qualifies for the services cost method exception in section 59A(d)(5).

Column (c).

Enter the amount of the partners' base erosion tax benefits attributable to amounts paid or accrued to all foreign persons that are a related party of any of the partners representing compensation or consideration paid for services, excluding amounts qualifying for the services cost method exception in section 59A(d)(5).

Line 10b. Compensation/consideration paid for services excepted by section 59A(d)(5).

Column (a).

Enter the amounts paid or accrued by the partnership to any foreign person that is a related party of any of the partners for services qualifying for the services cost method exception in section 59A(d)(5).

Line 11. Interest expense.

Column (a).

Enter the amount of interest paid or accrued by the partnership for the tax year (excluding interest paid or accrued in a prior year treated as paid or accrued in the current year under section 163(j) or similar provisions).

Column (b).

Enter the amount of interest expense paid or accrued to all foreign persons that are a related party of any of the partners (excluding interest paid or accrued in a prior year treated as paid or accrued in the current year under section 163(j) or similar provisions).

Column (c).

Enter the amount of the partners' base erosion tax benefits attributable to interest expense paid or accrued by the partnership that is allowed as a deduction in the current tax year. If the partner is a foreign person, include the individual lines from column (c) of Worksheet A on the applicable Schedule K-3.

Schedule K-3.

When completing line 11 on the Schedule K-3, if the partner is a foreign person, enter the total from column (a) of Worksheet A on the partner's Schedule K-3 in column (a) of line 11, enter the total from column (b) of Worksheet A on the Schedule K-3 in column (b) of line 11 and enter the total from column (c) of Worksheet A on the Schedule K-3 in column (c) of line 11.

Complete Worksheet A for all partnership-related items and complete a Worksheet A for each foreign partner's share of the amounts reported on the partnership Worksheet A and attach a statement containing the partner’s share of the information in Worksheet A to the Schedule K-3.

Line 12. Payments for the purchase of tangible personal property.

Column (a).

Enter the amount paid or accrued by the partnership for the tax year for the purchase of tangible personal property.

Column (b).

Enter the amount paid or accrued to all foreign persons that are a related party of any of the partners for the purchase of tangible personal property.

Column (c).

Enter the amount of base erosion tax benefits attributable to amounts paid or accrued to any foreign persons that are a related party of any of the partners for the purchase of tangible property.

Line 13. Premiums and/or other considerations paid or accrued for reinsurance as covered by section 59A(d)(3) and section 59A(c)(2)(A)(iii).

Column (a).

Enter the amount paid or accrued by the partnership for the tax year for reinsurance.

Column (b).

Enter the amount of any premiums or other consideration paid or accrued to all foreign persons that are a related party of any of the partners for reinsurance taken into account under section 803(a)(1)(B) (relating to return premiums and premiums or other consideration arising out of indemnity reinsurance that reduces life insurance gross income) or section 832(b)(4)(A) (relating to amounts deducted from gross premiums written on insurance contracts for return premiums and premiums paid for reinsurance).

Column (c).

Enter the amount of the partners' base erosion tax benefits attributable to premiums or other consideration as described in section 59A(c)(2)(A)(iii) paid or accrued to any foreign person that is a related party of any of the partners for reinsurance.

Line 14a. Nonqualified derivative payments.

Column (a).

Enter the amount paid or accrued by the partnership for the tax year attributable to derivative contracts as defined in section 59A(h)(4).

Column (b).

Enter the amount paid or accrued to all foreign persons that are a related party of any of the partners with respect to derivative contracts that are not eligible for the qualified derivative payment exception under section 59A(h) and Regulations section 1.59A-6. Do not include any amount paid that is a qualified derivative payment on line 14a, column (b).

Column (c).

Enter the amount of base erosion tax benefits attributable to nonqualified derivative payments paid or accrued to any foreign person that is a related party of any of the partners.

Line 14b. Qualified derivative payments excepted by section 59A(h).

Enter the total amount of qualified derivative payments paid or accrued by the partnership. Generally, a qualified derivative payment is any payment made by the taxpayer pursuant to a derivative contract, provided that the taxpayer recognizes gain or loss on the derivative contract as if it were sold for its fair market value on the last business day of the tax year; treats the gain or loss as ordinary; and treats the character of all other items of income, deduction, gain, or loss with respect to a payment pursuant to the derivative as ordinary. A payment is not a qualified derivative payment if the payment would be treated as a base erosion payment if it were not made pursuant to a derivative (such as interest, royalty, or services income). With respect to a contract with both derivative and nonderivative components, a payment is not a qualified derivative payment if it is properly allocable to the nonderivative component.

For tax years beginning after June 7, 2021, attach to Schedule K-2 (and each Schedule K-3) a written representation that all payments satisfy the requirements of Regulations section 1.59A-6(b)(2) to meet the reporting requirement of Regulations sections 1.59A-6(b)(2) and 1.6038A-2(b)(7)(ix).

Line 15. Payments reducing gross receipts made to surrogate 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 receipts of the partnership. This amount includes payments to a surrogate foreign corporation that is a related party to the partner, but only if the entity first became a surrogate foreign corporation after November 9, 2017. The amount also includes payments to a foreign person that is a member of the same expanded affiliated group, as defined in section 7874(c)(1), as the surrogate foreign corporation. A surrogate foreign corporation is defined in section 7874(a) (2)(B) but does not include a foreign corporation that is treated as a domestic corporation under section 7874(b).

Column (c).

Enter the base erosion tax benefits attributable to amounts paid or accrued to certain expatriated entities described in column (b) resulting in a reduction of gross receipts of the partnership.

Line 16. Other payments—specify.

Column (a).

Enter the amount paid or accrued for the tax year by the partnership that has not been included on lines 8 through 15 above.

Column (b).

Enter the amount paid or accrued to any foreign person that is a related party of any of the partners that is a base erosion payment that has not otherwise been included on lines 8 through 15 above.

Column (c).

Enter the amount of the partners' base erosion tax benefits related to other specified base erosion payments not listed in any of the categories on lines 8 through 15 above.

Attachment.

For amounts reported on line 16, attach a statement to both Schedules K-2 and K-3 (for distributive share) describing the type and amount of other payments, using the same column headings as specified in this schedule: "Total Base Erosion Payment," "Total Base Erosion Tax Benefit." For each type of payment, the attachment must identify the relationship of a partner to the foreign related party consistent with the categories and instructions for columns (b) and (c) of this schedule.

Line 17(c). Base erosion tax benefits related to payments reported on lines 6 through 16, on which tax is imposed by section 871 or 881, with respect to which tax has been withheld under section 1441 or 1442 at 30% (0.30) statutory withholding tax rate.

Enter the aggregate amount of the partners' base erosion tax benefits, reported on lines 8 through 16, on which tax is imposed under section 871 or 881 and with respect to which tax has been deducted and withheld under section 1441 or 1442 at a 30% statutory withholding tax rate.

Line 18(c). Portion of base erosion tax benefits reported on lines 6 through 16, on which tax is imposed by section 871 or 881, with respect to which tax has been withheld under section 1441 or 1442 at a reduced withholding rate pursuant to an income tax treaty.

Multiply ratio of percentage withheld divided by 30% (0.30) times base erosion tax benefit. Complete Worksheet B below for all partnership-related items and attach a Worksheet B to the Schedule K-3 for each partner's share of the amounts reported on the partnership Worksheet B.

Complete Worksheet B below to determine the portion of the base erosion tax benefits, reported on lines 8 through 16, on which tax is imposed under section 871 or 881 and with respect to which tax has been deducted and withheld at a reduced withholding tax rate (but not exempt from tax) pursuant to a U.S. income tax treaty. Keep a copy of the completed Worksheet B for the partnership’s records.

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

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

Instructions for Schedules K-2 and K-3 (Form 8865) - Additional Material

Index

A

Attachment 1,
Attachment 2,
Attachment 5, Attachment 5
Attachment 6, Additional Information for Sec. 2,

C

Capital gains and losses, Lines 11 through 15 and 27 through 30. Capital gains and losses.
Charitable contributions, Line 38. Charitable contributions.
Codes for Types of Tax, Column (a).
Computer-Generated Schedules K-2 and K-3, Computer-Generated Schedules K-2 and K-3
Country code, Country code.
Currency, Reporting currency.

E

EIN, Schedule K-2, Identifying Information
Example 1, Example 1.
Example 2, Example 2.
Example 3, Line 1.
Example 4, Line 3.
Example 5, Example 5.

F

Foreign branch category income, Foreign branch category income.
Foreign oil and gas taxes, Box 2. Foreign oil and gas taxes.
Foreign tax translation, Box 4. Foreign tax translation.
Foreign taxes not creditable but deductible, Line 45. Foreign taxes not creditable but deductible.
Foreign taxes paid or accrued to sanctioned countries, Foreign taxes paid or accrued to sanctioned countries.
Foreign taxes related to PTEP resourced by treaty, Foreign taxes related to PTEP resourced by treaty.
Foreign-derived DEI on Form 8993, Section 2. Information To Determine Foreign-Derived Deduction Eligible Income on Form 8993
Foreign-derived gross receipts, Line 9. Gross receipts.
Foreign-Derived Intangible Income (FDII) Deduction apportionment factors, Section 3. Foreign-Derived Intangible Income (FDII) Deduction Apportionment Factors
Form 8621, Information to Complete, Schedule K-2, Part VII, and Schedule K-3, Part VII (Information To Complete Form 8621)
Form 8858 information, Box 7. Form 8858 information.
Future Developments, Future Developments

H

High-taxed income, Box 5. High-taxed income.

O

Ordinary dividends and qualified dividends, Lines 7 and 8. Ordinary dividends and qualified dividends.
Other deductions, Lines 49 and 50. Other deductions.
Other income, Line 20. Other income.
Other interest expense, Lines 41 through 43. Other interest expense.
Other international items, Box 12. Other international items.
Other Tax Information, Section 5. Other Tax Information

P

Part III. Other Information for Preparation of Form 1116 or 1118, Schedule K-2, Part III, and Schedule K-3, Part III (Other Information for Preparation of Form 1116 or 1118)
Part IV. Information on Partners’ Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII), Schedule K-2, Part IV (Information on Partners’ Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)), and Schedule K-3, Part IV (Information on Partner’s Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII))
Part VI. Information on Partners' Section 951(a)(1) and Section 951A Inclusions), 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)
Part VII. Information To Complete Form 8621, Schedule K-2, Part VII, and Schedule K-3, Part VII (Information To Complete Form 8621)
Part VIII. Partners' Information for Base Erosion and Anti-Abuse Tax (Section 59A), Schedule K-2, Part VIII (Partners’ Information for Base Erosion and Anti-Abuse Tax (Section 59A)), and Schedule K-3, Part VIII (Partner’s Information for Base Erosion and Anti-Abuse Tax (Section 59A))
Partner determination, Partner determination.
Partnership determination, Partnership determination.
Partner’s section 250 deduction re FDII, Schedule K-2, Part IV (Information on Partners’ Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)), and Schedule K-3, Part IV (Information on Partner’s Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII))
Parts of Sch. K-2, in general, Uses of the parts of Schedules K-2 and K-3, in general.
Parts of Schedules K-2 and K-3, in general, Form references.
PFIC, QEF general information, Section 1. General Information on Passive Foreign Investment Company (PFIC), Qualified Electing Fund (QEF), or Qualifying Insurance Corporation (QIC)
Purchase or creation of property rights for intangibles, Line 8. Purchase or creation of property rights for intangibles (patents, trademarks, etc.).

R

R&E expenses, Line 32. R&E expenses.
Rental income, Lines 3 and 4. Rental income.

U

Upstream Loans, Upstream loans.

W

What’s New, What’s New
Where to File, When and Where To File
Who Must File, Who Must File
Worksheet A, Interest Paid or Accrued by the Partnership, Worksheet A—Interest Paid or Accrued by the Partnership
Worksheet B, Sec. 2, Line 18, Column (c), Worksheet B—Section 2, Line 18, Column (c)