1065 Schedule K-3 Partner's Instructions for Schedule K-3 (Form 1065)

2021

Partner’s Instructions for
Schedule K-3 (Form 1065)

Department of the Treasury
Internal Revenue Service

Partner’s Share of Income, Deductions, Credits, etc.—International (For Partner’s
Use Only)
Contents
General Instructions . . . . . . . . .
Purpose of Schedule K-3 . .
How To Use Schedule K-3 .
Specific Instructions . . . . . . . . .
Part I. Partner’s Share of
Partnership’s Other
Current Year International
Information . . . . . . . . .
Part II. Foreign Tax Credit
Limitation . . . . . . . . . .
Part III. Other Information for
Preparation of Form 1116
or 1118 . . . . . . . . . . . .
Part IV. Information on
Partner’s Section 250
Deduction With Respect
to Foreign Derived
Intangible Income (FDII) .
Part V. Distributions From
Foreign Corporations to
Partnership . . . . . . . . .
Part VI. Information on
Partner’s Section 951(a)
(1) and Section 951A
Inclusion . . . . . . . . . . .
Part VII. Information to
Complete Form 8621 . . .
Part VIII. Partner’s Share of
Partnership’s Interest in
Foreign Corporation
Income (Section 960) . . .
Part IX. Partner’s Information
for Base Erosion and
Anti-Abuse Tax (Section
59A) . . . . . . . . . . . . . .
Part X. Foreign Partner’s
Character and Source of
Income and Deductions.
Part XI. Section 871(m)
Covered Partnerships . .
Part XII. Reserved for Future
Use . . . . . . . . . . . . . .
Part XIII. Foreign Partner’s
Distributive Share of
Deemed Sale Items on
Transfer of Partnership
Interest . . . . . . . . . . . .

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

Future Developments

For the latest information about
developments related to Form 1065 and
its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form1065.

Jun 23, 2021

What’s New

Schedule K-3 (Form 1065) is new for the
2021 tax year. Schedule K-3 replaces,
supplements, and clarifies the former
line 16, Foreign Transactions, in Part III of
Schedule K-1 (Form 1065). Schedule K-3
also replaces, supplements, and clarifies
the reporting of certain amounts formerly
reported on line 20, Other information, in
Part III of Schedule K-1. Schedule K-3
assists partnerships in providing you with
the information necessary to complete
your returns with respect to the
international tax aspects of the Internal
Revenue Code. For example,
Schedule K-3 provides information
necessary for a partner that is a
corporation (corporate partner) or
individual (individual partner) to figure their
foreign tax credit on Form 1118, Foreign
Tax Credit-Corporations; or Form 1116,
Foreign Tax Credit (Individual, Estate, or
Trust), respectively.

General Instructions
The Partner’s Instructions for
Schedule K-1 (Form 1065) generally apply
to Schedule K-3, including Inconsistent
Treatment of Items and Errors. These
instructions provide additional information
specific to Schedule K-3.

Purpose of Schedule K-3

Schedule K-3 reports items of
international tax relevance from the
operation of a partnership. You must
include this information on your tax or
information returns. See separate parts for
specific instructions. You only need to use
the schedules that are applicable to you.
For example, in general, if the partner
receiving Schedule K-3 is a domestic
corporation, the partnership did not
complete Part X, Foreign Partner's
Character and Source of Income and
Deductions, because that part is
inapplicable to domestic corporation
partners. If the partner receiving
Schedule K-3 is itself a partnership, it will
use information from Schedule K-3 to
complete Schedules K-3 to report to its
partners.
The proper treatment of certain items
by the partner are dependent on
information that the partnership may not
Cat. No. 74716D

have, and thus the partnership may have
reported certain information on the
Schedule K-3 based on assumptions that
are incorrect. In such cases, the partner
must treat the items according to the
partner’s actual facts, and file a Form
8082, Notice of Inconsistent Treatment or
Administrative Adjustment Request
(AAR), to identify and explain the
inconsistency.

How To Use Schedule K-3
Reporting currency. All amounts are
reported in U.S. dollars except where
otherwise specified.
References to other forms. References
in these instructions to Form 1040, U.S.
Individual Income Tax Return, are
intended, if applicable, to include Form
1040-SR, U.S. Tax Return for Seniors, as
well as other tax returns for noncorporate
partners such as Form 1041, U.S. Income
Tax Return for Estates and Trusts.
Similarly, references to Form 1120, U.S.
Corporation Income Tax Return, are
intended, if applicable, to apply to other
forms in the 1120 series. References to
forms which have been replaced are
intended, if applicable, to include the
replacement forms.
Uses of the parts of Schedule K-3, in
general. The following are brief
descriptions of each part of Schedule K-3.
Detailed information is provided in
Specific Instructions.
Part I. Used to determine any
international tax items not reported
elsewhere on Schedule K-3 (Form 1065).
Part II. Used to determine your
distributive share of partnership income
and loss by source and separate category
of income for purposes of the foreign tax
credit limitation. Partners will use the
information to claim and figure a foreign
tax credit on Form 1116 or 1118.
Part III. Used to determine the
allocation and apportionment of research
and experimental (R&E) expense, interest
expense, and the foreign-derived
intangible income (FDII) deduction for
purposes of the foreign tax credit
limitation. Also use this part to determine
your distributive share of the partnership's

creditable foreign taxes paid or accrued,
and to determine income adjustments
under section 743(b) by source and
separate category. Partners will use the
information to figure and claim a foreign
tax credit on Form 1116 or 1118.
Part IV. Used to determine your
deduction with respect to FDII. Partners
will 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. Used, in combination with
other information known to you, such as
from Schedule P (Form 5471), Information
Return of U.S. Persons With Respect to
Foreign Corporations, to determine your
share of distributions by foreign
corporations to the partnership that are
attributable to previously taxed earnings
and profits (PTEP) in your annual PTEP
accounts with respect to the foreign
corporations (which are excludable from
your gross income) or non-previously
taxed earnings and profits (E&P), and the
amount of foreign currency gain or loss on
the PTEP that you are required to
recognize under section 986(c). Use the
information to figure and report the
dividends and foreign currency gain or
loss on Form 1040 and Form 1120. Also
use the information to claim and figure a
foreign tax credit on Form 1116 or 1118.
Part VI. Used to determine your
income inclusions under sections 951(a)
and 951A if you are a U.S. shareholder of
any of the listed controlled foreign
corporations (CFCs). Partners will use the
information to complete Form 8992, U.S.
Shareholder Calculation of 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. Used to complete Form 8621,
Information Return by a Shareholder of a
Passive Foreign Investment Company or
Qualified Electing Fund, and to provide
information required to determine your
inclusion with respect to the passive
foreign investment company (PFIC).
Part VIII. Used to determine your
deemed paid taxes on inclusions under
section 951A, 951(a)(1), or 1293(f).
Domestic corporate partners and partners
making a section 962 election will use the
information to figure a deemed paid
foreign tax credit on Form 1118.
Part IX. Used to figure the base
erosion and anti-abuse tax (BEAT).
Corporate partners will use the information
to complete Form 8991, Tax on Base
Erosion Payments of Taxpayers With
Substantial Gross Receipts.

Part X. Used to provide information to
a foreign partner (or a pass-through entity
partner with a foreign owner) to determine
its tax liability or reporting requirements
with respect to income effectively
connected with a U.S. trade or business
(ECI) or with respect to fixed,
determinable, annual, or periodical
(FDAP) income. Partners will use the
information to figure and report any U.S.
tax liability on Forms 1040-NR, U.S.
Nonresident Alien Income Tax Return;
1120-F, U.S. Income Tax Return of a
Foreign Corporation; or other applicable
form.
Part XI. Certain partners that have
entered into section 871(m) transactions
referencing units in the partnership will
use any information reported in this part to
determine their U.S. withholding tax and
reporting obligations with respect to those
transactions under section 871(m) and
related rules, including for purposes of
determining the amounts to report on
Forms 1042 and 1042-S.
Part XII. Reserved
Part XIII. Used if you are a foreign
person to determine your distributive
share of deemed sale items on transfer of
a partnership interest. Partners will use the
information to complete Form 4797, Sales
of Business Property; and Form 8949,
Sales and Other Dispositions of Capital
Assets.

Specific Instructions
Schedule K-3
Identifying
Information
Item E—Part Applicability. The
partnership checked the “Yes” box to
indicate the applicable parts of
Schedule K-3. The partnership checked
the “No” box to indicate the inapplicable
parts of Schedule K-3.

Part I. Partner’s Share of
Partnership’s Other
Current Year International
Information
This part reports your information for
international tax items not reported
elsewhere on the Schedule K-3.

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. If the partnership sells
non-depreciable personal property (other
than inventory and certain intangible
property), you, the partner, are treated as
the seller. Therefore, you will need to
determine the source of the gain reported
on Part II, line 1, column (f). In general, if
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you are a U.S. citizen or resident alien
individual, the gain is U.S. source.
However, a U.S. citizen or resident alien
individual with a tax home (section 911(d)
(3)) in a foreign country is treated as a
nonresident if an income tax of at least
10% is imposed by and paid to a foreign
country regarding such sale. See section
865(g)(2).
If the partnership checked box 1 on
Part I, use the information attached to
Schedule K-3 to determine if a foreign
country imposed a tax of at least 10% or
more on the gain from each sale. If so, and
you have a tax home in a foreign country,
such gain is foreign source income and
reported on Form 1116. For more
information, see the instructions later to
Part II, column (f).
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 had such taxes, it checked
box 2 and attached a partially completed
Schedule I (Form 1118), to Schedule K-3.
If you are a corporation, use the partially
completed Schedule I to complete your
Schedule I (Form 1118). If you are an
individual, estate, or trust, see Form 1116,
Part III, line 12, and the associated
instructions for the applicable reduction for
individuals.
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).
If the partnership checked box 3 on
Part I, it attached a statement that
separately identifies any arrangement,
along with your share of the taxes paid or
accrued in connection with the
arrangement in which the partnership
participates that would qualify as a splitter
arrangement under section 909. The box
should be checked only if the partnership
knows or has reason to know an entity that
took into account related income from the
arrangement is a covered person with
respect to one or more partners. For

Instructions for Sch. K-3 (Form 1065) (2021)

example, you are a payor of a foreign tax if
you take into account the foreign taxes
paid or accrued by the partnership under
section 702(a)(6). If the partnership wholly
owns a reverse hybrid (as defined in
Regulations section 1.909-2(b)(1)(iv)) and
you own 10% or more (determined by vote
or value) of the interest in the partnership,
the reverse hybrid is a covered person
with respect to you. You cannot credit the
foreign taxes paid or accrued by the
partnership with respect to the reverse
hybrid until you or the partnership takes
into account the related income of the
reverse hybrid. Until then, the taxes are
suspended. The partnership reported your
share of the potentially suspended taxes
as a result of the application of section 909
on Part III, section 4, line 2E. If you are a
corporation, complete Form 1118,
Schedule G, line E for taxes suspended
under section 909. If you are an individual,
estate, or trust, include on Form 1116,
Part III, line 12, taxes suspended under
section 909. If you are required to
complete Form 5471 for a controlled
foreign corporation (CFC), include in
Schedule E-1, column (d), line 3b, taxes
suspended under section 909.
If the partnership checked box 3, and
the statement indicates that the
partnership took into account the related
income from the splitter arrangement, the
taxes are partially or fully unsuspended
depending on the amount of related
income taken into account. Even though
the taxes are unsuspended, in certain
cases you might not be eligible to claim a
credit for those taxes, for example, when
the related income is taken into account
as part of a dividend for which you are
eligible for a section 245A deduction. To
the extent you are eligible to claim a credit
for unsuspended taxes, these amounts
may be claimed on Form 1118 or 1116, as
applicable. If you are required to complete
Form 5471, for a CFC, report the
unsuspended taxes on Form 5471,
Schedule E-1, column (d), line 3a.
In some cases, you may take into
account related income directly that allows
you to partially or fully unsuspend taxes,
for example, by way of a subpart F or
GILTI inclusion with respect to related
income.
There might be a splitter
arrangement with respect to the
CAUTION partner even if the partnership did
not identify one, given that the partnership
did not have the information available to
the partner. Therefore, you must identify
such arrangement even if box 3 is not
checked.

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Box 4. Foreign tax translation. If the
partnership checked box 4, it will attach a
statement described in the instructions for
Part III, section 4.

Box 5. High-taxed income. If the
partnership checked box 5, you must
determine if the passive income reported
to you by the partnership is treated as
income in another separate category.
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).
You must group your distributive shares of
passive income from a partnership
according to the rules in Regulations
section 1.904-4(c)(3). However, the
portion, if any, of the distributive share of
income attributable to income earned by a
domestic partnership through a foreign
qualified business unit (QBU) is separately
grouped under the rules of Regulations
section 1.904-4(c)(4). See Regulations
section 1.904-4(c)(5)(ii). The partnership
will attach Worksheets 1 and/or 2.
Use Schedule K-3 and your taxes on
your other passive income (that is, passive
income that is not attributable to your
distributive share of the partnership’s
income as reported on Schedule K-3) to
determine if you need to assign passive
income and the associated taxes to
another separate category of income. You
must allocate and apportion your
expenses to this passive income to
determine if the income is treated as
income in another separate category. This
includes both your distributive share of
partnership expenses and expense
incurred by you directly. If you are a
corporation, see the Instructions for Form
1118 for how to report your income and
taxes reclassified under the high-taxed
income rule. If you are an individual,
estate, or trust, see the Instructions for
Form 1116 for how to report your income
and taxes reclassified under the
high-taxed income rule.
Box 6. Section 267A disallowed deductions. If the partnership checked box 6
on Part I and attached a statement titled
"Section 267A Disallowed Deduction,"
prepare your tax return by taking into
account that you are not allowed a
deduction for any of the amounts listed in
the statement. Thus, for example, do not
claim as a deduction any amount reported
on lines 41 through 43 of Schedule K-3,
Part II, Section 2, or line 9 of Part X,
Section 2, to the extent listed in the
statement as an amount for which a
deduction is disallowed under section
267A. As an additional example, in the
case of a Form 1120 filer, include the
amount of disallowed deductions under
section 267A on Schedule K, Question 21.
See also Form 1120-F, page 2, item EE.
Box 6 and the accompanying
statement describe only interest or
CAUTION royalty paid or accrued by the
partnership for which the partnership

Instructions for Sch. K-3 (Form 1065) (2021)

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knows, or has reason to know, that you
are disallowed a deduction under section
267A. In certain cases, the partnership
may not know, or have reason to know,
that you are disallowed a deduction for
interest or royalty paid or accrued by the
partnership.
See Instructions for Form 1065,
Schedule B, line 22. For your share of any
interest or royalty paid or accrued by the
partnership, you must apply section 267A
and determine whether a deduction is
disallowed, regardless of whether box 6 is
checked or whether the amount is listed
on the accompanying statement.
Items 7 through 9. The partnership will
attach Form 5471; Form 8858; Form 8865;
Form 5713, International Boycott Report;
and other relevant international tax forms.
If the partnership has filed Form 8990,
Limitation on Business Interest Expense
Under Section 163(j), the partnership will
also provide on Schedule K-1 the
information needed to complete Form
8990, Schedule A for foreign partners
which are required to report their
distributive share of excess business
interest expense, excess taxable income,
and excess business interest income, if
any, that is attributable to income
effectively connected with a U.S. trade or
business.
Box 10. Partner loan transactions. If
this box is checked, the partnership
identified upstream or downstream
partnership loan transactions. See
Regulations section 1.861-9(e)(8) and (9)
for purposes of determining special rules
regarding interest expense allocation and
apportionment if you have such loan
transactions with the partnership.
There might be a partner loan
transaction even if the partnership
CAUTION did not identify one, given that the
partnership did not have the information
available to the partner.

!

Box 11. Dual consolidated loss. If the
partnership checked box 11 and you are a
domestic corporation (other than a
regulated investment company, a real
estate investment trust, or an S
corporation), the dual consolidated loss
(“DCL”) rules pursuant to Regulations
section 1.1503(d)-1 through 1.1503(d)-8
may apply to your share of certain
partnership items. In order to comply with
the DCL rules, you may need information
in addition to that provided by the
partnership in this schedule (for example,
your share of the income or DCL
attributable to the partnership’s foreign
branch or interest in a hybrid entity). Some
of the necessary information may be
provided on Form 8858.
Box 12. Other international items. If
the partnership has transactions, income,

deductions, payments, or anything else
that implicates the international tax
provisions of the Internal Revenue Code
and such items are not otherwise reported
on this part or other parts of Schedule K-3,
the partnership reported that information
on a statement and checked box 12.

Parts II and III

Schedule K-3, Parts II and III, report
information you use to figure the foreign
tax credit. In general, a U.S. individual,
estate, trust, or corporation may claim a
credit for taxes paid or accrued, and in
some cases deemed paid, to foreign
countries or U.S. possessions. In general,
foreign corporations and nonresident alien
individuals may claim a credit for taxes
paid or accrued to foreign countries or
U.S. possessions with respect to ECI. The
amount of foreign tax credit in a tax year is
generally limited to the lesser of the
foreign taxes paid or accrued or the U.S.
tax on foreign source income. The
limitation is figured by separate categories
of foreign source income, including foreign
branch category, passive category, and
general category. See the instructions for
Forms 1116 and 1118, as well as Pub.
514, Foreign Tax Credit for Individuals, for
a summary of the rules for determining the
source and separate categories of
income. Note that the information on Parts
II and III may need to be included on the
Schedule K-3 you file if you are a
partnership receiving Schedule K-3 as a
partner in the partnership. For example,
another domestic partnership or a foreign
partnership will need to report the share of
foreign source income and taxes on the
Form 1065 or 8865, Schedule K-3, Parts II
and III. Similarly, if you are a CFC partner
in the partnership, the U.S. shareholder of
the CFC will need to report the information
reported on your Schedule K-3, Parts II
and III, on Form 5471, in particular,
Schedule E.

Part II. Foreign Tax Credit
Limitation
Column (a). U.S. source. Do not report
amounts in this column on Form 1116 or
1118 unless you elect to resource such
income under an applicable U.S. income
tax treaty. See section 904(d)(6). See the
instructions for Forms 1116 and 1118 for
income resourced by treaty reported as a
separate category of income.
Columns (b) through (e). Foreign
source. Add the amounts reported in
these columns to your other income in
these separate categories and report the
total amounts on the applicable Form
1116, Part I, or Form 1118, Schedule A.
Exception. If you are a less-than-10%
limited partner and you do not hold your
partnership interest in the ordinary course

of your active trade or business, then any
amounts reported on Schedule K-3, Part
II, section 1 and Part III, section 1,
columns (b), (d), and (e); Part III, section
3, columns (c) and (d); and Part III, section
5, columns (b), (c), (e), and (f) should be
reported as passive category income.
Deductions reported on Part II, section 2,
columns (b), (d), and (e) should be
reported as reducing passive category
income. Similarly, any foreign taxes paid
or accrued on foreign source income in
Part III, section 4, (b), (c), (e), and (f),
should be assigned to passive category
income. Finally, any amounts reported in
Part III, section 2, columns (b), (d), and (e)
should be assigned to passive category
income. See Regulations section
1.904-4(n)(1)(ii).
Column (f). Sourced by partner. You
must determine the source and separate
category of the income reported in this
column. The income in this column will
generally be with respect to sale of
personal property other than inventory,
depreciable property, and certain
intangible property sourced under section
865. This column might also include
foreign currency gain on a section 988
transaction. If you are a U.S. citizen or
resident, sales and gains reported in this
column will generally be U.S. source
income and not reported on Form 1116 or
1118 unless you elect to resource such
income under an applicable income tax
treaty. There are certain exceptions, for
example, a U.S. citizen or resident with a
tax home (as defined in section 911(d)(3))
in another country is treated as a
nonresident if an income tax of at least
10% is imposed by and paid to a foreign
country regarding such sale. See the
instructions for Part I, Box 1 above. Also,
the source of foreign currency gain or loss
on section 988 transactions may be
determined by reference to the residence
of the QBU on whose books the asset,
liability, or item of income or expense is
properly reflected. See the Instructions for
Form 1118 and Pub. 514 for additional
details.

Section 1, Gross Income
Lines 1 through 24

Form 1118, Schedule A, requires a
corporation to separately report certain
types of gross income by source and
separate category. Schedule K-3, Part II,
lines 1 through 23 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 would report line 24, taking
into account section 904(b)(2) and PTEP
adjustments, by country on their Form
1116, Part I, line 1a. Because all gross
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income is reported on one line on the
Form 1116, there is no need to specify
other reporting lines for gross income
below.
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, report for each gross
income item, 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, a statement is attached to
expand Schedule K-3, Part II for that type
of income to report the additional
countries.
Line 1. Sales. If you file Form 1118, add
the amount reported on this line to your
other sales and report the total on the
Form 1118, Schedule A, column 7, by
separate category. See the instructions for
column (f).
Line 2. Gross income from performance of services. If you file Form 1118,
add the amount reported on this line to
your other gross income from
performance of services and report the
total on the Form 1118, Schedule A,
column 8, by separate category.
Lines 3, 4, and 10. Rental income, royalties, and license fees. If you file Form
1118, add the amount reported on this line
to your other rental income, royalties, and
license fees and report the total on the
Form 1118, Schedule A, column 6, by
separate category.
Line 5. Guaranteed payments. If you
file Form 1118, add the amount reported
on this line to your other guaranteed
payments and report the total on the Form
1118, Schedule A, column 11, by separate
category.
Line 6. Interest income. If you file Form
1118, add the amount reported on this line
to your other interest income and report
the total on the Form 1118, Schedule A,
column 5, by separate category.
Lines 7 and 8. Ordinary dividends and
qualified dividends. Some of the
amounts reported on these lines may be
attributable to PTEP in annual PTEP
accounts that you have with respect to a
foreign corporation and are therefore
excludable from your gross income. If you
file the Form 1116, do not include the
amount attributable to PTEP in your
annual accounts in Part I, line 1a. If you file
Form 1118, add the amount reported on
this line, less the amount attributable to
PTEP in your annual PTEP accounts, to
your other dividends and report the total
on the Form 1118, Schedule A, column 4,
by separate category.

Instructions for Sch. K-3 (Form 1065) (2021)

See the Instructions for Form 1116 for
additional information with respect to rules
regarding capital gain rate differentials (as
defined in section 904(b)(3)(D)) for
qualified dividends.
Lines 11 through 15 and 27 through
30. Capital gains and losses. 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. These rules
apply to individuals and may require
adjustments to the amounts on lines 11
through 15, which in turn affects the total
amount on line 24. See the Instructions for
Form 1116 for additional information. If
you file Form 1116, report lines 27 through
30 on Form 1116, Part I, line 5, by
separate category. If you file Form 1118,
add the amounts reported on
Schedule K-3, Part II, lines 11 through 15
to other gross income you report on the
Form 1118, Schedule A, column 11, by
separate category. Add the amounts
reported on Schedule K-3, Part II, lines 27
through 30 to other amounts you report on
Form 1118, Schedule A, column 13(j), or
Form 1118, Schedule H, Part II, column
(c), as applicable, by separate category.
Lines 16 and 46. Section 986(c) gain
and loss. This line reports the
partnership’s share of a lower-tier
pass-through entity’s section 986(c) gain
or loss, and the amount of section 986(c)
gain or loss on distributions of PTEP
sourced from the partnership’s annual
PTEP accounts. You will need to
determine your foreign currency gain or
loss under section 986(c) with respect to
distributed PTEP sourced from annual
PTEP accounts that you have with respect
to a foreign corporation, using Part V of
the Schedule K-3.
The amount of foreign currency gain
and loss that you report on Form 1118 and
other forms, for example, Form 1040 or
1120, will include your share of the
partnership’s foreign currency gain or loss
under section 986(c) and your own foreign
currency gain or loss under section
986(c). If you file Form 1118, add the
amount on Schedule K-3, Part II, line 16 to
your other section 986(c) gain and report
the total on the Form 1118, Schedule A,
column 9, by separate category. Identify
the type of gain as section 986(c) gain in
Form 1118, Schedule A, column 10. Add
the amount reported on Schedule K-3,
Part II, line 46 to your other section 986(c)
losses and enter the total on the Form
1118, Schedule A, column 13(h), or
Schedule H, Part II, column (c), as
applicable, by separate category. If you
entered an amount in Form 1118,
Schedule A, column 13(h), enter the type
of loss as section 986(c) loss in Form
1118, Schedule A, column 13(i).

Lines 17 and 47. Section 987 gain and
loss. If you file Form 1118, add the
amount reported on Schedule K-3, Part II,
line 17 to your other section 987 gain and
enter the total on the Form 1118,
Schedule A, column 9, by separate
category. Identify the type of gain as
section 987 gain in Form 1118,
Schedule A, column 10. Add the amount
reported on Schedule K-3, Part II, line 47
to your other section 987 loss and enter
the total on the Form 1118, Schedule A,
column 13(h), or Schedule H, Part II,
column (c), as applicable, by separate
category. If you entered an amount in
Form 1118, Schedule A, column 13(h),
enter the type of loss as section 987 loss
in Form 1118, Schedule A, column 13(i).
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 of the foreign currency gain or
loss is determined by reference to the
residence of the taxpayer, the foreign
currency gain and loss will be reported in
column (f). For example, if you are a U.S.
resident, such gain or loss is U.S. source
and would not be reported on Form 1116
or Form 1118. If you file Form 1118, add
the amount on Schedule K-3, Part II,
line 18 to your other section 988 gain and
enter the total on the Form 1118,
Schedule A, column 9, by separate
category. Identify the type of gain as
section 988 gain in Form 1118,
Schedule A, column 10. See instructions
for column (f). Add the amount reported on
Schedule K-3, Part II, line 48 to your other
section 988 loss and enter the total on the
Form 1118, Schedule A, column 13(h), or
Schedule H, Part II, column (c), as
applicable, by separate category. If you
entered an amount in Form 1118,
Schedule A, column 13(h), enter the type
of loss as section 988 loss in Form 1118,
Schedule A, column 13(i).
Line 19. Section 951(a) inclusions. If
you file Form 1118, add the amount
reported on this line to your other section
951(a) inclusions and report the total on
the Form 1118, Schedule A, column 3(a),
by separate category.
Line 20. Other income. If you file Form
1118, add the amount reported on this line
to your other income and report the total
on the Form 1118, Schedule A, column
11, by separate category.
Line 24. Total gross income. If you file
Form 1116, add the amounts reported in
rows A, B, and C (and additional rows, if
applicable) to your other foreign source
gross income from those countries, and
enter the totals in Form 1116, Part I,

Instructions for Sch. K-3 (Form 1065) (2021)

-5-

line 1a, taking into account any section
904(b) adjustments for capital gains, as
described above for Schedule K-3, Part II,
lines 11 through 15 and 27 through 30, or
PTEP adjustments, as described above
for Schedule K-3, Part II, lines 7, 8, 16,
and 46.
If you file Form 1118, add the amounts
reported in A, B, and C (and additional
rows, if applicable) to your other foreign
source gross income from those countries,
and enter the totals in line 11 of Form
1118, Schedule A taking into account any
PTEP adjustments, as described above
for Schedule K-3, Part II, lines 7, 8, 16,
and 46.

Section 2, Deductions
Lines 25 through 54

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 Regulations sections
1.861-8 through -20. For purposes of
allocating and apportioning expenses, in
general, a partner adds the distributive
share of the partnership's deductions with
other deductions incurred directly by the
partner or through other pass-through
entities including partnerships, S
corporations, and trusts (see Regulations
section 1.904-5(a)(4)(iv) for a definition of
pass-through entity). See Regulations
section 1.861-8(e)(15). Schedule K-3, Part
II, lines 25 through 50 generally follow 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.
See Form 1116, Part I, lines 2 through 5.

Line 25. Expenses allocable to sales
income. If you file Form 1118, add the
amount reported on this line to your other
expenses allocable to sales income and
report the total on the Form 1118,
Schedule A, column 13(f), by separate
category.
Line 26. Expenses allocable to gross
income from performance of services.
If you file Form 1118, add the amount
reported on this line to your other
expenses allocable to gross income from
performance of services and report the
total on the Form 1118, Schedule A,
column 13(g), by separate category.
Lines 31, 37 and 44 through 45. Other
deduction. If you file Form 1118, add the
amounts reported on these lines to your
other deductions and report the total on
the Form 1118, Schedule A, column 13(j),
or Form 1118, Schedule H, Part II, column
(c), as applicable, by separate category.

Line 32. R&E expenses. Add the R&E
expenses reported in column (f) to your
other R&E expenses. After determining
the portion of such expenses that are
allocable to U.S. source income or foreign
source income because they are
performed predominantly in a particular
geographic area, report the remaining
R&E expense on Form 1118, Schedule H,
Part I. See Regulations section
1.861-17(f).

certain individuals, estates, and trusts is
allocated and apportioned 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
Regulations section 1.861-10T. See
Regulations section 1.861-9(e)(3) and
Temporary Regulations section
1.861-9T(d)(1) and (3).

Lines 33 and 35. Allocable rental, royalty, and licensing expenses (depreciation, depletion, and amortization). If
you file Form 1118, add the amounts
reported on these lines to your other
allocable rental, royalty, and licensing
expenses (depreciation, depletion, and
amortization) and report the total on the
Form 1118, Schedule A, column 13(d), by
separate category.

Exception. If you are a less-than-10%
(including constructively) limited partner,
the partnership's interest expense is
directly allocated to your distributive share
of the partnership gross income based on
the source and character of the income. If
your partnership interest is not held in the
ordinary course of your active trade or
business, all such income is passive
category income. See Regulations section
1.861-9(e)(4)(i) for further guidance. If you
file Form 1118, report such interest
expense on the passive category Form
1118, Schedule A, line 13(j). If you file
Form 1116, report such interest expense
on the passive category Form 1116, Part I,
line 4b. However, if your partnership
interest is held in the ordinary course of
your active trade or business, your share
of the partnership’s interest expense is
apportioned in accordance with your
share of gross foreign source income in
each separate category and gross U.S.
source income from the partnership. See
line 24 for the source and separate
category of the partner's distributive share
of gross income. Report the interest
expense on the appropriate Form 1118 or
1116, as applicable.

Lines 34 and 36. Allocable rental, royalty, and licensing expenses (other
than depreciation, depletion, and amortization). If you file Form 1118, add the
amounts reported on these lines to your
other allocable rental, royalty, and
licensing expenses (other than
depreciation, depletion, and amortization)
and report the total on the Form 1118,
Schedule A, column 13(e), as applicable,
by separate category.
If Part I, box 6, is checked, royalty
expenses may include amounts
CAUTION for which you are not allowed a
deduction under section 267A. See
statement with respect to Part I, box 6,
attached to Schedule K-3.

!

Line 38. Charitable contributions.
Charitable contribution deductions should
not be reported on Form 1116 or 1118
because such deductions are allocable to
U.S. source income.
Lines 39 and 40. Interest expense specifically allocable under Regulations
sections 1.861-10 and -10T. If you file
Form 1118, add the amounts reported on
these lines to your other interest expense
specifically allocable under Regulations
sections 1.861-10 and -10T and report the
total on Form 1118, Schedule H, Part II,
column (b), lines 1b and c.
Lines 41 through 43. Other interest expense. If you file Form 1118, add the
sum of the interest expense included on
these lines in Schedules K-3, Part II,
column (f) to your other interest expense
and report the total on Form 1118,
Schedule H, Part II, column (b), line 2. If
you file Form 1116, allocate and apportion
the sum of the interest expense included
on these lines in Schedule K-3, Part II,
column (f) and report the allocated and
apportioned amounts on the applicable
separate category Form 1116, Part I,
line 4b. Interest expense incurred by

Exception. See Regulations section
1.861-9(e)(8) and (9) for special rules
concerning downstream and upstream
partnership loans that require a matching
of related interest income to interest
expense allocations.
If Part I, box 6, is checked, interest
expense may include amounts for
CAUTION which you are not allowed a
deduction under section 267A. See
statement with respect to Part I, box 6,
attached to Schedule K-3.

!

Exception. See Regulations section
1.861-9T(d)(1) for an exception to the
apportionment of interest expense when
an individual’s foreign source income
(including income excluded under section
911) does not exceed $5,000. Such
interest expense may be allocated entirely
to U.S. source income.
Line 45. Foreign taxes deductible, but
not creditable. See the instructions for
Forms 1116 and 1118 for examples of
foreign taxes deductible, but not
creditable.

-6-

Note. Foreign taxes that are creditable
(even if a partner chooses to deduct such
taxes) are not reported as expenses on
Part II. Do not claim a foreign tax credit on
Form 1116 or 1118 for amounts reported
on line 45. However, you may claim a
deduction for such taxes on the applicable
form, including the Forms 1040 and 1120.
Creditable foreign taxes are reported
on Part III, section 4.
Line 49. Other allocable deductions. If
you file Form 1118, add the amounts
reported on this line to your other allocable
deductions and enter the total on the Form
1118, Schedule A, column 13(j), by
separate category.
Line 50. Other apportioned share of
deductions. If you file Form 1118, add
the amounts reported on this line to your
other apportioned share of deductions and
report the total on the Form 1118,
Schedule H, Part II, column (c), by
separate category.

Part III. Other Information
for Preparation of Form
1116 or 1118
Section 1. R&E Expenses
Apportionment Factors

This section reports the information that
you need to allocate and apportion your
R&E expense for foreign tax credit
limitation purposes. R&E expenses are
allocated and apportioned by the partner.
See Regulations section 1.861-17(f)(1).
Individual, estate, and trust partners will
use this section 1 to determine the R&E
expense reported on Form 1116, Part I.
See the Instructions for Form 1116.
Corporate partners will use this section 1
to determine the R&E expense reported
on Form 1118, Schedule H, Part I.

Line 1. Add the amounts reported on
line 1 by standard industrial classification
(SIC) code to your other gross receipts
and report on Form 1118, Schedule H,
Part I.
Line 2. Add the amounts reported on
line 2 to the partner's other 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. See the
Instructions for Form 1118 to determine
the exclusive apportionment of the R&E
expenses.

Section 2. Interest Expense
Apportionment Factors

This section includes the information that
you need to allocate and apportion your
interest expense for foreign tax credit
limitation purposes. This part is relevant
for all partners except certain limited
partners with less than a 10% partnership

Instructions for Sch. K-3 (Form 1065) (2021)

interest. See Regulations section
1.861-9(e)(4)(i). Individual, estate, and
trust partners will use this section 2 to
determine the interest expense reported
on Form 1116, Part I, line 4b. See the
Instructions for Form 1116. Because the
interest expense is reported on one line on
the Form 1116, there is no need to specify
additional reporting on the lines below.
Corporate partners will use this section
2 to determine the interest expense
reported on Form 1118, Schedule H, Part
II. The particular line reporting on Form
1118 is specified below.
Line 3. Report the inside basis of the
partnership assets reported on line 3 on
Form 1118, Schedule H, Part II, column
(a), line 1b.
Line 4. Report the inside basis of the
partnership assets reported on line 4 on
Form 1118, Schedule H, Part II, column
(a), line 1c.
Line 5. Report the inside basis of the
partnership assets reported on line 5 on
Form 1118, Schedule H, Part II, column
(a), line 1d.
Line 6. Report the amounts on line 6 on
Form 1118, Schedule H, Part II, column
(a), line 2 and 3, as applicable.
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 corporate
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 956 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, if
you are eligible for the section 245A
deduction for distributions received from

that corporation, all of the value of its stock
is generally 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)). See Regulations section
1.904(b)-3(c)(2).
The amount reported on line 7 is the
value of stock of the partnership-owned
specified 10%-owned foreign corporation
that is not a CFC. Use the information
provided in the attachment to line 7 to
determine if such amount should be
reported on Form 1118, Schedule H, Part
II, line 3, lines (a) through (f), as (1)
section 245A dividend, or (2) Other.
If the specified 10%-owned foreign
corporation is a CFC, you must subdivide
a portion of the value of stock in each
separate category and in the residual
grouping for U.S. source income between
a section 245A and non-section 245A
subgroup under the rules described in
Regulations section 1.861-13(a)(5).
The amount reported on line 8 is the
value of the stock in partnership-owned
CFCs. Use the information provided in the
attachment to line 8 to determine if such
amount should be reported on Form 1118,
Schedule H, Part II, line 3, lines (a)
through (f), as (1) section 245A dividend,
or (2) Other.

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

Section 3 reports the information
necessary for you to assign the FDII
deduction to a source and separate
category such that it may be reported on
Form 1118, Schedule A or Form 1116,
Part I.

Section 4. Foreign Taxes

Section 4 reports your share of the foreign
taxes paid or accrued by the partnership
by separate category and source.
Line 1. Report the taxes on line 1 in the
applicable portions of Form 1116, Part II,
and Form 1118, Schedule B, Part I, for the
applicable separate category of income.
To complete those parts, refer to the
statement attached to Schedule K-3,
referred to earlier in the instructions with
respect to Part I, Box 4, with 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).
Note. The partner takes its distributive
share of the partnership’s foreign taxes
into account in the partner’s tax year with
or within which the partnership’s tax year

Instructions for Sch. K-3 (Form 1065) (2021)

-7-

ends regardless of whether the partner or
partnership takes foreign taxes into
account on the cash or accrual basis.
Line 2. Report the total reduction of taxes
for each separate category of income on
line 2 on Form 1116, Part III, line 12, and
Form 1118, Schedule B, Part II, line 3.
Line 3. Report the redetermined foreign
taxes reported on line 3 on the Foreign
Tax Redetermination Schedule of the
Form 1116 or Form 1118, and on an
amended return, if required. See the
instructions for Form 1116 or Form 1118
and Regulations sections 1.905-3
through -5 for additional information.
Note. If you are an accrual method
taxpayer, generally you may not claim a
credit for additional taxes reported on
line 3 by the partnership unless those
taxes have been paid. See section 905(c)
(2) and Regulations section 1.905-3(a).

Section 5. Other Tax
Information

Section 5 reports the section 743(b)
income adjustments allocated to you by
source, separate category, and class of
gross income. The section 743(b) income
adjustments should be included as
relevant in other parts of the
Schedule K-3. For example, the section
743(b) income adjustments should be
reflected as part of the total depreciation
reported on Part II, section 2. Therefore,
you do not need to adjust other reported
amounts for the section 743(b) income
adjustments.

Part IV. Information on
Partner’s Section 250
Deduction With Respect to
Foreign Derived Intangible
Income (FDII)
A domestic corporate partner should use
this section to calculate the partner's FDII
on Form 8993.

Section 1. Information To
Determine Deduction Eligible
Income (DEI) and Qualified
Business Asset Investment
(QBAI) on Form 8993.
Lines 1–7. A partner must include the
amount reported to it on line 1 in
calculating the gross income on line 1 of
Form 8993. The partner must also include
any amounts that it identifies from lines 3
through 7 of Schedule K-3 that are not
attributable to its DEI in lines 2(a) through
(f) of Form 8993. Use information on
line 2(a)-(c) and in section 3 to determine
the expenses properly allocable to DEI on
line 5 of Form 8993.

Line 8. Partnership QBAI. A partner
must include the amount reported to it on
line 8, of Schedule K-3, Part IV, in
calculating the QBAI used to determine
Deemed Tangible Income Return on line 8
of Form 8993. However, for certain items
determined by the partner that affect the
amount of a partner’s adjusted bases
included in its share of partnership
specified tangible property, the partner
must use and the partnership must
provide information that separately
distinguishes 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.

Section 2. Information To
Determine Foreign-Derived
Deduction Eligible Income
(FDDEI) on Form 8993.
Line 9. Gross Receipts. A partner must
include the amounts reported to it on line 9
of Schedule K-3, Part IV, on line 9(b) of
Form 8993. However, the partner must
only include the portion of the amounts on
lines 9(a) through (c) of Schedule K-3,
Part IV, section 1 that are attributable to its
gross DEI on line 4 of Form 8993.
Line 10. COGS. A partner must include
the amounts reported to it on line 10 of
Schedule K-3, Part IV, on line 10(b) of
Form 8993. However, the partner must
only include the portion of the amount on
line 10 of Schedule K-3, Part IV, section 1
that are attributable to its gross DEI on
line 4 of Form 8993.
Line 11. Allocable deductions. A
partner must include the amounts reported
to it on line 11 of Schedule K-3, Part IV, on
line 13 of Form 8993.
Line 12. Other apportioned deductions. A partner must include the
amounts reported to it on line 12 of
Schedule K-3, Part IV, on line 17 of Form
8993. However, the partner must only
include the portion of the amount on
line 12 of Schedule K-3, Part IV, section 1
that are attributable to its gross DEI on
line 4 of Form 8993.

Section 3. Other Information for
Preparation of Form 8993.
Interest Expense and Interest
Expense Apportionment Factors
This section reports the information that
you need to allocate and apportion your
interest expenses for FDII purposes.

Lines 13A and 13B. Interest expense
specifically allocable under Regulations
sections 1.861-10(e) and -10T. Include
these amounts on line 5 and/or line 14 of
Form 8993.
Line 13C. Other interest expense. Add
the Interest expense to your other interest
expense.
Exception. Certain corporate partners
with a less than 10% interest in a
partnership shall directly allocate its
distributive share of the partnership’s
interest expense to its distributive share of
partnership gross income. See
Regulations section 1.861-9(e)(4). After
apportionment, if necessary, include the
appropriate amount of interest expense on
line 5 and/or line 14 of Form 8993.
Line 14. Interest expense apportionment factors. Corporate partners will use
this section to determine the interest
expense reported on line 5 and 14 of Form
8993.

R&E Expenses and R&E Expenses
Apportionment Factors
This section reports the information that
you need to allocate and apportion your
R&E expense for FDII purposes. R&E
expenses are allocated and apportioned
by the partner. See Regulations section
1.861-17(f)(1).
Line 15. Gross receipts by SIC code.
Add the amounts to the partner's other
gross receipts by SIC code.
Line 16. R&E Expenses. Add the
amounts to the partner's other R&E
expenses by SIC code.

Part V. Distributions From
Foreign Corporations to
Partnership

Use Part V to determine your share of
distributions by foreign corporations to the
partnership (with your share being
reported in this Part V) that are attributable
to PTEP in your annual PTEP accounts
with respect to the foreign corporations
(which are excludable from your gross
income) or non-previously taxed E&P, and
the amount of foreign currency gain or loss
on the PTEP that you are required to
recognize under section 986(c). The
amount of foreign currency gain or loss on
the PTEP that you are required to
recognize under section 986(c) is equal to
the excess of the U.S. dollar amount of the
PTEP over your U.S. dollar basis in the
PTEP. If the distributed PTEP was
maintained in a functional currency other
than the U.S. dollar, the U.S. dollar
amount of the distributed PTEP is
determined by translating the distributed
PTEP into U.S. dollars using the spot rate
on the date that the PTEP was distributed.
-8-

See section 989(b)(1). Your U.S. dollar
basis in the distributed PTEP is generally
equal to the U.S. dollar amount of E&P
that you previously included in gross
income. See section 989(b)(1) and (3).
Also use Part V, in combination with
other information known to you, to claim
and figure a foreign tax credit on Forms
1116 or 1118, and, if eligible, to claim and
figure a dividends received deduction
under section 245A on Form 1120 with
respect to distributions that are
attributable to non-previously taxed E&P.
Include the U.S. dollar amount of E&P
distributions from qualified foreign
corporations in determining the amount of
qualified dividends you report on line 3a of
Form 1040, or the amount of dividends
reported on Form 1120. A foreign
corporation identified as a qualified foreign
corporation in column (j) that is a passive
foreign investment company (as defined in
section 1297) as to you for the tax year of
the foreign corporation in which the
distribution was made, or the preceding
tax year, is not a qualified foreign
corporation, regardless of whether it is
indicated as such in column (j). See
section 1(h)(11)(C)(iii)(I) and Notice
2004-70, 2004-44 I.R.B. 724.
Include the U.S. dollar amount of E&P
distributions from a non-qualified foreign
corporation in determining the amount of
ordinary dividends you report on line 3b of
Form 1040, or Form 1120.
However, do not include the U.S. dollar
amount of E&P distributions from a foreign
corporation to the extent the distributions
are attributable to PTEP in annual PTEP
accounts that you have with respect to the
foreign corporation, or attributable to E&P
that are excludable from the your gross
income under section 1293(c), in
determining the amount of dividends that
you report on line 3a or 3b of Form 1040,
or Form 1120. See Notice 2019-01,
2019-02 I.R.B. 275.
Include the amount of foreign currency
gain or loss that you are required to
recognize under section 986(c) in
determining the amount to report on Form
1120, or Schedule 1 (Form 1040), line 8
(Other income).
If the partnership received a distribution
that is attributable to PTEP in an annual
PTEP account of the partnership, or
attributable to E&P that are excludable
from the partnership’s gross income under
section 1293(c), that is treated as a
dividend for purposes of section 1411
(that is, for purposes of the net investment
income tax) and, therefore, may be net
investment income (such PTEP, “NII
PTEP”), it will attach a statement to the
Schedule K-3 regarding your share of the
partnership’s NII PTEP. If you are an
individual who is a U.S. citizen or resident,

Instructions for Sch. K-3 (Form 1065) (2021)

or a domestic trust or estate, use the U.S.
dollar amounts of NII PTEP reported on
the statement, and follow the Instructions
for Form 8960, to figure and report your
net investment income. Corporate
partners are not subject to the net
investment income tax. See Regulations
sections 1.1411-1 through -10 for details.
Note that your share of a distribution
received by the partnership that is
attributable to PTEP in your annual PTEP
accounts, or attributable to E&P that are
excludable from your gross income under
section 1293(c), may also be treated as a
dividend for purposes of section 1411
and, therefore, may be NII PTEP.
Note. Columns (e) and (f) are reported in
the foreign corporation’s functional
currency.

Part VI. Information on
Partner’s Section 951(a)(1)
and Section 951A
Inclusion
Use Part VI to include in gross income the
appropriate amount of subpart F income
inclusion and/or section 951(a)(1)(B)
inclusion, and to complete Form 8992.

If the partnership is a domestic
partnership that does not apply Proposed
Regulations section 1.958-1(d)(1) to treat
it as not owning stock of a foreign
corporation within the meaning of section
951, and is a U.S. shareholder of the
foreign corporation, then any subpart F
income inclusions and section 951(a)(1)
(B) inclusions are inclusions of the
partnership, of which you generally
include in gross income a distributive
share. In such a case, your share of the
partnership’s subpart F income inclusions
and section 951(a)(1)(B) inclusions are
reported in Schedule K-1, line 11, Other
income (loss) and are not reported in
Schedule K-3, Part VI, columns (e) and (f).
For each CFC listed in column (a) of
which you are a U.S. shareholder, include
the amounts of subpart F income and
section 951(a)(1)(B) inclusion reported on
Part VI in determining the amount you
report on Form 1120, Schedule C, line 16,
or Schedule 1 (Form 1040), line 8 (Other
income).
Note that, for corporate partners, in
determining the amount you report on
Form 1120, Schedule C, line 16, the
section 951(a)(1)(B) inclusion amounts
reported on Part VI may be reduced under
Regulations section 1.956-1(a)(2).
For each CFC listed in column (a) of
which you are a U.S. shareholder, report
the tested income and tested loss for each
CFC on Form 8992, Schedule A, columns
(c) and (d), respectively, and include your
share of each CFC's items described in

columns (i) through (n) in determining the
amount to report on Form 8992,
Schedule A, columns (e) through (j),
respectively.

Part VII. Information to
Complete Form 8621

U.S. persons may be required to complete
and file Form 8621 and/or include
amounts in income, with respect to PFICs
owned through a partnership. This
includes 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), as well as PFICs with respect
to which a pedigreed QEF, MTM,
qualifying insurance corporation (QIC), or
other election has been, or may be, made.
For information regarding the requirement
to file Form 8621, as well as certain filing
exceptions, see Regulations section
1.1298-1 and the Form 8621 instructions.
Use the information provided in this
Schedule K-3, Part VII (including any
supplemental attachments (Table 4 or 5, if
applicable), as instructed below to
complete Form 8621 with respect to each
PFIC for which you have a filing obligation.
Additionally, for any PFIC that you own
through your interest in the partnership,
use the information provided in this
Schedule K-3, Part VII (including any
supplemental attachments (Table 4 or 5, if
applicable) to determine your income
inclusion with respect to the PFIC (if any)
and complete your U.S. federal income
tax return.
If a PFIC reported on this Schedule K-3
also constitutes a CFC within the meaning
of section 957 (PFIC/CFC) and you are a
U.S. shareholder (within the meaning of
section 951(b)) with respect to such PFIC/
CFC, the information on this schedule with
respect to such PFIC/CFC may not be
relevant to you. The box in section 1,
column (m) will be checked if the PFIC
also constitutes a CFC. See section
1297(d) for additional information.

Section 1. General Information
on Passive Foreign Investment
Company (PFIC), Qualified
Electing Fund (QEF), or
Qualifying Insurance
Corporation (QIC)
Columns (a) through (e). If you are
required to complete Form 8621 with
respect to a PFIC reported on this
schedule, use this information to complete
the Form 8621 background information.
Columns (f) through (i). If you are
required to complete Form 8621 with
respect to a PFIC reported on this
schedule, enter this information on Form
8621, Part I, lines 1 through 4.

Instructions for Sch. K-3 (Form 1065) (2021)

-9-

Note. If you are making an election under
Regulations section 1.1291-10, 1.1297-3,
or 1.1298-3 with respect to a PFIC
reported on this Schedule K-3, Part VII,
you may need additional information from
the partnership regarding the value of the
PFIC shares reported in column (i) that is
not reported here.
Column (j). If the partnership is a
domestic partnership, this column will
indicate to you (using the codes below)
whether the partnership has made an
election with respect to the PFIC which
binds the partners. If the partnership is a
foreign partnership, no code will be
entered in this column; however, if certain
information with respect to the PFIC is
provided, you may be able to make certain
elections with respect to the PFIC on Form
8621.

Partnership Election Codes
Codes

Election Type

QEF

Qualified Electing Fund
Election

MTM

Mark-to-Market Election

QIC

Qualifying Insurance
Corporation Election

Note. If the partnership is a domestic
partnership and has made a pedigreed
QEF, MTM, or QIC election with respect to
a PFIC, the partnership is not required to
complete Schedule K-3, Part VII with
respect to that PFIC if the partnership files
Form 8621 for that PFIC. In that case, you
may not be required to file Form 8621 with
respect to that PFIC and income
inclusions with respect to the PFIC, if any,
will be figured by the partnership and
reported to you on Schedule K-1, Part III.
However, if the partnership is a domestic
partnership that has made a pedigreed
QEF, MTM, or QIC election with respect to
a PFIC for which the partnership does not
file Form 8621, or if it owns stock of an
unpedigreed QEF, it is required to
complete Schedule K-3, Part VII with that
PFIC’s information, and you may be
required to file Form 8621 with respect to
that PFIC. See Regulations section
1.1298-1(b)(2) and the Form 8621
instructions for additional information.
Columns (k) through (n). Use the
information provided in these columns to
make certain elections with respect to a
PFIC on Form 8621, Part II. If you do not
intend to make any election with respect to
a PFIC reported on this Schedule K-3,
Part VII, you may generally ignore these
boxes for such PFIC.
Note. If you are making an election under
Regulations section 1.1291-9, 1.1297-3,
or 1.1298-3 with respect to a PFIC/CFC,
or a PFIC that is a “former PFIC” within the
meaning of Regulations section

1.1291-9(j)(2)(iv), you may need
additional information from the partnership
that is not reported on this Schedule K-3,
Part VII, including information regarding
the PFIC’s E&P.

Section 2. Additional
Information on PFIC or QEF
Note. The partnership will complete
section 2 with respect to each PFIC
reported on section 1, and each line
completed for a PFIC in section 1
corresponds to the same line on section 2.
If the PFIC has no current year activity, or
has no other information for the
partnership to report in columns (c)
through (o), the partnership will only
include the name and EIN of the PFIC in
columns (a) and (b) and will leave
columns (c) through (o) blank with respect
to that PFIC.

QEF Information
Columns (c) and (d). This information is
to assist you in determining your income
inclusions from certain PFICs with respect
to which you have elected, or may elect, to
treat as a QEF.
If you make, or have made, a QEF
election with respect to a PFIC reported
on Schedule K-3, Part VII, enter the
amounts from columns (c) and (d) on
Form 8621, Part III, lines 6a and 7a,
respectively, and include these amounts in
gross income on your U.S. federal income
tax return unless you are making an
election under section 1294 with respect
to the QEF for the current tax year. If you
are making a section 1294 election with
respect to the QEF for the current tax year,
use the rest of Form 8621, Part III, lines 8
and 9 to determine the amount of deferred
tax with respect to the QEF for the current
tax year.
Note. If the partnership is a domestic
partnership and has made a pedigreed
QEF election with respect to a PFIC, and
the partnership files Form 8621 for that
PFIC, such PFIC will not be reported on
Schedule K-3, Part VII and your
distributive share of the partnership’s QEF
inclusions, if any, will be reported to you
on Schedule K-1, Part III. However, if the
partnership has made a pedigreed QEF
election with respect to a PFIC, but does
not file Form 8621 for that PFIC, or if the
partnership owns stock of a PFIC that is
an unpedigreed QEF, the partnership is
required to include this information in
columns (c) and (d), and you may be
required to file Form 8621 with respect to
such PFIC. See Regulations section
1.1298-1(b)(2) for more information.
Note. If your interest in the partnership
constitutes an “applicable partnership
interest” within the meaning of section

1061(c) or the regulations thereunder, you
may need additional information not
reported on this Schedule K-3 from the
QEF with respect to its computation of its
net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) to perform certain
computations under section 1061 or the
regulations thereunder. The partnership
may aid you 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.

Mark-to-Market Information
Columns (e) and (f). This information is
to assist you in determining your gain or
loss from certain PFICs with respect to
which you have made, or may make, an
MTM election (MTM PFIC).
If you make, or have made, an MTM
election with respect to a PFIC reported
on Schedule K-3, Part VII, enter the
amount in column (f) on Form 8621, Part
IV, line 10a. You may use the information
in column (e) to assist you in determining
your adjusted tax basis in the MTM PFIC
in which you are a shareholder through
your ownership in the partnership. Your
adjusted tax basis in the MTM PFIC stock
may be equal to the fair market value of
the stock at the beginning of the prior tax
year reported in column (e). However,
your adjusted tax basis may not be equal
to the fair market value of the MTM PFIC
stock depending on the amounts of prior
year income inclusions and the amounts
for which you were allowed a deduction
with respect to the MTM PFIC. See
sections 1296(a)(2) and 1296(d) for
additional information. Once you have
determined your adjusted tax basis in the
MTM PFIC stock, enter that amount on
Form 8621, Part IV, line 10b, and use the
rest of Form 8621, Part IV, lines 10c-12 to
determine your MTM gain or loss to
include in on your U.S. federal income tax
return.
Note. If the partnership is a domestic
partnership and has made an MTM
election with respect to a PFIC, and the
partnership files Form 8621 for that PFIC,
such PFIC will not be reported on
Schedule K-3, Part VII and your
distributive share of the partnership’s
MTM gain or loss, if any, will be reported
to you on Schedule K-1, Part III. However,
if the partnership has made an MTM
election with respect to a PFIC, but does
not file Form 8621 for that PFIC, the
partnership is required to include this
information in columns (e) and (f), and you
may be required to file Form 8621 with
respect to such PFIC. See Regulations
section 1.1298-1(b)(2) for more
information.
-10-

Note. If you are required to file Form 8621
for a MTM PFIC owned by a domestic
partnership (because, for example, the
partnership does not file Form 8621 for
that MTM PFIC), enter the amount in
column (f) on Form 8621, Part IV, line 10a.
You may need additional information from
the partnership regarding your share of its
adjusted tax basis in the MTM PFIC stock
to complete the rest of Form 8621, Part IV.
Your share of the partnership’s adjusted
tax basis in the MTM PFIC stock may be
equal to your share of the fair market value
of the stock at the beginning of the prior
tax year reported in column (e). However,
your share of the partnership’s adjusted
tax basis in the MTM PFIC stock may not
be equal to the fair market value of the
stock at the beginning of the prior tax year,
depending on the amounts of the
partnership’s prior year income inclusions
and the amounts for which the partnership
was allowed a deduction with respect to
the MTM PFIC. Once you determine your
share of the partnership’s adjusted tax
basis in the MTM PFIC shares, enter this
amount on Form 8621, Part IV, Line 10b
and use the rest of Form 8621, Part IV,
lines 10c-12 to determine your MTM gain
or loss to include in on your U.S. federal
income tax return.

Section 1291 and Other
Information
Note. Generally, this information is to
assist you in satisfying any information
reporting obligations for, and in figuring
income inclusions with respect to, section
1291 funds. However, except as
otherwise provided, this information may
be relevant to PFICs with respect to which
a pedigreed QEF, MTM, or other election
has been made by you or the partnership.
Column (g). This information is provided
to help you assess your holding period in
the PFIC stock through your ownership in
the partnership. Unless also provided in
section 1, column (g), with respect to an
acquisition of stock in the PFIC during the
partnership's tax year, these dates do not
need to be entered on Form 8621 or on
your U.S. federal income tax return.
Note. The dates entered in this column
(g) will be the dates on which the
partnership acquired the PFIC stock. If
you acquired your partnership interest
after the date listed with respect to a PFIC,
you may have a different holding period
with respect to such PFIC stock.
Column (h). Your share of the amount of
cash and fair market value of property
distributed by the PFIC during the tax year
may be reported on different parts of Form
8621, or not reported at all on Form 8621.

Instructions for Sch. K-3 (Form 1065) (2021)

Where on Form 8621 To Report
Distributions From PFICs
IF you are a
shareholder of a...

THEN...

Section 1291 fund

enter this amount on
Form 8621, Part V,
line 15a.

QEF for which you are
not making a section
1294 election for the
current tax year

you do not need to
enter this on Form 8621.

QEF for which you are
making a section 1294
election for the current
tax year

enter this amount on
Form 8621, Part III,
line 8b.

MTM PFIC

you do not need to
enter this on Form 8621.

Note. Deemed distributions by QEFs are
not reported on Schedule K-3, Part VII. If
you make, or have made, an election
under section 1294 and are deemed to
have received a distribution from the QEF,
this information is required to complete
Form 8621, Parts III and VI. See section
1294(f) and Regulations section
1.1294-1T for additional information.
Note. If you have made a section 1294
election with respect to a QEF owned by
the partnership, a distribution of earnings
by the QEF will terminate the section 1294
election to the extent the election is
attributable to the earnings distributed. In
such a case, enter the amount of such
distribution on Form 8621, Part VI, line 22.
See Regulations section 1.1294-1T(e) and
the Form 8621, Part VI instructions for
additional information.
Column (i). This information is to help
you assess any information related to the
date of a distribution from a PFIC. You do
not need to enter these dates on Form
8621 or on your U.S. federal income tax
return.
Column (j). This information is to help
you assess any available foreign tax credit
attributable to an excess distribution from
a section 1291 fund in which you are a
shareholder through your ownership in the
partnership. If you are required to file Form
8621 with respect to a section 1291 fund
owned by the partnership, use this amount
to determine your foreign tax credit to
include on Part V, line 16d. See section
1291(g) for additional information on
creditable foreign taxes.
Note. Your share of foreign taxes in
column (j) includes only foreign taxes
within the meaning of section 1291(g) and
does not include taxes attributable to QEF
inclusions under section 1293. If you are a
corporate shareholder of a QEF that
meets the ownership requirements of
section 1293(f)(3), use Part VIII to
determine your deemed paid foreign tax

credit under section 960, including with
respect to inclusions under section
1293(f).
Column (k). This information is to help
you assess your excess distribution and
resulting additional tax and interest charge
with respect to each section 1291 fund in
which you are a shareholder through your
ownership in the partnership. If you are
required to file Form 8621 with respect to
a section 1291 fund owned by the
partnership, use this amount to determine
the amount to include on Part V, line 15b
and use the rest of Form 8621, Part V,
lines 15 and 16 to determine the amount
of any excess distribution and resulting
additional tax and interest charge to
include on your U.S. federal income tax
return with respect to the section 1291
fund.
Note. The information in column (k) is
only relevant with respect to section 1291
funds and is not relevant for any PFIC with
respect to which a pedigreed QEF or MTM
election has been, or may be, made.
Column (l). This information is provided
to help you assess the treatment to you on
any disposition by the partnership of stock
in a PFIC in combination with column (g).
These dates do not need to be entered on
Form 8621.
Note. Your holding period of the PFIC
stock may have begun on a different date
than the partnership's holding period.
Columns (m) through (o). This
information is to assist you in figuring any
gain or loss on the partnership's
disposition of PFIC stock.
For each section 1291 fund in which
you are a shareholder through your
ownership in the partnership, enter the
amount in column (o) on Form 8621, Part
V, line 15f, and use the rest of Form 8621,
Part V, line 16 to determine the amount of
any excess distribution and resulting
additional tax and interest charge to
include on your U.S. federal income tax
return with respect to the section 1291
fund. Your adjusted tax basis in the PFIC
shares as reported by the partnership
should reflect any adjustments in the
partnership’s shares in the section 1291
fund that are specific to you; you may also
need to make corresponding adjustments
to your basis in your partnership interest.
For each MTM PFIC in which you are a
shareholder through your ownership in the
partnership, and with respect to which you
are required to file Form 8621, enter the
amounts in columns (m) and (n) on lines
13a and 13b, respectively, of Form 8621,
Part IV to complete the rest of Form 8621,
Part IV, lines 13 and 14 in determining
your MTM gain or loss to include in your
U.S. federal income tax return. Your basis
in the MTM PFIC shares as reported by

Instructions for Sch. K-3 (Form 1065) (2021)

-11-

the partnership should reflect adjustments
made by the partnership with respect to
the MTM PFIC, as well as any other
partner-specific adjustments such as
section 743(b) adjustments; you may also
need to make corresponding adjustments
to your basis in your partnership interest.
See section 1296(b)(2) for additional
information on adjustments to basis in
MTM PFIC shares held by foreign
partnerships with respect to section 1296
income inclusions and deductions.
For each QEF in which you are a
shareholder through your ownership in the
partnership with respect to which you have
previously made a section 1294 election,
and for which you are required to file Form
8621, you may need the amounts reported
in columns (m) through (o) to complete
Part VI, lines 22 through 24. See
Regulations section 1.1294-1T and the
Form 8621 instructions for additional
information.
Note. If you have made a QEF election
with respect to a PFIC which you own
indirectly through the partnership, you may
be required to adjust your share of the tax
basis in the PFIC shares as reported by
the partnership, and thus your gain or loss
reported in column (o), by cumulative QEF
inclusions and distributions made by the
QEF; your basis in your partnership
interest may need to be similarly adjusted.
See section 1293(d) for more information
on basis adjustments with respect to
QEFs.

Part VIII. Partner’s Share
of Partnership’s Interest in
Foreign Corporation
Income (Section 960)

Note. Amounts on this part are reported
in foreign currency.
In general, for purposes of the foreign
tax credit, a domestic corporate U.S.
shareholder of a CFC is deemed to pay all
or a portion of the foreign income taxes
paid or accrued by the CFC that are
properly attributable to subpart F income
or tested income of the CFC that the U.S.
shareholder includes in gross income. See
section 960(a) and (d). See also section
1293(f) with respect to QEF inclusions
from a PFIC. The domestic corporate U.S.
shareholder may claim a credit for such
foreign taxes, subject to certain limitations.
Individuals, estates, and trusts may also
claim a foreign tax credit for foreign
income taxes deemed paid with respect to
a CFC. However, they must make an
election under section 962.
To calculate the foreign taxes deemed
paid by a partner that is a corporate U.S.
shareholder of a CFC held by a
partnership, the income, deductions, and
taxes of the CFC must be assigned to
separate categories of income and then to

Example, Domestic Corporate Partner’s Form 1118, Schedule C
1a

5a

5b

5c

6

7

8a

9

10

CFC

DIRRA

i

CFC

100u

$20

50u

0.500

$10

income groups in those separate
categories. See Regulations section
1.960-1(c)(1). This is completed on Form
5471, Schedule Q (CFC Income by CFC
Income Groups). The income groups
include the subpart F income group, the
tested income group, and the residual
income group. Each single item of foreign
base company income as defined in
Regulations section 1.954-1(c)(1)(iii) is a
separate subpart F income group. See
Regulations section 1.960-1(d)(2)(ii)(B).
The tested income group consists of
tested income within a section 904
category. See Regulations section
1.960-1(d)(2)(ii)(C). The residual income
group consists of any income not in the
other income groups or in a PTEP group.
See Regulations section 1.960-1(d)(2)(ii)
(D). See Regulations section 1.960-3(c)(3)
with respect to the PTEP groups. The
PTEP groups are not reported on this
Schedule K-3, Part VIII.
Schedule K-3, Part VIII, reports your
share of the CFC's net income in each
income group in functional currency. A
domestic corporate partner (or an
individual, estate or trust electing under
section 962) will report in functional
currency its share of the net income in the
subpart F income groups by CFC in
column 8(a) of Form 1118, Schedule C
(see section 960(a)). The partner uses
information from Schedule K-3, Part VIII to
complete column 5 of Form 1118,
Schedule C.
Note. The amount entered in column 8(a)
will not equal the share of the net income
in the subpart F income group if there is a
qualified deficit. See Regulations section
1.960-2(b)(3)(ii).
The partnership will attach a Form
5471 for each CFC to each Schedule K-3.
The partner will use each Form 5471,
Schedule Q, to determine the total net
income in the subpart F income groups of
the CFC to report on column 6 of Form
1118, Schedule C, and the total current
year taxes by subpart F income groups of
the CFC to report on column 7 of Form
1118, Schedule C. This will allow the
partner to figure the taxes deemed paid
with respect to section 951(a)(1)
inclusions by subpart F income group on
Form 1118, Schedule C. Similarly, the
partner will use Form 5471, Schedule Q,
to determine the total tested taxes in each
tested income group to determine the pro
rata share of tested foreign income taxes
to report on Form 1118, Schedule D,
column 8.

Example. In Year 1, USP, a domestic
partnership, has two domestic corporate
partners with equal interests in the
partnership. USP wholly owns CFC. CFC
earns passive category interest income of
100u sourced from Country X and pays a
withholding tax of $20 to a foreign country.
USP completes Form 5471, including
Schedule Q, for CFC. The code for
Country X is “X.” On Form 5471,
Schedule Q, USP reports the following.

Example, USP’s Form 5471,
Schedule Q, for CFC

The amounts shown on lines 1 through 4
reflect the partner's distributive share of
gross receipts from the partnership's
business or rental activities. The partner
should use the information from lines 2
through 4 to complete line 1b of Part I,
Form 8991.

Bi
(i)

(xi)

(xii)

X

100u

$20

1

Line 1. Gross receipts for section
59A(e). This is the partner's distributive
share of gross receipts for the tax year as
described in Regulations section
1.448-1T(f)(2)(iv).

On Schedule K-3, Part VIII, USP reports
the following to each of its partners.

Example, USP’s Schedule K-3,
Part VIII for Partners
B PAS
Ci
(i)

(ii)

X

50u

1
a(1) CFC

On Form 1118, Schedule C, with respect
to the passive category each domestic
corporate partner reports with respect to
the information received on Schedule K-3
(including the attached Form 5471,
Schedule Q) as shown in Example,
Domestic Corporate Partner’s Form 1118,
Sch. C.

Part IX. Partner’s
Information for Base
Erosion and Anti-Abuse
Tax (Section 59A)

If you are a corporate partner of a
partnership, use this part from the
partnership to determine your BEAT
liability, if any. The BEAT is generally
levied on certain large corporations that
have deductions and certain other similar
items paid or accrued to foreign related
parties 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."
-12-

Section 1. Applicable Taxpayer
Lines 1 through 4

A PAS

a(1) CFC

Corporate partners that are applicable
taxpayers under Regulations section
1.59A-2 may be subject to the BEAT. See
Regulations section 1.59A-7 for further
information regarding the application of
section 59A to partnerships and the
Instructions for Form 8991 to determine
whether a corporate partner is an
applicable taxpayer subject to the BEAT.
Certain small partners are not required to
include the partner's amount of base
erosion tax benefits resulting from a base
erosion payment made by a partnership.
See Regulations section 1.59A-7(d)(2) for
further information regarding the
application of the exception for small
partners.

Line 5. Amounts included in the denominator of the base erosion percentage pursuant to Regulations section 1.59A-2(e)(3)(i)(B). This is the
partner's distributive share of the
partnership's deductions to be included in
the denominator of the partner's 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. Base Erosion
Payments and Base Erosion
Tax Benefits

The partner should use the information
from lines 8 through 16 to complete lines 3
through 16 of Schedule A, Form 8991.
Line 8. Purchase or creations of property rights for intangibles (patents,
trademarks, etc.). This is the partner's
distributive share of amounts paid or
accrued to a foreign person that is a
related party of the partner 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). The amounts in columns (b)
and (c) are included on line 3 of
Schedule A, Form 8991.
Line 9. Rents, royalties, and license
fees. The amounts in columns (b) and (c)

Instructions for Sch. K-3 (Form 1065) (2021)

of line 9 are included on line 4 of
Schedule A, Form 8991.

accrued to a foreign person that is a
related party of the partner.

Line 10(a). Compensation/consideration paid for services NOT excepted by
section 59A(d)(5). The amounts in
columns (b) and (c) are included on
line 5a of Schedule A, Form 8991.

Column (c). This is the partner's base
erosion tax benefit attributable to interest
expense paid or accrued by the
partnership that is allowed as a deduction
in the current tax year. See Regulations
section 1.59A-3(b)(4) for more information
on how a foreign corporation with a U.S.
trade or business or permanent
establishment determines the amount of
interest that is a base erosion tax benefit.
For domestic corporate partners, the
total amounts in columns (b) and (c) are to
be included on line 6 of Schedule A,
columns (a)(1), (a)(2), (b)(1), and (b)(2),
on Form 8991.
For foreign corporate partners, the
amounts in each column (b) (Base Erosion
Payment) and (c) (Base Erosion Tax
Benefit) are used to determine the
amounts to be included on line 6 of
Schedule A, columns (a)(1), (a)(2), (b)(1),
and (b)(2), on Form 8991.

Line 10(b). Compensation/consideration paid for services excepted by section 59A(d)(5).
Column (a). The amount on line 10(b)
is included on line 5b of Schedule A, Form
8991.
Line 11. Interest expense. The
partnership has completed Worksheet A
for your distributive share of items. Use
the information in the completion of your
Form 8991.
Column (a). This is the partner's
distributive share of all 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). This is the partner's
distributive share of all interest expense
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) that is paid or

Line 12. Payments for the purchase of
tangible personal property. The
amounts in columns (b) and (c) of line 12
are included on line 7 of Schedule A, Form
8991.
Line 13. Premiums and/or other consideration paid or accrued for reinsurance as covered by section 59A(d)(3)
and section 59A(c)(2)(A)(iii). The

Worksheet A
Foreign Partner’s Distributive Share of Interest Paid by the Partnership
(a)

(b)

Total Interest Paid or
Interest Paid or
Accrued in the Current Accrued to Foreign
Year
Related Parties of the
Foreign Partner in the
Current Year

(c)
Interest Expense Paid
or Accrued to Foreign
Related Parties of the
Foreign Partner that is
Allowed as a
Deduction in the
Current Year

(1) Foreign Partner’s
Distributive Share of
Interest Expense on
Liabilities Described in
Regulations section
1.882–5(A)(1)(ii)(A) or (B)
(Direct Allocations)
(2) Foreign Partner’s
Distributive Share of
Interest Paid on U.S.
Booked Liabilities under
Regulations section
1.882–5(d)(2)(vii)
(3) Foreign Partner’s
Distributive Share of
Interest Paid on All Other
Liabilities of the
Partnership

Line 14a. Nonqualified derivative payments. The amounts on this line are
reported on line 9 on Schedule A, Form
8991.
Column (a). This is the partner's
distributive share of all amounts paid or
accrued by the partnership attributable to
derivative contracts as defined in section
59A(h)(4).
Column (b). This is the partner's
distributive share of amounts paid or
accrued by the partnership to a foreign
person that is a related party of the partner
attributable to derivative contracts that are
not eligible for the qualified derivative
payments exception under Regulations
section 1.59A-6 (nonqualified derivative
payments).
Column (c). This is the partner's base
erosion tax benefit attributable to
nonqualified derivative payments paid or
accrued by the partnership to a foreign
person that is a related party of the
partner.
Line 14b. Qualified derivative payments excepted by section 59A(h).
This is the partner's distributive share of
qualified derivative payments excepted by
section 59A(h). 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.
The amount from line 14(b) is included
on line 9 of Schedule A, Form 8991. The
partner meets the reporting requirements
of Regulations sections 1.59A-6(b)(2) and
1.6038A-2(b)(7)(ix) by entering the
amount from line 14b on line 9b on
Schedule A, Form 8991.
Line 15. Payments reducing gross receipts made to surrogate foreign corporation. The amounts from columns (b)
and (c) of line 15 are included on line 10 of
Schedule A, Form 8991.

Totals. Combines line (1)
through line (3)

Instructions for Sch. K-3 (Form 1065) (2021)

amounts from columns (b) and (c) of
line 13 are included on line 8 on
Schedule A, Form 8991.

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Line 16. Other payments—specify.
The amounts from columns (b) and (c) of
line 16 are included on line 11 of
Schedule A, Form 8991.
Line 17(c). Base erosion tax benefits
related to payments included 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.
Line 18(c). Portion of base erosion tax
benefits included 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
reduced withholding rate pursuant to
income tax treaty. The amount on
line 18(c) is included on line 14,
Schedule A, Form 8991.
For more information regarding this
computation, see the Instructions for
Worksheet for Schedule A, Line 14,
Columns (a-2) and (b-2), Form 8991.
Line 19(c). Total base erosion tax benefits. The partner should use the
information on section 1, lines 1 through 5,
and section 2, line 19, column (c), to assist
in the partner's determination of whether
the partner is an applicable taxpayer and
to complete the applicable lines on Form
8991 and Schedule A.

Part X. Foreign Partner’s
Character and Source of
Income and Deductions.

Use this part if you are a foreign person
that earns ECI from U.S. and/or foreign
sources and/or U.S. source FDAP to
determine if you have a U.S. tax obligation
for the applicable tax year. You may be
required to figure your U.S. income tax
liability and file U.S. income tax returns
and forms (for example, Form 1120-F,
Form 1040-NR, and other applicable
forms).

Section 1. Gross Income

The partnership uses Part X to report your
distributive share of income that is subject
to tax in the United States. Keep it for your
records. You must report items of income
from your Part X on your tax return and
accompanying schedules. Each line in this
section of the schedule corresponds to a
line on the existing Form 1065,
Schedule K, lines 1 through 11. For a
more detailed description of the types of
income listed in each line, see the
Partner's instructions for Part III, Income
(Loss), on Schedule K-1 (Form 1065).
Column (a). Total. This is your
distributive share of the partnership's
gross income.
Column (b). Partner determination. If
income is reported in column (b), it means

that the partnership was unable to
determine the income's source. You must
determine the source of income in column
(b). The source of income is important in
determining how to report income on your
tax return. Each type of income has its
own sourcing rules. For example, if you
have capital gains listed in column (b), you
must determine the source of such gain
under section 865. For more information
on sourcing rules for particular items of
income, see Pub. 514 and section 865.
Once you have determined the source of
the income in column (b), use the
statement the partnership attached to the
Schedule K-3 to report the income. If you
determine the income is U.S. source, the
statement attached to the K-3 will advise
reporting the income as either ECI, FDAP,
or other. If you determine the income is
foreign source, the statement will advise
whether the income should be reported as
ECI.
Columns (c) and (d). Effectively connected income.
Nonresident aliens.
Lines 1 through 5. Report ECI in lines 1
through 5 on Schedule E to Form
1040-NR, attaching it to your tax return.
See the Income (Loss) section of the
Partner's Instructions for Schedule K-1
(Form 1065) for more information on how
to complete Schedule E.
Line 6. Interest income. Report
amounts of ECI listed in line 6 (Interest
Income) on line 2b of your Form 1040-NR.
Line 7. Dividends. Report amounts of
ECI listed in line 7 (Dividends) on line 3a
or 3b of your Form 1040-NR.
Line 9. Royalties. Report amounts of
ECI listed in line 8 (Royalties) on line 4 of
Schedule E (Form 1040).
Lines 10 through 14. Report amounts
of ECI listed in lines 10-14 on Schedule D
(Form 1040) or Form 4797 attached to
your tax return. Such amounts include, for
example, gains from the disposition of a
U.S. real property interest. See the
Partner's Instructions for Form 1065,
Schedule K-1, Part III, Income (Loss), and
the instructions for Form 1040-NR, lines
14 and 15, for more information on how to
report this income.
Line 15. Other income. Follow the
Partner's Instructions for Schedule K-1
(Form 1065), Part III, box 11.
Foreign corporations. Foreign
corporations should report ECI on
Schedule P (Form 1120-F), in accordance
with the instructions.
Note. Do not report foreign source
income listed in column (d) as ECI if you
determine it is subpart F income as
defined under section 952(a).
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Do not report income listed in
column (d) as ECI if it is dividends,
CAUTION interest, or royalties paid by a
foreign corporation in which you own or
are considered to own (within the meaning
of section 958) more than 50% of the total
combined voting power of all classes of
stock entitled to vote.

!

Column (e). U.S. Source Non-ECI
(FDAP).
Nonresident aliens. Generally,
amounts of U.S. source non-ECI listed
in column (e) are entered on your
Form 1040-NR, Schedule NEC.
Foreign corporations. Generally,
amounts of U.S. source non-ECI from
column (e) are reported on your Form
1120-F, section I.
Although the partnership
determined this income is not
CAUTION effectively connected to its trade
or business, the income could be
effectively connected to your U.S. trade or
business. See Pub. 519, or the
Instructions for Form 1120-F for more
information on when U.S. source income
is ECI.

!

Column (f). U.S. source Non-ECI (Other). If you are engaged in any trade or
business within the United States, report
these amounts as ECI on your tax return
as directed by the Instructions for Form
1040-NR or the Instructions for Form
1120-F. If you are not so engaged, you do
not need to report these amounts on your
tax return. Transportation income subject
to tax under section 887 is reported on
line 23c of Form 1040-NR and Form
1120-F, page 1, section 1, line 9, as
applicable.

Section 2. Deductions, Losses,
and Net Income

In figuring a foreign corporation's or
nonresident alien's ECI, deductions are
allowed only if they are connected with
income effectively connected with a U.S.
trade or business. See sections 861(b),
873, and 882(c). To determine ECI, a
foreign corporation and nonresident alien
individual must allocate and apportion
deductions and losses to gross income in
the ECI statutory grouping and to gross
income in the non-ECI residual grouping.
See Regulations section 1.861-8(f)(1)(iv).
For additional guidance for foreign
corporations, see Schedule H of Form
1120-F. See also Schedule I (Form
1120-F). For additional guidance for
nonresident aliens, see the Instructions for
Form 1040-NR. Section 2 also generally
corresponds to the deductions separately
reported on Form 1065, Schedule K.
Add the foreign corporation's share of
partnership expenses to the foreign
corporation's expenses and enter those

Instructions for Sch. K-3 (Form 1065) (2021)

expenses on Form 1120-F, Schedule H.
The following instructions provide specific
instructions for reporting expenses on
Form 1120-F. See the Instructions for
Form 1040-NR to determine the
appropriate placement of the nonresident
alien partner's share of the partnership's
expenses.
Column (b). Partner determination.
Include the foreign corporation's share of
partnership expenses that must be
apportioned to ECI by the foreign
corporation on Form 1120-F, Schedule H,
Part II. This includes R&E expenses and
interest expense.
Columns (c) through (e). Partner determination—non-ECI. Enter the foreign
corporation's share of partnership
deductions definitely related and allocated
to non-ECI on Form 1120-F, Schedule H,
Part I.
Columns(f) and (g). Partner determination—ECI. Enter the foreign corporation's
share of partnership deductions definitely
related and allocated to ECI on Form
1120-F, Schedule H, Part I.
Line 2. R&E expense. Add the foreign
corporation's share of partnership R&E
expenses to the foreign corporation's
other R&E expenses and apportion such
R&E expenses to ECI. Enter the resultant
amount on Form 1120-F, Schedule H, Part
II, line 16. See Regulations section
1.861-17(f).
Line 7. Interest expense on
U.S.-booked liabilities. A foreign
corporate partner reports its share of
interest expense on the partnership's
U.S.-booked liabilities, as described in
Regulations section 1.882-5(d) (2)(vii), on
Schedule I (Form 1120-F).
Line 10. Section 59(e)(2) expenditures.
R&E expenses are not included on this
line. R&E expenses that are also section
59(e)(2) expenditures are included on
line 2.
Line 16. Charitable contributions.
Charitable contributions may be deducted
whether or not they are effectively
connected with a U.S. trade or business.
See sections 873(b)(2) and 882(c)(1)(B),
and Regulations section 1.882-4(b) for
more information.
If Part I, box 6 is checked, interest
or royalty expense may include
CAUTION amounts for which the partner is
not allowed a deduction under section
267A. See the statement with respect to
Part I, Box 6, attached to the
Schedule K-3.

!

Section 3. Allocation and
Apportionment Methods for
Deductions

Section 3 provides information you may
use to apportion deductions to ECI or
non-ECI. See Regulations section 1.861-8
through 1.861-20 and Temporary
Regulations sections 1.861-8T
through -9T. The ratios listed below
generally correspond to the ratios on Form
1120-F, Schedule H, Part III.
Line 1a. Gross ECI. Add the amount
reported on this line to other amounts you
report on Form 1120-F, Schedule H, Part
III, line 21a.
Line 1b. Worldwide gross income. Add
the amount reported on this line to other
amounts you report on Form 1120-F,
Schedule H, Part III, line 21b.
Line 2. Average U.S. assets (inside basis). If you use the ratio of the U.S. assets
(inside basis) to the worldwide assets
method to apportion expenses to ECI,
check the "Yes" box for Form 1120-F,
Schedule H, Part III, line 24, and attach a
statement.
Line 4a. Add the amount reported on this
line to other amounts you report on Form
1120–F, Schedule H, Part III, line 23a.
Line 4b. Worldwide personnel. Add the
amount reported on this line to other
amounts you report on Form 1120-F,
Schedule H, Part III, line 23b.
Line 5. If you have R&E expense, use
the appropriate information from this line.
Lines 7 and 8. Check the "Yes" box on
line 24 or 25 of Form 1120-F, Schedule H,
Part III, if you used another apportionment
method based on amounts entered on
lines 7 and 8. Attach a statement to Form
1120-F.

Section 4. Reserved for Future
Use

Part XI. Section 871(m)
Covered Partnerships

If you are a U.S. or foreign person that has
entered into a section 871(m) transaction
that references units in the partnership,
use this part to determine your U.S.
withholding tax and reporting obligations
with respect to those transactions under
section 871(m) and related sections,
including for purposes of determining the
amounts to report on Forms 1042 and
1042-S.
This part will be provided if the
partnership is a publicly traded partnership
as defined in section 7704(b) (a "PTP")
that is a covered partnership as defined in
Regulations section 1.871-15(m)(1) (a
“covered partnership”) or directly or
indirectly holds an interest in a lower-tier

Instructions for Sch. K-3 (Form 1065) (2021)

-15-

partnership that is a covered partnership.
The information in this part is to permit you
to determine your U.S. withholding tax and
reporting obligations under section 871(m)
and related rules if you are a U.S. or
foreign person that has entered into a
section 871(m) transaction that references
units in the partnership, including for
purposes of determining the amounts to
report on Forms 1042 and 1042-S.
If you have entered into a potential
section 871(m) transaction with another
person that references units in the
partnership, you may need this information
to determine your obligations under
section 871(m) and related rules.
Generally, a potential section 871(m)
transaction is a securities lending or
sale-repurchase transaction, a notional
principal contract, or any other specified
financial transaction that references one or
more underlying securities, and an
underlying security is any interest in an
entity that could give rise to a U.S. source
dividend. See Regulations section
1.871-15 for additional information,
including the definitions of underlying
securities and potential section 871(m)
transactions.

Part XII. Reserved for
Future Use
Part XIII. Foreign Partner’s
Distributive Share of
Deemed Sale Items on
Transfer of Partnership
Interest
Use this part to determine the information
you must report with respect to effectively
connected gain or loss arising from the
transfer of an interest in a partnership.

In general. Section 864(c)(8) requires a
foreign partner that transfers part or all of
an interest in a partnership engaged in the
conduct of a trade or business in the
United States to include in income the
effectively connected gain or loss from the
transfer. A partnership distribution is
considered a transfer when it results in
recognition of gain or loss. See
Regulations section 1.731-1(a). Any
foreign person, any domestic partnership
that has a foreign person as a direct
partner, and any domestic partnership that
has actual knowledge that a foreign
person indirectly holds, through one or
more partnerships, an interest in the
domestic partnership that transfers an
interest in this type of partnership must
provide information regarding the transfer
to the partnership no later than 30 days
after the transfer. See Pub. 541 for more
information.
To determine the amount of gain or
loss described in section 864(c)(8),

generally, a foreign transferor must first
determine its gain or loss on the transfer of
a partnership interest (“outside gain” and
“outside loss”). For this purpose, outside
gain or loss is determined under all
relevant provisions of the Internal
Revenue Code and the regulations
thereunder. A foreign transferor may
recognize capital gain or loss (“outside
capital gain” or “outside capital loss”) and
ordinary gain or loss (“outside ordinary
gain” or “outside ordinary loss”) on the
transfer of its partnership interest and
must separately apply section 864(c)(8)
with respect to its capital gain or loss and
its ordinary gain or loss. Part XIII, line 1,
provides the information for the partner to
determine its outside ordinary gain or
outside ordinary loss. The partner then
applies Regulations section 1.751-1(a)(2)

to determine its outside capital gain or
loss.
Line instructions. The foreign transferor
must compare the outside gain or loss
amounts with the relevant aggregate
deemed sale effectively connected gain or
loss provided on Part XIII, lines 2 and 3.
The foreign transferor only includes in
income the lower of the outside amount
and the deemed sale effectively
connected amount. This determination is
made separately with respect to capital
gain or loss and ordinary gain or loss. For
example, a foreign transferor would
compare its outside ordinary gain to its
aggregate deemed sale effectively
connected ordinary gain, treating the
former as effectively connected gain only
to the extent it does not exceed the latter.

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The amount determined is entered on
Form 4797. Similarly, the foreign transfer
would compare its outside capital gain to
its aggregate deemed sale effectively
connected capital gain, treating the former
as effectively connected gain only to the
extent it does not exceed the latter. The
amount determined is entered on Form
8949, Sales and Other Dispositions of
Capital Assets, depending on whether the
gain is short-term or long-term capital
gain. Compare losses by using the
absolute value of each number, so that the
transferor recognizes the number that is
closer to zero. If an amount is entered on
line 4, use it to determine gain or loss from
the transfer of the partnership interest
when completing Form 8949.

Instructions for Sch. K-3 (Form 1065) (2021)