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Partnership Instructions for
Schedules K-2 and K-3
(Form 1065)
Department of the Treasury
Internal Revenue Service
Partners’ Distributive Share Items—International
Partner’s Share of Income, Deductions, Credits, etc.—International
Section references are to the Internal Revenue
Code unless otherwise noted.
Contents
What’s New . . . . . . . . . . . . . .
General Instructions . . . . . . . . .
Purpose of Schedules K-2
and K-3 . . . . . . . . . . . .
Who Must File . . . . . . . . .
When and Where To File . .
How To Complete
Schedules K-2 and K-3 . .
Specific Instructions . . . . . . . . .
Schedule K-2, Identifying
Information . . . . . . . . .
Schedule K-3, Identifying
Information . . . . . . . . .
Part I. 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. Partners' Section
250 Deduction with
Respect to FDII . . . . . . .
Part V. Distributions From
Foreign Corporations to
Partnership . . . . . . . . .
Part VI. Information on
Partners' Section 951(a)
(1) and Section 951A
Inclusions . . . . . . . . . .
Part VII. Information to
Complete Form 8621 . . .
Part VIII. Partnership's
Interest in Foreign
Corporation Income
(Section 960) . . . . . . . .
Part IX. Partners' Information
for Base Erosion and
Anti-Abuse Tax (Section
59A) . . . . . . . . . . . . . .
Part X. Foreign Partners'
Character and Source of
Income and Deductions .
Part XI. Section 871(m)
Covered Partnerships . .
Part XIII. Foreign Partner's
Distributive Share of
Deemed Sale Items on
Transfer of Partnership
Interest . . . . . . . . . . . .
Aug 25, 2021
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Future Developments
For the latest information about
developments related to Schedule K-2
(Form 1065) and Schedule K-3 (Form
1065), and their instructions, such as
legislation enacted after they were
published, go to IRS.gov/Form1065.
What’s New
Schedules K-2 and K-3 are new for the
2021 tax year. These schedules replace,
supplement, and clarify the former line 16,
Partners’ Distributive Share Items, Foreign
Transactions, of Schedule K, Form 1065,
and line 16, Foreign Transactions, of
Schedule K-1 (Form 1065). Schedules
K-2 and K-3 also replace, supplement,
and clarify reporting of certain amounts
formerly reported on Form 1065,
Schedule K, line 20c, Other items and
amounts, and Schedule K-1, Part III,
line 20, Other information. The new
schedules assist partnerships in providing
partners with the information necessary for
the partners to complete their returns with
respect to the international tax provisions
of the Internal Revenue Code. For
example, the new Schedule K-3 provides
information necessary for corporate and
individual partners to figure their foreign
tax credit on Form 1118, Foreign Tax
Credit—Corporations, and Form 1116,
Foreign Tax Credit (Individual, Estate or
Trust), respectively.
General Instructions
The Instructions for Form 1065 and
Instructions for Schedule K-1 (Form 1065)
generally apply to Schedules K-2 and K-3.
This instruction provides additional
information needed to complete
Schedules K-2 and K-3.
Purpose of Schedules K-2
and K-3
Schedule K-2 is an extension of
Schedule K of Form 1065 and is used to
report items of international tax relevance
from the operation of a partnership.
Schedule K-3 is an extension of
Schedule K-1 (Form 1065) and is
generally used to report to partners their
Cat. No. 74375Q
share of the items reported on
Schedule K-2. Partners must include the
information reported on Schedule K-3 on
their tax or information returns.
Who Must File
The partnership need not complete this
schedule if the partnership does not have
items of international tax relevance
(typically, international activities or foreign
partners).
Any partnership required to file Form
1065 and that has items relevant to the
determination of the U.S. tax or certain
withholding tax or reporting obligations of
its partners under the international
provisions of the Internal Revenue Code
must complete the relevant parts of
Schedules K-2 and K-3. See each part
and section for a more detailed description
of who must file each part and section.
Penalties may apply for filing Form 1065
without all required information or for
furnishing Schedules K-3 to partners
without all required information. The
penalties that apply with respect to Form
1065 and Schedule K-1 apply with respect
to Schedules K-2 and K-3, respectively.
See Penalties in the Instructions for Form
1065.
Note. Except as otherwise required by
statute, regulations, or other IRS
guidance, a partnership is not required to
obtain information from its direct or
indirect partners to determine if it needs to
file each of these parts.
Note. A partnership is only required to
complete the relevant portions of
Schedules K-2 and K-3, as applicable. For
example, if the partnership does not own
(within the meaning of section 958) stock
of a foreign corporation other than solely
by reason of applying section 318(a)(3)
(providing for downward attribution) as
provided in section 958(b), it is not
required to complete Schedules K-2 and
K-3, Parts V, VI, VII, and VIII.
Note. Schedules K-2 and K-3 consist of
the most common international tax
provisions of the Internal Revenue Code.
However, not all provisions are specifically
identified on these schedules. To the
extent that an international provision is
impacted and is not otherwise specifically
identified, the partnership should check
box 12 on Schedule K-2, Part I, and
Schedule K-3, Part I, and attach a
statement to both Schedules K-2 and K-3
(for distributive share).
When and Where To File
Attach Schedules K-2 and K-3 to the
partnership’s Form 1065 and file both by
the due date (including extensions) for
that return.
Provide Schedule K-3 to the partners of
the partnership according to the timeline
for providing the Schedule K-1. See the
Instructions for Form 1065.
See the Instructions for Form 1065 for
requirements with respect to
recordkeeping.
See the Instructions for Form 1065
concerning amendments or adjustments
to Schedules K-2 and K-3.
Computer-Generated
Schedules K-2 and K-3
Generally, all computer-generated forms
must receive prior approval from the IRS
and are subject to an annual review.
However, see the Exception below.
Requests for approval may be submitted
electronically to [email protected],
or requests may be mailed to:
Internal Revenue Service
Attn: Substitute Forms Program
SE:W:CAR:MP:P:TP
1111 Constitution Ave. NW, Room
6554
Washington, DC 20224
Exception. If a computer-generated
Schedule K-2 or K-3 conforms to and
does not deviate from the official form and
schedules, it may be filed without prior
approval from the IRS.
Important. Be sure to attach the approval
letter to a computer-generated
Schedule K-2 or K-3. However, if the
computer-generated form is identical to
the IRS prescribed form, it does not need
to go through the approval process, and
an attachment is not necessary.
Every year, the IRS issues a revenue
procedure to provide guidance for filers of
computer-generated forms. In addition,
every year the IRS issues Pub. 1167,
General Rules and Specifications for
Substitute Forms and Schedules, which
reprints the most recent applicable
revenue procedure. Pub. 1167 is available
at IRS.gov/irb/2020-53_IRB#RevProc-2020-55. The procedures relevant to
Form 1065 and Schedule K-1 (Form 1065)
apply for purposes of Schedules K-2 and
K-3.
How To Complete Schedules
K-2 and K-3
Reporting currency. Report all amounts
in U.S. dollars except where specified
otherwise.
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-2 and
Schedule K-3, in general.
Part I of Schedule K-2 (and Part I of
Schedule K-3). Used to report
international tax items not reported
elsewhere on Schedule K-2 or K-3.
Part II of Schedule K-2 (and Part II
of Schedule K-3). Used to figure the
partnership’s income or loss by source
and separate category of income and to
report the partner’s distributive share of
such income or loss. Partners will use the
information to figure and claim a foreign
tax credit on Form 1116 or 1118.
Part III of Schedule K-2 (and Part III
of Schedule K-3). Used to report
information necessary for the partner to
determine the allocation and
apportionment of research and
experimental (R&E) expense, interest
expense, and the foreign-derived
intangible income (FDII) deduction for the
foreign tax credit limitation. Also used to
report foreign taxes paid or accrued by the
partnership and the partner’s distributive
share of such taxes. Also used to report
income adjustments under section 743(b)
by source and separate category.
Partners will use the information to figure
and claim a foreign tax credit on Form
1116 or 1118.
Part IV of Schedule K-2 (and Part IV
of Schedule K-3). Used to report the
information necessary for the partner to
determine its section 250 deduction with
respect to foreign-derived intangible
income (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 of Schedule K-2 (and Part V
of Schedule K-3). Used to report
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information the partner needs, in
combination with other information known
to the partner, to determine the amount of
each distribution from a foreign
corporation that is treated as a dividend or
excluded from gross income because the
distribution is attributable to previously
taxed earnings and profits (PTEP) in the
partner’s annual PTEP accounts with
respect to the foreign corporation, and the
amount of foreign currency gain or loss on
the PTEP that the partner is required to
recognize under section 986(c).
Partners will report the dividends and
foreign currency gain or loss on Forms
1040 or 1120. If eligible, partners will also
use this information to figure and claim a
dividends received deduction under
section 245A on Form 1120. Partners will
also use the information to figure and
claim a foreign tax credit on Form 1116 or
1118.
Part VI of Schedule K-2 (and Part VI
of Schedule K-3). Used to provide
information the partner needs to
determine any inclusions under sections
951(a)(1) and 951A. Partners will use the
information to complete Form 8992, U.S.
Shareholder Calculation of Global
Intangible Low-Taxed Income (GILTI), and
Forms 1040 and 1120 with respect to
subpart F income inclusions, section
951(a)(1)(B) inclusions, and section 951A
inclusions.
Part VII of Schedule K-2 (and Part
VII of Schedule K-3). Used to provide
information needed by partners to
complete Form 8621, Information Return
by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing
Fund, and to provide partners with
information to determine income
inclusions with respect to the passive
foreign investment company (PFIC).
Part VIII of Schedule K-2 (and Part
VIII of Schedule K-3). Used to provide
the foreign corporation's net income in the
income groups for purposes of the
partner's deemed paid taxes computation
with respect to inclusions under sections
951A, 951(a)(1), and 1293(f). Partners will
use the information to figure and claim a
deemed paid foreign tax credit on Form
1118.
Part IX of Schedule K-2 (and Part IX
of Schedule K-3). Used to provide
information for the partner to figure its
base erosion and anti-abuse tax (BEAT).
Partners will use the information to
complete Form 8991, Tax on Base
Erosion Payments of Taxpayers With
Substantial Gross Receipts.
Part X of Schedule K-2 (and Part X
of Schedule K-3). Used to provide
information for the partner to figure its tax
liability with respect to income effectively
connected with a U.S. trade or business
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
(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,
and 1120-F, U.S. Income Tax Return of a
Foreign Corporation, or other applicable
forms.
Part XI of Schedule K-2 (and Part XI
of Schedule K-3). Used to provide
certain information to U.S. and foreign
partners with respect to section 871(m) by
a publicly traded partnership that satisfies
certain other requirements. Certain
partners will use the information to
determine their U.S. withholding tax
obligations and to figure and report any
U.S. tax liability on Forms 1042 and
1042-S.
Part XII. Reserved.
Part XIII of Schedule K-3. Used to
provide information for a foreign partner to
figure its distributive share of deemed sale
items on a transfer of the 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
If the information required in a
given section exceeds the space
CAUTION provided within that section, do
not write “See attached” in the section or
leave the section blank. Instead, complete
all entry spaces in the section and attach
the remaining information on additional
sheets. For all attachments include the
part, section, line number, and column of
the relevant portion of Schedule K-2 and
Schedule K-3. The additional sheets must
conform with the IRS version of that
section.
!
Schedule K-2, Identifying
Information
At the top of each new page, enter the
name of the partnership as it appears on
Form 1065. At the top of each new page,
enter the EIN of the partnership as it
appears on the Form 1065.
Item A—Withholding Foreign Partnership. If the partnership is a withholding
foreign partnership under Revenue
Procedure 2017-21, 2017-6 I.R.B. 791,
check the "Yes" box. Otherwise check the
"No" box.
If the "Yes" box is checked, provide the
partnership's withholding foreign
partnership employer identification
number (WP-EIN). Enter the partnership's
WP-EIN regardless of whether the
partnership filed this Form 1065 using its
WP-EIN.
Item B—Qualified derivatives dealer. If
the partnership (including the home office
or any branch) is a qualified derivatives
dealer under Rev. Proc. 2017-15, 2017-3
I.R.B. 437, check the "Yes" box.
Otherwise, check the "No" box.
If the "Yes" box is checked, provide the
partnership's qualified intermediary
employer identification number (QI-EIN).
Item C—Part applicability. Check the
“Yes” box to indicate the applicable parts
of Schedule K-2 and Schedule K-3.
Complete each applicable part.
Check the “No” box to indicate the
inapplicable parts of Schedule K-2 and
Schedule K-3. Do not complete the
inapplicable parts.
Schedule K-3, Identifying
Information
Items A and B. Items A and B should be
the same as reported on Schedule K-1,
Part I, Items A and B.
Items C and D. Items C and D should be
the same as reported on Schedule K-1,
Part II, Items E and F.
Item E. Item E should correspond to
Schedule K-2, Identifying Information,
Item C.
Schedule K-2, Part I
(Partnership’s Other Current
Year International Information),
and Schedule K-3, Part I
(Partner’s Share of
Partnership’s Other Current
Year International Information)
Notes.
• Certain partners will use the information
reported in the attachments with respect
to boxes 1 through 5 and 10 to claim and
figure a foreign tax credit on Form 1116 or
1118.
• Certain partners will also use the
information reported in the attachments
with respect to box 6 to prepare their tax
returns (Forms 1040, 1120, 1040-NR, and
1120-F, as applicable) by taking into
account that under section 267A they are
not allowed deductions for the amounts
listed in the statement with respect to
box 6.
• Certain partners will use the information
reported in attachments with respect to
boxes 7 through 9 to identify any
international tax information reporting
forms or other international tax forms that
may impact the partners’ tax returns.
• Certain partners may use the
information reported in attachments with
respect to boxes 7 and 11 to determine
any dual consolidated losses which may
not be deducted on Form 1120.
This part is used to report information
for international tax items not reported
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-3-
elsewhere on the Schedule K-2. Check
the box to indicate whether any of the
following international tax items are
applicable in the tax year. If applicable,
attach statements, as described below, to
the Schedule K-2. If applicable, the
partnership must also complete
Schedule K-3, Part I, and include with the
Schedule K-3 the attachment(s) as
described below with the partner's
distributive share of the amounts.
Box 1. Gain on personal property sale.
In general, income from the sale of
personal property is sourced according to
the residence of the seller. See section
865. For sourcing purposes, personal
property sold by the partnership is treated
as sold by the partners. See section 865(i)
(5). A U.S. citizen or resident alien
individual with a tax home (as defined in
section 911(d)(3)) in a foreign country is
treated as a nonresident with respect to
the sale of personal property only if an
income tax of at least 10% of the gain
derived from the sale is actually paid to a
foreign country with respect to that gain.
See section 865(g). In addition, if a U.S.
resident maintains an office or other fixed
place of business in a foreign country,
income from the sale of personal property
attributable to such office or other fixed
place of business is foreign source only if
an income tax of at least 10% of the
income from the sale is actually paid to a
foreign country with respect to such
income.
If the partnership has income from the
sale of personal property (other than
inventory, depreciable personal property,
and certain intangible property excepted
from the general rule of section 865(a)), it
must check box 1 and attach a statement
to Schedule K-2 and Schedule K-3 (for
distributive share) reflecting all the
information shown in Table 1, Information
on Personal Property Sold. Do not
combine sales of property. Each item of
property sold must be listed separately
with the information shown in Table 1. For
column (g), enter the two-letter code from
the list at IRS.gov/CountryCodes. Do not
enter “various” or “OC” for the country
code. If the property sale is taxed by more
than one country, complete a separate line
for that country, but indicate in some
manner (for example, a footnote) that the
property entered on both lines is the same
property.
Box 2. Foreign oil and gas taxes. A
separate foreign tax credit limitation is
applied with respect to foreign oil and gas
taxes. See section 907(a) and Regulations
section 1.907(a)-1 for details. If the
partnership has such taxes, it must check
box 2 and attach a completed Schedule I
(Form 1118) to the Schedule K-2 and
Schedule K-3 (with the partner’s
distributive share). The partnership need
not complete Form 1118, Schedule I, Part
I, column 12; Part II, lines 2 through 4; or
Part III, lines 1 and 3. The partnership
must attach Schedule I (Form 1118) even
if there are no corporate partners because
the limitation applies to individuals eligible
to claim a foreign tax credit.
Note. The partnership attaches a partially
completed Schedule I (Form 1118) so that
the partner has the information it needs to
complete Schedule I (Form 1118) or Form
1116. The partnership is not attaching
Schedule I (Form 1118) as a form required
to be filed by the partnership for purposes
of the partnership determining creditable
taxes because a partnership cannot claim
a foreign tax credit.
Box 3. Splitter arrangements. Foreign
taxes with respect to a foreign tax credit
splitting event are suspended until the
related income is taken into account by
the taxpayer. See section 909. There is a
foreign tax credit splitting event with
respect to foreign taxes of a payor if in
connection with a splitter arrangement the
income is or will be taken into account by
a covered person. See Regulations
section 1.909-2(a). A covered person, as
defined in Regulations section 1.909-1(a)
(4), includes, for example, any entity in
which the payor holds, directly or
indirectly, at least a 10% ownership
interest (determined by vote or value). A
payor, as defined in Regulations section
1.909-1(a)(3), includes, for example, a
person that takes foreign income taxes
paid or accrued by a partnership into
account pursuant to section 702(a)(6).
The partnership must report foreign
taxes that are potentially suspended on
Schedule K-2, Part III, Section 4, line 2E,
and each partner's share of such taxes on
Schedule K-3, Part III, Section 4, line 2E.
A partnership may not be able to
determine whether taxes are suspended
and whether related income is taken into
account. However, where the partnership
is able to determine that taxes are
potentially suspended, or potentially
unsuspended, it must report such taxes
and the information requested in these
instructions for box 3. For example, where
a partnership owns a reverse hybrid and
the foreign country assesses tax on the
partnership for income earned by the
reverse hybrid, the partnership should
report such taxes as potentially
suspended taxes.
Report foreign taxes that are potentially
suspended on Schedule K-2, Part III,
Section 4, line 2E, and each partner's
share of such taxes on Schedule K-3, Part
III, Section 4, line 2E.
Check box 3 and attach a statement to
Schedule K-2 and Schedule K-3 that
includes the following for each splitter
arrangement in which the partnership
participates that would qualify as a splitter
arrangement under section 909 if one or
more partners are covered persons with
respect to an entity that took into account
related income from the arrangement.
Section 1 of attached
statement—Potentially suspended
taxes.
1. Explanation of the splitter
arrangement (for example, reverse hybrid
owned by partnership).
2. Amount of taxes paid or accrued by
the partnership in connection with the
splitter arrangement.
3. Amount of related income on which
such taxes were paid or accrued.
4. The two-letter code for the country
to which the taxes were paid or accrued
from the list at IRS.gov/CountryCodes. Do
not enter “various” or “OC” for the country
code.
5. The separate category and source
of income to which the taxes are assigned
if determinable by the partnership.
Section 2 of attached
statement—Potentially unsuspended
taxes. Include a separate section that
reports the following with respect to each
splitter arrangement for which the
partnership has taken into account any
related income.
1. Origin year of the splitter
arrangement.
2. Explanation of the splitter
arrangement (for example, reverse hybrid
owned by partnership).
3. Amount of taxes paid or accrued by
the partnership in connection with the
Table 1
Information on Personal Property Sold (For use with Sch. K-2 (Form
1065), Part I, box 1; also for use with Sch. K-3 (Form 1065), Part I, box 1)
(a) Property
description
(b) Date of
sale
(c) Proceeds
(d) Basis
(e) Amount
of tax paid
in local
currency
(f) Amount
of tax paid
in U.S.
dollars
-4-
(g) Taxing
country
(enter
two-letter
country
code)
splitter arrangement in the origin year of
the splitter arrangement.
4. Amount of related income on which
such taxes were paid or accrued in the
origin year of the splitter arrangement.
5. The two-letter code for the country
to which the taxes were paid or accrued
from the list at IRS.gov/CountryCodes. Do
not enter “various” or “OC” for the country
code.
6. The separate category and source
of income to which the taxes are assigned
if determinable by the partnership.
7. Amount of related income taken
into account in the current tax year and the
amount of taxes originally paid that relate
to that portion of the related income if
determinable by the partnership.
Box 4. Foreign tax translation. If the
partnership reports any foreign taxes on
Schedules K-2 and K-3, Part III, Section 4,
it must check the box for item 4 and attach
to Schedules K-2 and K-3 the statement
described in the instructions for those
sections.
Box 5. High-taxed income. If the
partnership has passive income, check
the box for item 5 and attach a statement
to Schedules K-2 and K-3 with Worksheet
1 or 2, or both, completed. The partner will
use this information to determine whether
its passive income is high-taxed passive
income.
Income received or accrued by a U.S.
person that would otherwise be passive
income is not treated as passive income if
the income is determined to be high-taxed
income. See section 904(d)(2)(B)(iii)(II).
To determine if income is high-taxed
income, a partner must group its shares of
items of passive income from a
partnership according to the rules in
Regulations section 1.904-4(c)(3), except
that the portion, if any, of the 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 also
Regulations section 1.904-4(c)(5)(ii). For
this purpose, a foreign QBU is a qualified
business unit (as defined in section
989(a)), other than a controlled foreign
corporation (CFC) or noncontrolled
10%-owned foreign corporation, that has
its principal place of business outside the
United States.
Note. Passive income is not treated as
subject to a withholding tax or other
foreign tax when a credit is disallowed in
full for such foreign tax, for example, under
section 901(k).
Example 1. In Year 1, USP, a
domestic partnership, has two domestic
corporate partners with equal interests in
the partnership. In Year 1, USP receives
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Worksheets 1 and 2 for Schedule K-2
Worksheet 1
Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of Allocable Expenses
A
Passive income subject to withholding tax of 15%
or more
B
Passive income subject to withholding tax of less
than 15% but greater than zero
C
Passive income not subject to any foreign tax
D
Passive income subject to no withholding tax, but
subject to other foreign tax
II. Taxes
Worksheet 2
Reference: Regulations section 1.904-4(c)(4)
A
Name of foreign QBU: _______________________________________________________________
(Complete a separate Worksheet 2 for each
foreign QBU)
I. Passive Income Net of Allocable Expenses
B
Passive income subject to withholding tax of 15%
or more
C
Passive income subject to withholding tax of less
than 15% but greater than zero
D
Passive income not subject to any foreign tax
E
Passive income subject to no withholding tax, but
subject to other foreign tax
$100 of passive dividend income from a
noncontrolled 10%-owned foreign
corporation subject to a 15% withholding
tax. USP also receives $150 of passive
interest income from an unrelated person
subject to a 30% withholding tax. USP
incurs $80 of expenses that are allocable
to the interest income. USP also receives
$50 of passive dividend income from a
CFC which is not subject to tax. No
expenses are allocable to the dividend
income. USP's branch operation in
Country X that is treated as a QBU under
section 989(a) receives $100 of passive
dividend income subject to a 15%
withholding tax. Finally, USP earns $400
of passive income with respect to its
branch operation in Country X that is
treated as a QBU under section 989(a).
Such income is subject to foreign tax (but
not withholding tax) of $40. Expenses of
$120 are allocable to the distributive share
of branch income. No expenses are
allocable to the dividend income.
For Year 1, USP checks box 5 on Part I
of Schedule K-2 (Form 1065) and
attaches Worksheet 1 and Worksheet 2
and to Schedule K-2.
USP completes the same worksheets
with the distributive shares and attaches
those worksheets to each Schedule K-3
provided to the partners.
the partnership knows, or has reason to
know, that one or more of its partners is
not allowed a deduction under section
267A. See the instructions for Form 1065,
Schedule B, line 22, and FAQs for section
267A at IRS.gov/businesses/partnerships/
faqs-for-Form-1065-Schedule-B-OtherInformation-Question-22 for additional
information regarding section 267A. In
addition, for each partner that is
disallowed a deduction under section
267A, the partnership should, on the
Schedule K-3 as to the specific partner,
check box 6 in Part I, and attach to the
Schedule K-3 a statement titled "Section
267A Disallowed Deduction" that
separately lists the following information.
A. The amount of interest paid or
accrued by the partnership for which
the partner is not allowed a deduction
under section 267A.
B. The amount of royalty paid or
accrued by the partnership for which
the partner is not allowed a deduction
under section 267A.
C. The extent to which information
reported on other parts of the
Schedule K-3 (for example, a line in
Part II, Section 2; or Part IX, Section 2)
reflects interest or royalty for which the
partner is not allowed a deduction
under section 267A.
Box 6. Section 267A disallowed deduction. Check box 6 if the partnership paid
or accrued any interest or royalty for which
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-5-
II. Taxes
When completing other parts of
Schedules K-2 and K-3 (for
CAUTION example, a line in Part II, Section
2, or Part IX, Section 2), list an amount
without regard to whether the partner is
disallowed a deduction under section
267A for the amount.
!
Box 7. Form 8858 information. If the
partnership filed one or more Forms 8858,
Information Return of U.S. Persons With
Respect to Foreign Disregarded Entities
(FDEs) and Foreign Branches (FBs),
check box 7 and attach the form(s) to
Schedule K-2 and K-3.
Box 8. Form 5471 information. If the
partnership filed one or more Forms 5471,
Information Return of U.S. Persons With
Respect to Certain Foreign Corporations,
check box 8 and attach the form(s) to
Schedules K-2 and K-3.
Box 9. Other forms. If the partnership
filed any other international tax forms,
check box 9, and attach those form(s) to
Schedules K-2 and K-3. This includes, but
is not limited to, the following forms.
• Form 5713, International Boycott
Report.
• Form 8833, Treaty-Based Return
Position Disclosure Under Section 6114 or
7701(b).
• Form 8621.
• Form 8865, Return of U.S. Persons
With Respect to Certain Foreign
Partnerships.
Worksheets for Example 1
Worksheet 1 for Example 1
Reference: Regulations section 1.904-4(c)(3)
I. Passive Income Net of
Allocable Expenses
II. Taxes
A
Passive income subject to
withholding tax of 15% or more
$170
$60
B
Passive income subject to
withholding tax of less than 15%
but greater than zero
0
0
C
Passive income not subject to
any foreign tax
50
0
D
Passive income subject to no
withholding tax, but subject to
other foreign tax
0
0
Worksheet 2 for Example 1
Reference: Regulations section 1.904-4(c)(4)
A
Name of foreign QBU: _________Country X QBU_____________
(Complete a separate
Worksheet 2 for each foreign
QBU)
I. Passive Income Net of
Allocable Expenses
II. Taxes
B
Passive income subject to
withholding tax of 15% or more
$100
$15
C
Passive income subject to
withholding tax of less than 15%
but greater than zero
0
0
D
Passive income not subject to
any foreign tax
0
0
E
Passive income subject to no
withholding tax, but subject to
other foreign tax
280
40
See Other Forms, Returns, and
Statements That May Be Required in the
Instructions for Form 1065.
If the partnership has filed Form 8990,
check box 9 and 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. A
partnership will need to check this box and
attach a statement with the information in
the applicable Table 2 or 3 if either the
partnership knows or has reason to know
that it (a) received a loan from its partner
(or a member of the partner’s affiliated
group) (“downstream loan”), as described
in Regulations section 1.861-9(e)(8), or (b)
loaned an amount to its partner (or a
member of the partner’s affiliated group)
(“upstream loan”), as described in
Regulations section 1.861-9(e)(9).
Downstream loans. On an attached
statement, the partnership will provide the
details with respect to any downstream
loans from its partner or a member of the
partner’s affiliated group, including the
amount of interest expense paid or
accrued by the partnership. Report the
information separately for each separate
loan. The reporting should be as follows in
Table 2, Downstream Loans.
Table 2. Downstream Loans
Name of
Lender
Lender’s
TIN
Date
of
Loan
Amount Interest
of
Expense
Loan
for the
Year
If there are any partners in the same
affiliated group as the lender, attach to
each of the Schedules K-2 and K-3 a
statement to expand the columns in the
table to include the information requested
in the first two columns for each such
partner.
-6-
Upstream loans. On an attached
statement, the partnership will provide the
details with respect to any upstream loans
to its partner or a member of the partner’s
affiliated group, including the amount of
interest income received or accrued by the
partnership. Report the information
separately for each separate loan. The
reporting should be as follows in Table 3.
Upstream Loans.
Table 3. Upstream Loans
Name of Borrower’s Date Amount
Borrower
TIN
of
of
Loan Loan
Interest
Expense
for the
Year
If there are any partners in the same
affiliated group as the borrower attach to
each of the Schedules K-2 and K-3 a
statement to expand the columns in the
table to include the information requested
in the first two columns for each such
partner.
Box 11. Dual consolidated loss. Check
box 11 if either (a) the reporting
partnership directly or indirectly owns a
foreign branch (as defined in Regulations
section 1.367(a)-6T(g)) or an interest in a
hybrid entity (as defined in Regulations
section 1.1503(d)-1(b)(3)), or (b) the
reporting partnership is a hybrid entity (as
defined in Regulations section
1.1503(d)-1(b)(3)). However, box 11
should not be checked if the reporting
partnership knows that none of its partners
is a domestic corporation (other than a
regulated investment company, a real
estate investment trust, or an S
corporation). A domestic corporate
partner’s interest in the reporting
partnership or its indirect interest in a
foreign branch or hybrid entity may be
treated as a separate unit and subject to
the dual consolidated loss (“DCL”) rules
pursuant to Regulations section
1.1503(d)-1 through 1.1503(d)-8. A
reporting partnership may need to provide
information to its domestic corporate
partners, in addition to the information
provided in this schedule, in order for such
partners to comply with the DCL rules (for
example, the partner’s share of income or
DCL attributable to the foreign branch or
interest in a hybrid entity). Some of the
necessary information may be provided on
Form 8858.
Box 12. Other international transactions. If the partnership has transactions,
income, deductions, payments, or
anything else that is impacted by the
international tax provisions of the Internal
Revenue Code and such events are not
otherwise reported on this part or other
parts of Schedules K-2 and K-3, report
that information on a statement that is
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
attached to Schedules K-2 and K-3 and
check box 12.
Schedule K-2, Parts II and III,
and Schedule K-3, Parts II and
III
Note. Certain partners will use the
following information to claim and figure a
foreign tax credit on Form 1116 or 1118.
Schedules K-2 and K-3, Parts II and III,
must be completed unless the partnership
does not have a direct or indirect partner
that is eligible to claim a foreign tax credit
and such partner would have to file a Form
1116 or Form 1118 to claim a credit. This
requirement applies regardless of whether
the partnership pays or accrues foreign
taxes because other information, such as
the source of the partnership’s income
and the value of its assets, are relevant in
determining the partner’s foreign tax
credit. A partner that is eligible to claim a
foreign tax credit includes a domestic
corporation, a U.S. citizen or resident,
certain U.S. trusts and estates, certain
foreign corporations, and certain
nonresident individuals. See sections 901
and 906. An indirect partner includes a
partner that owns the partnership through
a pass-through entity (for example, a
partnership, S corporation, or a trust (see
Regulations section 1.904-5(a)(4)(iv) for
the definition of pass-through entity). An
indirect partner also includes a partner
that owns the partnership through a
foreign corporation. A partnership that
does not have or receive sufficient
information or notice regarding a direct or
indirect partner must presume such
partner is eligible to claim a foreign tax
credit and such partner would have to file
a Form 1116 or Form 1118 to claim a
credit. As such, the partnership must
complete the Schedule K-2 and K-3,
accordingly.
On Schedule K-2, Parts II and III, the
partnership reports its gross income,
gross receipts, cost of goods sold, certain
deductions, and taxes by source and
separate category. The partnership also
reports information that the partner needs
to allocate and apportion expenses and
determine the source of certain items of
gross income. Unless specifically noted
below, the partnership reports on
Schedule K-3, Parts II and III, the partner’s
share of the partnership’s gross receipts,
gross income, cost of goods sold, certain
deductions and taxes by source and
separate category. The partner adds its
share of the partnership’s foreign source
gross income, gross receipts, cost of
goods sold, certain deductions and taxes
by separate category to its other foreign
source gross income, gross receipts, cost
of goods sold, certain deductions, and
taxes in that separate category to figure its
foreign tax credit. The partnership also
reports on the Schedule K-3 the
distributive share of expenses and the
allocation and apportionment factors so
that the partner may determine expenses
allocated and apportioned to foreign
source income.
Partnership determination. The source
and separate category of certain gross
income, gross income, and cost of goods
sold as well as the allocation and
apportionment of certain deductions can
be determined by the partnership. This
includes deductions that are definitely
related to certain gross income of the
partnership. See Regulations section
1.861-8(b)(1). See Schedule K-2, Part II,
columns (a) through (e); Part III, Section 1,
columns (a) through (e); Part III, Section 3,
columns (a) through (d); and Part III,
Section 5, columns (a) through (f). In Part
III, Section 2, columns (a) through (e),
some partnership assets may be
characterized by source and separate
category by the partnership. This includes
certain assets that attract directly
allocated interest expense under
Temporary Regulations section
1.861-10T(b) and (c). See Temporary
Regulations section 1.861-10T(d)(2).
In Part III, Section 4, in the U.S. and
foreign columns, the partnership assigns
foreign taxes paid or accrued to a
separate category and source.
The partner's distributive share of the
amounts determined by the partnership
are reported on equivalent columns in
Schedule K-3, Parts II and III.
Certain gross income, gross receipts,
assets, cost of goods sold, deductions,
and taxes are not assigned to a source or
separate category by the partnership. See
Partner determination, later.
Exception. If the partnership knows
that its only partners are less-than-10%
limited partners that do not hold their
interest in the ordinary course of the
partner's active trade or business, the
partnership's foreign source gross income
and gross receipts should be reported as
passive category income and its
deductions allocated and apportioned to
foreign source income should be reported
as reducing passive category income. See
Schedule K-2, Part II, column (c); Part III,
Section 1, column (c); Part III, Section 3,
column (b); and Part III, Section 5, column
(d). Report the assets as generating
passive category income in Schedule K-2,
Part III, Section 2, column (c). Similarly,
any foreign taxes paid or accrued on
foreign source income should be assigned
to passive category income. See
Schedule K-2, Part III, Section 4, column
(d). The partner's distributive share of the
amounts determined by the partnership
are reported on equivalent columns in
Schedule K-3, Parts II and III. See
Regulations section 1.904-4(n)(1)(ii).
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-7-
Schedule K-3. If the partnership
knows or has reason to know that some
partners are less-than-10% limited
partners (and their partnership interest is
not held in the ordinary course of the
partner's active trade or business), but not
all partners meet this description, when
completing the Schedule K-3 for the
less-than-10% limited partners, report the
partner's foreign source income as
passive category income. See Part II,
column (c); Part III, Section 1, column (c);
Part III, Section 3, column (b); and Part III,
Section 5, column (d). Report the assets
as generating passive category income in
Part III, Section 2, column (c). Similarly,
report the foreign taxes paid or accrued on
foreign source income as passive
category income in Part III, Section 4,
column (d).
Foreign branch category income. A
domestic partnership itself does not have
foreign branch category income. However,
report all amounts that would be foreign
branch category income of its partners as
if all partners were U.S. persons that were
not pass-through entities. See
Schedule K-2, Part II, column (b); Part III,
Sections 1 and 2, column (b); and Part III,
Sections 4 and 5, column (c). The
partner's distributive share of the amounts
determined by the partnership are
reported on equivalent columns in
Schedule K-3, Parts II and III.
Schedule K-3. Any amounts reported
on Schedule K-2 as foreign branch
category income should be reported as
general category income on the
Schedule K-3, Parts II and III, provided to
foreign individuals and foreign
corporations.
Section 901(j) income. Income derived
from each sanctioned country is subject to
a separate foreign tax credit limitation. If
the partnership derives such income,
enter code "901j" on the line after
“category code.” See Schedule K-2, Part
II, Sections 1 and 2, column (e); Part III,
Sections 1 and 2, column (e); Part III,
Section 3, column (d); and Part III,
Sections 4 and 5, column (f). The partner's
distributive share of the amounts
determined by the partnership are
reported on equivalent columns in
Schedule K-3, Parts II and III. See the
Instructions for Form 1118 for the potential
countries to be listed with the section
901(j) category of income.
Note. As of the date of these instructions,
section 901(j) is the only category
reported on Part II, Sections 1 and 2,
column (e); Part III, Sections 1 and 2,
column (e); and Part III, Section 5, column
(f)
Section 951A category income.
Section 951A category income is any
amount of Global Intangible Low-Taxed
Income (GILTI) includible in gross income
under section 951A (other than passive
category income). (Section 951A category
income does not include passive category
income.) If the partnership pays or
accrues tax on the receipt of a distribution
of PTEP assigned to the reclassified
section 951A PTEP group or section 951A
PTEP group, the partnership must assign
those taxes to section 951A category
income.
The partnership will enter such taxes
on Part III, Section 4, column (b). This
code is not utilized in other portions of
Parts II and III.
Income resourced by treaty. If a
sourcing rule in an applicable income tax
treaty treats any U.S. source income as
foreign source, and there is an election to
apply the treaty, the income will be treated
as foreign source. This category applies if
the partnership pays or accrues foreign
taxes on receipt of a distribution of PTEP
that is sourced from an annual PTEP
account of the partnership that
corresponds to the separate category
relating to U.S. source income included
under section 951(a)(1) and resourced as
foreign source income under a treaty.
The designations below are only
relevant for Part III, Section 4, column (f).
Code “RBT PAS.” If an applicable
income tax treaty treats any U.S.
source passive category income as
foreign source passive category
income, and there is an election to
apply the treaty, enter code “RBT
PAS.”
Code “RBT GEN.” If an applicable
income tax treaty treats any U.S.
source general category income as
foreign source general category
income, and there is an election to
apply the treaty, enter code “RBT
GEN.”
Code “RBT 951A.” If an applicable
income tax treaty treats any U.S.
source section 951A category income
as foreign source section 951A
category income, and there is an
election to apply the treaty, enter code
“RBT 951A.”
Partner determination. In
Schedule K-2, Part II, column (f); Part III,
Section 1, column (f); Part III, Section 3,
lines 1 and 2, column (e); and Part III,
Section 5, column (g) enter the gross
income, income adjustments, and gross
receipts of the partnership that are
required to be sourced by the partner. This
includes income from the sale of most
personal property other than inventory,
depreciable property, and certain
intangible property sourced under section
865. This also includes certain foreign
currency gain on section 988 transactions.
See the instructions for Forms 1116 and
1118 and Pub. 514, Foreign Tax Credit for
Individuals, for additional details. In
Schedule K-2, Part II, column (f) and Part
III, Section 3, lines 3 and 4, column (e),
include deductions that are allocated and
apportioned by the partner. This includes
most interest expense and R&E expense.
See Regulations sections 1.861-9(e) and
1.861-17(f). In Schedule K-2, Part III,
Section 2, column (f), enter the assets that
are assigned to a source and separate
category by the partner. In Schedule K-2,
Part III, Section 4, in the partner column,
enter the foreign taxes that are assigned
to a source of income by the partner. This
includes taxes imposed on certain sales
income. The partner's distributive share of
the amounts determined by the
partnership are reported on equivalent
columns in Schedule K-3, Parts II and III.
Schedule K-2, Part II, and
Schedule K-3, Part II (Foreign
Tax Credit Limitation)
Section 1. Gross Income, lines 1
through 24
Schedule A (Form 1118) requires a
corporation to separately report certain
types of gross income by source and
separate category. Separate reporting is
required because each type of gross
income has a different sourcing rule. See
sections 861 through 865 (and section
904(h) and, in some cases, U.S. income
tax treaties). Schedules K-2 and K-3, Part
II, Section 1 generally follow the
separately reported types of gross income
on Schedule A. Individuals must follow the
same sourcing rules, but Form 1116 only
requires reporting of total gross income
from foreign sources by separate
category. Therefore, those required to file
Form 1116 will report line 24 by country on
their Form 1116, Part I, line 1a. Section 1
also generally follows the types of gross
income separately reported on Form
1065, Schedule K.
For each line, report the total for each
country in column (g).
Country code. Forms 1116 and 1118
require the taxpayer to report the foreign
country or U.S. possession with respect to
which the gross income is sourced. On
lines 1 through 24, for each gross income
item, enter on a separate line (A, B, or C)
the two-letter code from the list at IRS.gov/
CountryCodes for the foreign country or
U.S. possession within which the gross
income is sourced. If a type of income is
sourced from more than three countries,
attach a statement with the information
required on Schedule K-2, Part II, and
Schedule K-3, Part II, for that type of
income.
Note. Do not enter “various” or “OC” for
the country code.
-8-
Example 2. In Year 1, USP, a
domestic partnership, has employees who
perform services in Country X and Country
Y. USP earns $25,000 of general category
services income, $10,000 with respect to
Country X and $15,000 with respect to
Country Y. The two-letter code for Country
X is XX and the two-letter country code for
Country Y is YY. USP makes the following
entries on the first two lines of
Schedule K-2, Part II, under line 2.
Example 2 Table
Description
(d)
A
XX
$10,000
B
YY
$15,000
Exceptions. The instructions for
Forms 1116 and 1118 specify exceptions
from the requirement to report gross
income by foreign country or U.S.
possession with respect to regulated
investment companies and section 863(b).
Do not enter a foreign country or U.S.
possession (to report on a
country-by-country basis) for lines 16
through 18.
Lines 3 and 4. Rental income. These
lines are reported separately because
they are reported separately on Form
1065, Schedule K. The sourcing rule may
be the same for both types of rental
income.
Lines 7 and 8. Ordinary dividends and
qualified dividends. Enter only ordinary
dividends on line 7 and only qualified
dividends on line 8. Do not include as
ordinary dividends or qualified dividends
the amount of any distributions received to
the extent that they are attributable to
PTEP in annual PTEP accounts of the
partnership. See the instructions for
line 19 for when a partnership might have
an income inclusion with respect to a
foreign corporation.
Note. The amount by which distributions
are attributable to PTEP in annual PTEP
accounts of a direct or indirect partner is
not determined by the partnership and
therefore is not taken into account for
purposes of determining the ordinary
dividends to be entered on line 7 or the
qualified dividends to be entered on line 8.
Lines 11 through 15 and 27 through
30. Capital gains and losses. These
lines generally match the types of gains
and losses reported separately on Form
1065, Schedule K. Further, section 904(b)
(2)(B) contains rules regarding
adjustments to account for capital gain
rate differentials (as defined in section
904(b)(3)(D)) for any tax year.
Lines 16 and 46. Section 986(c) gain
and loss. Include the partnership’s share
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
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 an
annual PTEP account of the partnership.
Note. A partnership is only responsible
for computing and reporting foreign
currency gain or loss under section 986(c)
with respect to distributed PTEP sourced
from an annual PTEP account of the
partnership. It is not responsible for
computing or reporting foreign currency
gain or loss under section 986(c) with
respect to distributed PTEP sourced from
an annual PTEP account of a direct or
indirect partner.
Lines 17 and 47. Section 987 gain and
loss. The source of section 987 gain or
loss is generally determined by reference
to the source of the income or asset giving
rise to such gain or loss. A partnership
may also obtain section 987 gain or loss
information from Form 8858.
Lines 18 and 48. Section 988 gain and
loss. The source of foreign currency gain
or loss on section 988 transactions is
generally determined by reference to the
residence of the taxpayer or QBU on
whose books the asset, liability, or item of
income or expense is properly reflected. If
the source is determined by reference to
the residence of the taxpayer partner, the
section 988 gain and loss would be
reported in column (f).
Line 19. Section 951(a) inclusions.
Report section 951(a) inclusions if the
domestic partnership takes into account
such income. A domestic partnership may
not have subpart F income if, pursuant to
Proposed Regulations section 1.958-1(d)
(4), it applies Proposed Regulations
section 1.958-1(d)(1), which treats a
domestic partnership as not owning stock
of a foreign corporation within the meaning
of section 958(a) for purposes of section
951, and for purposes of any other
provision that applies by reference to
section 951.
Line 20. Other income. Attach a
statement to both Schedules K-2 and K-3
describing the amount and type of other
income. The statement must conform to
the format of Part II.
Line 24. Total gross income. Enter the
total gross income received from all
sources on line 24. Then add the gross
income in lines 1 through 23 by country or
possession and enter the total by country
in rows A, B, and C (and additional rows if
more than three countries).
Section 2. Deductions, lines 25
through 54
Schedule A (Form 1118) requires a
corporation to separately report certain
types of deductions and losses by source
and separate category. Separate reporting
is required because each type of
deduction may be allocated and
apportioned according to a different
methodology. See, for example,
Regulations sections 1.861-8 through -20
and Temporary Regulations sections
1.861-8T and -9T. For purposes of
allocating and apportioning expenses, in
general, a partner adds the distributive
share of the partnership's deductions to its
other deductions incurred directly by the
partner. See Regulations section
1.861-8(e)(15). Generally, Section 2
follows the separately reported types of
deductions and losses on Schedule A
(Form 1118). Individuals must generally
follow the same expense allocation and
apportionment rules, but Form 1116 only
requires separate reporting of certain
deductions by separate category. See
Form 1116, Part I, lines 2 through 5.
Generally, Section 2 also generally
corresponds to the deductions separately
reported on Schedule K (Form 1065).
Line 32. R&E expenses. In general,
R&E expenses are allocated and
apportioned by the partner and reported in
column (f). See Regulations section
1.861-17(f). R&E expenses, as described
in section 174, are ordinarily definitely
related to gross intangible income
reasonably connected with relevant broad
product categories of the taxpayer and are
allocable to gross intangible income as a
class related to such product categories.
The product categories are determined by
reference to the three-digit classification of
the Standard Industrial Classification
Manual (SIC code).
Line 38. Charitable contributions.
Charitable contribution deductions are
apportioned solely to U.S. source gross
income. See Regulations section
1.861-8(e)(12). Therefore, this deduction
should be reported in column (a).
Lines 39 and 40. Interest expense specifically allocable under Regulations
section 1.861-10 and -10T. Apart from
interest expense entered on line 39, enter
on line 40 interest expense that is directly
allocable under Temporary Regulations
section 1.861-10T to income from specific
partnership property. Such interest
expense is treated as directly allocable to
income generated by such partnership
property. See Temporary Regulations
section 1.861-9T(e)(1).
Lines 41 through 43. Other interest expense. A partner's distributive share of a
partnership's interest expense that is not
directly allocable to income from specific
partnership property is generally allocated
and apportioned by the partner, subject to
certain exceptions, and included in
column (f). See Temporary Regulations
section 1.861-9T(e)(1).
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-9-
Interest expense incurred by certain
individuals, estates, and trusts is
characterized based on the categories of
interest expense in sections 163 and 469:
active trade or business interest,
investment interest, or passive activity
interest, adjusted for any interest expense
directly allocated under Temporary
Regulations section 1.861-10T. See
Regulations section 1.861-9T(d). The
amounts in each category of interest
expense are reported on lines 41 through
43. If the partnership's only partners are
corporate partners, the partnership need
not report its interest expense by the
categories of interest expense in sections
163 and 469. All such interest expense
may be reported as business interest
expense on line 41.
Exception. If a partnership's only
partners are less-than-10% limited
partners (whether individual or corporate)
that do not hold their partnership interest
in the ordinary course of the partner's
active trade or business, the partnership's
interest expense is directly allocated to
partnership gross income based on
source of income. All such income is
passive category income. See
Regulations section 1.861-9(e)(4)(i) for
more information. However, if the partner
is not a less-than-10% limited shareholder
or the partnership interest is held in the
ordinary course of the partner's active
trade or business, follow the above rules.
Exception. See Regulations section
1.861-9(e)(8) and (9) for a special rule for
partnership loans. See also Box 10.
Partner loan transactions.
Line 45. Foreign taxes not creditable
but deductible. See the instructions for
Forms 1116 and 1118 for examples of
foreign taxes that are deductible, but not
creditable.
Note. Foreign taxes that are creditable
(even if a partner chooses to deduct such
taxes) are not reported as expenses on
Part II. Creditable taxes are reported on
Part III, Section 4.
Lines 49 and 50. Other deductions.
Attach to the Schedules K-2 and K-3 a
statement describing the amount and type
of other deductions. The statement must
conform to the format of Part II.
Schedule K-2, Part III, and
Schedule K-3, Part III (Other
Information for Preparation of
Form 1116 or 1118)
Section 1. R&E Expenses
Apportionment Factors
This section requires the partnership to
report information that a partner will use to
allocate and apportion its R&E expense
for foreign tax credit limitation purposes.
Deductible R&E expenses, as
described in section 174, are ordinarily
definitely related to gross intangible
income reasonably connected with
relevant broad product categories of the
taxpayer and are allocable to gross
intangible income as a class related to
such product categories. The product
categories are determined by reference to
the three-digit classification of the SIC
code. In general, R&E expenses are
apportioned based on gross receipts. R&E
expenses are allocated and apportioned
by the partner. See Regulations section
1.861-17(f)(1). This requires that the
partnership reports to its partners the
gross receipts by SIC code according to
source and separate category of income.
This also requires that the partnership
reports the amount of R&E expense
performed in the United States and
outside the United States to apply
exclusive apportionment. See Regulations
section 1.861-17(f)(2).
Column (e). As of the date of these
instructions, the only separate category
that could be included in column (e) is the
section 901(j) category of income. See the
Instructions for Form 1118 for the potential
countries to be listed with the section
901(j) category of income.
Line 1. Enter the gross receipts by SIC
code for each grouping. Such gross
receipts include both the partnership's
gross receipts and certain other parties'
gross receipts. See Regulations section
1.861-17(d)(3) and (4). Sales of parties
controlled by the partnership should be
included in line 1 if such controlled parties
can reasonably be expected to benefit
from the R&E expense connected with the
product categories. This includes sales
that benefit from the partner's R&E
expenses if licensed through the
partnership. Sales of uncontrolled parties
are also taken into account if such sales
involve intangible property that was
licensed or sold to the uncontrolled party if
the uncontrolled party can reasonably be
expected to benefit from the R&E
expense.
Line 2. Report the amount of R&E
expense related to activity performed in
the United States and the amount of R&E
expense related to activity performed
outside the United States by SIC code.
The total of the amounts on Schedule K-2,
Part III, Section 1, line 2, must equal
Schedule K-2, Part II, line 32. Similarly, the
total of the amounts on Schedule K-3, Part
III, Section 1, line 2, must equal
Schedule K-3, Part II, line 32.
Section 2. Interest Expense
Apportionment Factors
This section requires the partnership to
report information that a partner will use to
allocate and apportion its interest expense
for foreign tax credit limitation purposes.
With respect to corporate partners with
an interest in the partnership of 10% or
more, interest expense, including the
partner's distributive share of partnership
interest expense, is apportioned by
reference to the partner's assets, including
the partner's pro rata share of partnership
assets. See Regulations section
1.861-9(e)(2). Interest expense is
apportioned based on the average value
of assets. See Regulations section
1.861-9(g)(2)(i)(A). A taxpayer can use
either the tax book value or the alternative
book value of its assets. See Regulations
section 1.861-9(i). Under both methods,
the partner uses the partnership's inside
basis in its assets, including adjustments
required under sections 734(b) and
743(b). See Regulations section
1.861-9(e)(2) and -9(e)(3). When reporting
the asset that is the basis of stock in
nonaffiliated 10% owned corporations,
adjust such amount for earnings and
profits (E&P). See Regulations section
1.861-12(c)(2)(i)(A).
Column (b). The partnership
characterizes its pro rata share of the
partnership assets that give rise to foreign
branch category income as assets in the
foreign branch category. See Regulations
section 1.861-9(e)(10).
Column (e). As of the date of these
instructions, the only separate category
that could be included in column (e) is the
section 901(j) category of income. See the
Instructions for Form 1118 for the potential
countries to be listed with the section
901(j) category of income.
Line 1. Report the average of the
beginning-of-year and end-of-year inside
basis in the partnership’s assets. See
Regulations section 1.861-9(g)(2)(i)(A).
Line 2. Report the average of the
beginning-of-year and end-of-year inside
basis adjustments under sections 734(b)
and 743(b).
Lines 3 and 4. Report reductions in the
partnership's asset values to reflect the
partnership's directly allocable interest
under Regulations section 1.861-10(e)
and Temporary Regulations section
1.861-10T. See also Temporary
Regulations section 1.861-9T(e)(1).
Note. Line 2 is not reported according to
source or separate category.
Line 5. Report the average value of
assets excluded from the apportionment
formula. See section 864(e)(3).
Note. The SIC code for line 2B(i) does
not need to be the same SIC code for
line 2A(i).
Line 6. Individual partners who are
general partners or who are limited
partners with an interest in the partnership
-10-
of 10% or more follow the same rules as
corporate partners whose interest in the
partnership is 10% or more except that
their interest expense must be
apportioned according to the interest
expense classifications under sections
163 and 469. This includes reporting the
assets according to such classifications. If
the partnership has no such partners, the
partnership need not complete
Schedule K-2, Part III, Section 2, lines 6(b)
through (d), or Schedule K-3, Part III,
Section 2, lines 6(b) through (d). The
partnership would include the total amount
on line 6(a).
Schedule K-3. If the partnership's
partners are not limited to corporate
partners, when completing Schedule K-3,
Part III, Section 2, for the corporate
partners with an interest of 10% or more in
the partnership, do not complete lines 6(b)
through (d). Include the total distributive
share on line 6(a).
Lines 7 and 8. The amounts reported on
lines 7 and 8 are subsets of the amounts
reported on line 6 representing the value
of stock held by the partnership in certain
foreign corporations. In determining its
foreign tax credit limitation, a partner
should disregard interest expense that is
“properly allocable'' to stock of a
10%-owned foreign corporation that has
been characterized as a section 245A
asset. See section 904(b)(4) and
Regulations section 1.904(b)-3(a)(1)(ii).
The amount of properly allocable
deductions is determined by treating the
section 245A subgroup for each separate
category as a statutory grouping for
purposes of allocating and apportioning
interest deductions on the basis of assets.
Assets in a section 245A subgroup only
include stock of a specified 10%-owned
foreign corporation that has been
characterized as a section 245A asset.
The stock is characterized as a section
245A asset to the extent it generates
income that would generate a dividends
received deduction under section 245A if
distributed. This does not include income
that is included as GILTI, subpart F
income, or a section 951(a)(1)(B) inclusion
or income described in section 245(a)(5)
(which gives rise to a dividends received
deduction under section 245 instead of
section 245A).
In the case of a specified 10%-owned
foreign corporation that is not a CFC, all of
the value of its stock is potentially in a
section 245A subgroup because the stock
generally generates dividends eligible for
the section 245A deduction (and cannot
generate an inclusion under section
951(a)(1) or 951A(a)), if the partner meets
the requirements for eligibility. See
Regulations section 1.904(b)-3(c)(2).
However, because the partnership may
not have the information to determine if a
partner is eligible for a section 245A
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
deduction (for example, due to tiered
ownership), the partner must determine to
what extent the stock is treated as an
asset in a section 245A subgroup.
With respect to a partnership-owned
specified 10% foreign corporation that is
not a CFC, the partnership will report on
line 7, columns (a) through (e), the total
value of the stock in all such foreign
corporations. The value of the stock is the
partnership's basis in the stock adjusted to
take into account the E&P of the foreign
corporations as explained in Regulations
section 1.861-12(c)(2). The partnership
must attach a statement to the Schedules
K-2 and K-3 with the following information
for each foreign corporation for which
adjusted basis is reported on line 7.
• Name of foreign corporation.
• EIN or reference ID number. Do not
enter “FOREIGNUS”or “APPLIED FOR.”
• Percentage of voting and value of stock
owned by partnership in such foreign
corporation.
• Value of the stock in such corporation
included in each of the groupings in 6b
through d (identify separately each of
those groupings).
If the specified 10%-owned foreign
corporation is a CFC, a portion of the
value of stock in each separate category
and in the residual grouping for U.S.
source income is subdivided between a
section 245A and non-section 245A
subgroup under the rules described in
Regulations section 1.861-13(a)(5).
However, because the partnership
generally will not have the information to
apply the stock characterization rules
described in Regulations section
1.861-13(a)(5), the partner must apply
those rules to characterize the stock.
With respect to partnership-owned
CFCs, the partnership will report on line 8,
column (f), the total value of its stock in all
such foreign corporations. The value of
the stock is the partnership’s inside basis
in the stock adjusted to take into account
the E&P of the foreign corporations as
explained in Regulations section
1.861-12(c)(2). The partnership must
attach a statement to the Schedules K-2
and K-3 with the following information for
each foreign corporation for which basis is
reported on line 8.
• Name of foreign corporation.
• EIN or reference ID number. Do not
enter “FOREIGNUS”or “APPLIED FOR.”
• Percentage of voting and value of stock
owned by partnership in such foreign
corporation.
• Value of the stock in such corporation.
Section 3. Foreign-Derived
Intangible Income (FDII) Deduction
Apportionment Factors
This section requires the partnership to
report information that a partner will use to
allocate and apportion its FDII deduction
under section 250(a)(1)(A) for foreign tax
credit limitation purposes. The deduction
is definitely related and allocable to the
class of gross income included in the
partner’s foreign-derived deduction
eligible income (as defined in section
250(b)(4)) and is apportioned within the
class, if necessary, ratably between the
statutory grouping (or among the statutory
groupings) of gross income and the
residual grouping of gross income based
on the relative amounts of foreign-derived
deduction eligible income in each
grouping. See Regulations section
1.861-8(e)(13). If the partner is a member
of a consolidated group, see Regulations
section 1.861-14(e)(4). Accordingly, this
section requires the partnership to report
information that its partners will use to
determine the source and separate
category of its income so that the partners
may allocate and apportion the FDII
deduction under section 250(a)(1)(A) for
purposes of the foreign tax credit
limitation.
Lines 1 and 2. Report the partnership’s
foreign-derived gross receipts and cost of
goods sold, respectively, by source and
separate category.
Lines 3 and 4. Report the partnership’s
deductions allocable to foreign-derived
gross receipts and other partnership
deductions apportioned to foreign-derived
gross receipts, respectively. See Part IV,
Section 2, lines 11 and 12. Although these
deduction amounts are necessary to
figure the partner’s FDII deduction, once
this amount is determined, the actual FDII
deduction itself is allocated and
apportioned as described in Regulations
section 1.861-8(e)(13).
Column (d). As of the date of these
instructions, the only separate category
that could be included in column (d) is the
section 901(j) category of income. See the
Instructions for Form 1118 for the potential
countries to be listed with the section
901(j) category of income.
Section 4. Foreign Taxes
In Part III, Section 4, the partnership
assigns foreign taxes paid or accrued
(including on U.S. source income) to a
separate category and source. Include
taxes paid or accrued to foreign countries
or to U.S. possessions.
Attachment. As previously mentioned in
the instructions for Schedule K-2, Part I,
box 4 and Schedule K-3, Part I, box 4 (for
distributive share), for each of the
amounts listed in lines 1 through 3, attach
to the Schedules K-2 and K-3 a statement
reporting the following information.
• The dates on which the taxes were paid
or accrued.
• The exchange rates used.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-11-
• The amounts in both foreign currency
and U.S. dollars. See section 986(a).
Column (a). Enter the code for the type
of tax.
Codes for Types of Tax
Code
Type of Tax
WHTD
Withholding tax on
dividends
WHTP
Withholding tax on
distributions of PTEP
WHTB
Withholding tax on
branch remittances
WHTR
Withholding tax on
rents, royalties, and
license fees
WHTI
Withholding tax on
interest
ECI
Taxes paid or accrued
to foreign countries or
possessions on certain
effectively connected
income
OTHS
Other foreign taxes
paid or accrued on
sales income
OTHR
Other foreign taxes
paid or accrued on
services income
OTH
Other foreign taxes
paid or accrued
Column (b). Taxes assigned to section
951A category. Taxes assigned to
section 951A category income are taxes
paid or accrued on distributions of PTEP
assigned to the reclassified section 951A
PTEP and section 951A PTEP groups. A
partnership might not be able to complete
this column due to lack of information
regarding the treatment of the current year
distributions.
Note. Do not report as taxes assigned to
section 951A category income taxes on a
distribution that is assigned by a partner to
the reclassified section 951A PTEP or
section 951A PTEP groups as a result of
the partner’s prior section 951A inclusion.
Column (f). Other category.
Foreign taxes paid or accrued to
sanctioned countries. No credit is
allowed for foreign taxes paid or accrued
to certain sanctioned countries.
Foreign taxes related to PTEP
resourced by treaty. If the partnership
pays or accrues foreign taxes on receipt of
a distribution of PTEP that is sourced from
an annual PTEP account of the
partnership that corresponds to the
separate category relating to U.S. source
income included under section 951(a)(1)
and resourced as foreign source income
under a treaty, such taxes are included in
column (f).
On the line after "category code," enter
one of the following codes.
Code “RBT PAS.” If an applicable
income tax treaty treats any U.S.
source passive category income as
foreign source passive category
income, and there is an election to
apply the treaty, enter code “RBT
PAS.”
Code “RBT GEN.” If an applicable
income tax treaty treats any U.S.
source general category income as
foreign source general category
income, and there is an election to
apply the treaty, enter code “RBT
GEN.”
Code “RBT 951A.” If an applicable
income tax treaty treats any U.S.
source section 951A category income
as foreign source section 951A
category income, and there is an
election to apply the treaty, enter code
“RBT 951A.”
Line 1. Enter in U.S. dollars the total
foreign taxes (described in section 901 or
section 903) that were paid or accrued by
the partnership (according to its method of
accounting for such taxes). Do not reduce
the amount that you report on line 1 by the
reductions reported on line 2. Do not
report redetermined taxes on line 1.
Report such taxes on line 3.
If the partnership has the cash method
of accounting, check the "Paid" box and
enter foreign taxes paid during the tax
year on line 1. Report each partner's share
on Schedule K-3, Part III, Section 4, line 1.
If the partnership has the accrual
method of accounting, check the
“Accrued” box and enter foreign taxes
accrued on line 1. Report each partner's
share on Schedule K-3, Part III, Section 4,
line 1.
Note. Check only one box “paid” or
“accrued” depending on the method of
accounting the partnership takes into
account foreign taxes.
Enter on a separate line (that is, after A,
B, and C), taxes paid or accrued to each
country. Enter the two-letter code from the
list at IRS.gov/CountryCodes. Do not enter
“various” or “OC” for country code.
Example 3. The facts are the same as
in Example 2, earlier. USP has the cash
method of accounting and pays taxes of
$1,000 and $3,000 to Countries XX and
YY, respectively. USP completes Part III,
Section 4, line 1, as follows.
Example 3 Table
(a)
Direct
(901/903)
foreign
taxes
Paid
(e)
Type Foreign
of tax
A
XX
OTHR
1,000
B
YY
OTHR
3,000
Line 2. Enter on line 2 a negative number
for the sum of the taxes in the following
categories.
A. Taxes on foreign mineral income
(section 901(e)).
B. Reserved.
C. Taxes attributable to boycott
operations (section 908).
D. Reduction in taxes for failure to
timely file (or furnish all of the
information required on) Forms 5471,
Information Return of U.S. Persons
With Respect to Certain Foreign
Corporations, and 8865, Return of
U.S. Persons With Respect to Certain
Foreign Partnerships (section
6038(c)).
E. Foreign income taxes paid or
accrued during the current tax year
with respect to splitter arrangements
under section 909.
F. Foreign taxes on foreign corporate
distributions. For example, report
taxes on dividends eligible for a
deduction under section 245A and
ineligible for credit under section
245A(d). Also, include taxes on a
distribution of PTEP assigned to the
following PTEP groups: reclassified
section 965(a) PTEP, reclassified
section 965(b) PTEP, section 965(a),
section 965(b) PTEP, a portion of
which are not creditable. The
partnership may be unable to
determine the amount of a distribution
that is attributable to non-previously
taxed E&P or PTEP for which a foreign
tax credit may be partially or entirely
disallowed. However, it is important to
track this amount as a tax on a
distribution.
G. Other. Attach a statement to
Schedules K-2 and K-3 indicating the
reason for the reduction.
There is no need to report the amounts
on line 2 by country.
partnership that has the cash method of
accounting does not result in a foreign tax
redetermination. See Regulations section
1.905-3(a). Such amounts should be
reported on line 1 as foreign taxes paid by
the partnership in the current year.
Report the U.S. tax year to which the
foreign tax relates. This would be the U.S.
tax year that includes the close of the
foreign tax year to which the tax relates.
Report the date on which the tax was paid.
If there is more than one date tax is paid,
enter one of the dates paid on the
schedule itself and then attach to the
Schedules K-2 and K-3 a statement
including all of the information reported on
the schedule with the other dates paid.
If there is more than one
redetermination in a year with respect to
different countries, report such
redeterminations on separate lines. Enter
the two-letter code from the list at IRS.gov/
CountryCodes. Similarly, if there is more
than one redetermination in a year with
respect to the same country, but the
redeterminations are related to different
years, report such redeterminations on
separate lines. Do not enter “various” or
“OC” for the country code.
Example 4. The facts are the same
as in Example 3, earlier. In Year 3, USP
resolves a contest with the Country YY
taxing authorities and reduces the Country
YY tax to $2,000. USP pays the tax liability
on April 30 of Year 3. In Year 3, USP
reports on its Schedule K-2, Part III,
Section 4, line 3, as follows.
Example 4 Table
Foreign tax
redeterminations
A
(a)
(e)
Type of
tax
Foreign
OTHR
(1,000)
YY
Related tax
year
Year 1
Date tax paid
4/30/
Year 3
Section 5. Other Tax Information
This section provides other tax information
that a partner needs to figure its foreign
tax credit limitation.
Line 3. Enter in U.S. dollars the change
in foreign tax as a result of a foreign tax
redetermination. See section 905(c) and
Regulations sections 1.905-3 through -5. If
the amount is less than the original foreign
tax, report the change as a negative
amount. If the amount is more than the
original foreign tax, report the change as a
positive amount.
Column (b). Do not report any amounts
in this column.
Note. Payment of additional foreign taxes
that relate to an earlier tax year by a
Line 1. For partnerships other than
publicly traded partnerships, report the
-12-
Column (f). As of the date of these
instructions, this column will only include
the section 901(j) category and the
countries relevant to that category. See
the Instructions for Form 1118 for the
potential countries to be listed with the
section 901(j) category of income.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
total of all partners’ shares of the net
positive income adjustments resulting
from all section 743(b) basis adjustments.
Net positive income adjustments from all
section 743(b) basis adjustments means
the excess of all section 743(b)
adjustments allocated to the partner that
increase the partner's taxable income over
all section 743(b) adjustments that
decrease the partner's taxable income.
Attach to Schedules K-2 and K-3 a
statement showing each section 743(b)
basis adjustment making up the total and
identify the assets to which it relates and
the separate category and source of the
income generated by the assets. Make
sure to include the class of gross income
or deduction, for example, sales income,
interest income, or depreciation
deduction. The partnership may group
these section 743(b) basis adjustments by
asset category or description in cases
where multiple assets are affected if the
assets generate the same separate
category and source of income. The
section 743(b) positive income
adjustments should be included as
relevant in other parts of the
Schedule K-2. For example, the section
743(b) income adjustments should be
reflected as part of the total depreciation
reported on Part II, Section 2.
Line 2. For partnerships other than
publicly traded partnerships, report the
total of all partners' shares of the net
negative income adjustment resulting from
all section 743(b) basis adjustments. Net
negative income adjustments from all
section 743(b) basis adjustments means
the excess sum of all section 743(b)
adjustments allocated to the partner that
decrease partner taxable income over all
section 743(b) adjustments that increase
partner taxable income. Attach to the
Schedules K-2 and K-3 a statement
showing each section 743(b) basis
adjustment making up the total and
identify the assets to which it relates and
the separate category and source of the
income generated by the assets. Make
sure to include the class of gross income
or deduction, for example, sales income,
interest income, or depreciation
deduction. The partnership may group
these section 743(b) basis adjustments by
asset category or description in cases
where multiple assets are affected if the
assets generate the same separate
category and source of income. The
section 743(b) negative income
adjustments should be included as
relevant in other parts of the
Schedule K-2. For example, the section
743(b) income adjustments should be
reflected as part of the total depreciation
reported on Part II, Section 2.
Schedule K-2, Part IV
(Information on Partners’
Section 250 Deduction with
Respect to Foreign-Derived
Intangible Income (FDII)) and
Schedule K-3, Part IV
(Information on Partner’s
Section 250 Deduction with
Respect to Foreign-Derived
Intangible Income (FDII))
Note. Certain partners will use the
following information to claim and figure a
section 250 deduction with respect to FDII
on Form 8993.
This part is used by the partnership to
report information to a direct domestic
corporate partner (other than real estate
investment trusts, regulated investment
companies, and S corporations) or to a
partner which is a partnership that has a
direct or indirect domestic corporate
partner (other than real estate investment
trusts, regulated investment companies,
and S corporations) needed to determine
the domestic corporate partner's FDII. A
partnership that does not have or receive
sufficient information or notice regarding a
partner must presume the partner is a
domestic corporate partner or a
partnership that has a direct or indirect
domestic corporate partner and the
partnership must complete the Schedules
K-2 and K-3, Part IV, accordingly. Any
partnership with direct or indirect domestic
corporate partners must complete this
part, though the partnership does not have
foreign-derived gross receipts. Even if a
partnership has no foreign activities, and
therefore has no foreign-derived
deduction eligible income as reported in
Section 2 of this part, the partnership must
still report the information required by
Sections 1 and 3 of this part so that any
domestic corporate partner can correctly
determine its section 250 deduction. For
example, a domestic corporate partner
would still need information about the
partnership’s qualified business asset
investment (see instructions to line 8 of
this part) in such a case to determine its
deemed tangible income return and
deemed intangible income. See section
250(b)(2).
Section 250 allows a domestic
corporation a deduction for its FDII and a
direct or indirect domestic corporate
partner must take into account certain
activities of a partnership in computing the
domestic corporation's FDII. For the
treatment of a domestic corporation that is
a partner in a partnership, see Regulations
sections 1.250(b)-1(e), 1.250(b)-2(g), and
1.250(b)-3(e). These instructions
generally indicate how a partnership
should complete Part IV (of both
Schedules K-2 and K-3). However,
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-13-
Schedule K-2 includes the total of all
partners’ amounts and Schedule K-3
includes each partner’s share.
Enter each amount and total amounts
in U.S. dollars. The partnership should
determine and report the partner's share
of each item of the partnership contained
on this form in accordance with the
partner's distributive share of the
underlying item of income, gain,
deduction, and loss of the partnership.
The partnership should report these
amounts based on the best information
available to it about how its partners might
use this information to determine their FDII
deduction. The partnership may report
certain information differently to each
partner depending on federal income tax
determinations that the partner makes.
Each partner must then figure its FDII
deduction using Form 8993 including the
information reported to it on Schedule K-3,
Part IV taking into account partner
determinations. A partner must obtain
(and if requested by a partner, the
partnership must provide) any further
necessary information from the
partnership to correctly determine its FDII
deduction.
Special rules for determining foreign
use apply to transactions that involve
property or services provided to related
parties (see section 250(b)(5)(C) and
Regulations section 1.250(b)-6).
For special substantiation requirements
under the Regulations, see sections
1.250(b)-3(f), 1.250(b)-4(d)(3), and
1.250(b)-5(e)(4). In all other cases, a
taxpayer claiming a deduction under
section 250 will still be required to
substantiate that it is entitled to the
deduction even if it is not subject to the
specific substantiation requirements
contained in the regulations. See section
6001 and Regulations section
1.6001-1(a). Therefore, the partner must
be able to satisfy the general or special
substantiation requirements to be eligible
for the deduction. To the extent the
partner does not have the necessary
information in its possession to
substantiate the deduction, the
partnership must maintain the information.
As described above, the partnership
should determine the partner's share of
each item below in accordance with the
partner's distributive share of the
underlying item of income, gain,
deduction, and loss of the partnership.
Section 1. Information to
Determine Deduction Eligible
Income (DEI) and Qualified
Business Asset Investment (QBAI)
on Form 8993
Line 2(a). DEI gross receipts. Enter all
gross receipts from whatever source
derived except for amounts included on
lines 3–7.
Line 2(b). DEI cost of goods sold.
Enter the amount of cost of goods sold
attributable to the amount on line 2(a).
Line 2(c). DEI properly allocated and
apportioned deductions. Enter the
amount of deductions (including taxes)
properly allocable to the amount on
line 2(a). See Regulations section
1.250(b)-1(d)(2) for more details.
Deductions properly allocable to gross
DEI are determined without regard to
sections 163(j), 170(b)(2), 172, 246(b),
and 250.
Lines 3 through 7 are exclusions from
DEI used to determine the partner’s DEI.
Line 3. Section 951(a) inclusions.
Enter any amounts included in the gross
income under section 951(a)(1). Include
the section 78 gross-up with respect to the
inclusion under section 951(a)(1). A
partnership may not have subpart F
income if, pursuant to Proposed
Regulations section 1.958-1(d)(4), it relies
on Proposed Regulations section
1.958-1(d)(1), which treats a domestic
partnership as not owning stock of a
foreign corporation within the meaning of
section 958(a) for purposes of section
951, and for purposes of any other
provision that applies by reference to
section 951.
Note. Partners will determine whether
any amount included in the gross income
of such corporate partner is GILTI under
section 951A (or the section 78 gross-up
with respect to this inclusion under section
951A), which can only be determined by
the partner and therefore is not reported
on Part IV, Section 1 of Schedules K-2
and K-3.
Line 4. CFC dividends. Enter the
amount of any dividend received from a
CFC with respect to which the partner is a
U.S. shareholder as defined under section
951(b). Do not include as a dividend any
amount received from a CFC to the extent
that such amount is attributable to PTEP in
the annual PTEP accounts of the
partnership.
Line 5. Financial services income.
Enter the amount of net financial services
income (as defined in section 904(d)(2)
(D)) before interest and R&E deductions.
Line 6. Domestic oil and gas extraction
income. Enter the amount of net
domestic oil and gas extraction income
before interest and R&E deductions. The
term “domestic oil and gas extraction
income” means income described in
section 907(c)(1) determined by
substituting “within the United States” for
“without the United States.”
Line 7. Foreign branch income. Enter
the amount of net foreign branch income
before interest and R&E deductions (as
defined in section 904(d)(2)(J)). A
partnership should report all income that
would be foreign branch income of its
partners as if all partners were U.S.
persons.
Line 8. Partnership QBAI. Enter the
amount, if any, of the partnership QBAI. A
domestic corporation’s QBAI is its share of
the average of the aggregate adjusted
bases, determined as of the close of each
quarter of the tax year, in certain specified
tangible property. See Regulations section
1.250(b)-2(b). The adjusted basis is
determined by using the alternative
depreciation system under section 168(g)
and allocating depreciation deductions
with respect to such property ratably to
each day during the period in the tax year
to which such depreciation relates. See
Regulations section 1.250(b)-2(e). The
specified tangible property is that which is
used in the trade or business of the
corporation in the production of gross
income included in the domestic
corporation’s gross DEI and is of a type
with respect to which a deduction is
allowable under section 167. See
Regulations section 1.250(b)-2(b). If a
domestic corporation holds an interest in
one or more partnerships during a tax year
(including indirectly through one or more
partnerships that are partners in a
lower-tier partnership), the QBAI of the
domestic corporation for the tax year is
increased by the sum of the domestic
corporation’s partnership QBAI with
respect to each partnership for the tax
year. See Regulations section
1.250(b)-2(g)(1). Partnership QBAI is the
sum of the domestic corporation’s
proportionate share of the partnership’s
adjusted basis in the property and the
domestic corporation’s partner specific
QBAI basis in the property for the
partnership tax year that ends with or
within the tax year. See Regulations
section 1.250(b)-2(g)(2). Partnership
specified tangible property means with
respect to a domestic corporation,
tangible property that is used in the trade
or business of the partnership, of a type
with respect to which a deduction is
allowable under section 167, and used in
the production of gross income included in
the domestic corporation’s gross DEI. See
Regulations section 1.250(b)-2(g)(5).
If a partnership cannot determine the
portion of partnership specified tangible
property (for example, if the partnership
does not know if property gives rise to the
production of gross income in one of the
excluded categories from DEI that is
determined by the partner, which would
cause such property to not be classified
as partnership specified tangible
property), then in reporting the amount of
a partner's share of the partnership QBAI,
the partnership must separately state any
information so a direct or indirect domestic
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corporate partner can distinguish between
the amount of the adjusted bases in a
partnership's tangible property that the
domestic corporation would include in its
adjusted bases in the partnership
specified tangible property and the
amount of the adjusted bases in the
partnership's tangible property that the
domestic corporation would not include in
its adjusted bases in the partnership
specified tangible property.
If tangible property was used in the
production of DEI and in the production of
income that is non-DEI, then it is
considered dual-use property and treated
as specified tangible property in the same
proportion that the amount of the gross
income included in DEI produced with
respect to the property bears to the total
amount of gross income produced with
respect to the property. See Example 2 of
Regulations section 1.250(b)-2(g)(8) for
guidance on how to figure the partner
adjusted basis. If specified tangible
property is only partially depreciable then
only the depreciable portion is QBAI.
Example 5. X and Y are both
domestic corporations which are partners
in USP, a partnership that holds three
types of assets — A, B, and C. All types of
assets are tangible property used in the
trade or business of USP and with respect
to which a deduction is allowable under
section 167. The production of income
from A assets is DEI with respect to X and
Y. Thus, the A assets are partnership
specified tangible property with respect to
X and Y, and USP includes a
proportionate amount of the adjusted
bases of all A assets in calculating each
partner’s partnership QBAI. The
production of income from B assets is DEI
with respect to X. However, with respect to
Y, the production of income from B assets
is non-DEI. Thus, the B assets are
partnership specified tangible property
with respect to X only, and USP includes a
proportionate amount of the adjusted
bases of all B assets only in calculating
X’s partnership QBAI. The C assets are
dual-use property, because the production
of only part of the income from the C
assets is DEI with respect to X and Y.
Thus, the C assets are partnership
specified tangible property with respect to
both X and Y, but USP includes a
proportionate amount of the adjusted
bases of all C assets in calculating each
partner’s partnership QBAI only in the
proportion that the amount of the gross
income included in DEI produced with
respect to the C assets bears to the total
amount of gross income produced with
respect to the C assets.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Section 2. Information to
Determine Foreign-Derived
Deduction Eligible Income on
Form 8993
Foreign-derived gross receipts means,
with respect to a partnership, gross
receipts of the partnership for the
partnership's tax year that are used to
figure gross FDDEI as defined in
Regulations section 1.250(b)-1.
Each place where general property is
listed refers to amounts connected to the
sale, lease, exchange, or other disposition
of general property to a foreign person
and, as established to the satisfaction of
the Secretary, is for a foreign use as
defined in Regulations sections 1.250(b)-3
and 1.250(b)-4(d). The term general
property means any property other than
intangible property, a security (as defined
in section 475(c)(2)), an interest in a
partnership, trust, or estate, or a
commodity described in section 475(e)(2)
(A) that is not a physical commodity or a
commodity described in section 475(e)(2)
(B) through (D).
Each place where intangible property is
listed refers to amounts connected to the
sale, license, exchange, or other
disposition of intangible property to a
foreign person and, as established to the
satisfaction of the Secretary, is for a
foreign use as defined in Regulations
sections 1.250(b)-3 and 1.250(b)-4(d)(2).
Each place where services are listed
refers to amounts connected to services
that, as established to the satisfaction of
the Secretary, are provided to any person,
or with respect to property, located outside
the United States as defined in
Regulations section 1.250(b)-5.
If a transaction includes both a sales
component and a service component, the
transaction is classified as either a sale or
as a service according to the overall
predominant character of the transaction.
See Regulations section 1.250(b)-3(d).
For purposes of determining a
domestic corporation’s deductions that
are properly allocable to gross FDDEI, the
corporation’s deductions are allocated
and apportioned to gross FDDEI under the
rules of Regulations sections 1.861-8
through 1.861-14T and 1.861-17 by
treating section 250(b) as an operative
section described in Regulations section
1.861-8(f). See Regulations section
1.250(b)-1(d)(2).
Line 9. Gross receipts. Enter the
amount, if any, of the partnership's
foreign-derived gross receipts separately
for aggregate sales of general property,
aggregate sales of intangible property,
and aggregate services. Foreign-derived
gross receipts means gross receipts that
are used to figure gross FDDEI as defined
in Regulations section 1.250(b)-1(c)(16).
Line 10. COGS. Enter the amount of cost
of goods sold attributable to the amount(s)
on line 9.
For purposes of this form, when
figuring FDDEI, cost of goods sold
includes the cost of goods sold to
customers, and adjusted basis of
non-inventory property sold or otherwise
disposed of in trade or business.
In making that determination, attribute
costs of goods sold to gross receipts using
a reasonable method in accordance with
Regulations section 1.250(b)-1(d)(1).
Cost of goods sold must be attributed
to gross receipts with respect to gross DEI
or gross FDDEI regardless of whether
certain costs included in cost of goods
sold can be associated with activities
undertaken in an earlier tax year (including
a year before the effective date of section
250).
Line 11. Allocable deductions. Enter
the amount of the allocable deductions.
See Regulations section 1.250(b)-1(d)(2)
for more details. Enter the amounts of
interest and R&E expenses on lines 13
and 16, respectively. Deductions are
determined without regard to sections
163(j),170(b)(2), 172, 246(b), and 250.
Column (a). General Property. Enter
the amount of the deductions that are
allocated and apportioned to gross FDDEI
from all sales of general property.
Column (b). Intangible Property. Enter
the amount of the deductions that are
allocated and apportioned to gross FDDEI
from all sales of intangible property.
Column (c). Services. Enter the amount
of the deductions that are allocated and
apportioned to gross FDDEI from all
services.
Line 12. Other apportioned deductions. Enter all other apportioned
deductions that relate to gross FDDEI that
are not otherwise included on lines 11, 13,
and 16. If a deduction does not bear a
definite relationship to a class of gross
income constituting less than all of gross
income, it shall ordinarily be treated as
definitely related and allocable to all of the
taxpayer's gross income, including gross
DEI and gross FDDEI, except where
otherwise directed in the regulations.
Section 3. Other Information for
Preparation of Form 8993
Line 13. Interest deduction. The term
interest refers to the gross amount of
interest expense incurred by a taxpayer in
a given year. Interest expense includes
any expense that is currently deductible
under section 163 (including original issue
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-15-
discount), and interest equivalents. See
Temporary Regulations sections
1.861-9T(b) for the definition of interest
equivalents and 1.861-9T(c) for sections
that disallow, suspend, or require the
capitalization of interest deductions.
Line 13A and 13B. Interest expense
specifically allocable under Regulations sections 1.861-10(e) and -10T.
Apart from interest expense entered on
line 13A, enter on line 13B interest
expense that is directly allocable under
Temporary Regulations section 1.861-10T
to income from specific partnership
property. Such interest expense is treated
as directly allocable to income generated
by such partnership property. See
Temporary Regulations section
1.861-9T(e)(1).
Line 13C. Enter all interest deductions
not otherwise included on lines 13A and
13B.
Line 14. Interest expense apportionment factors. This line requires the
partnership to report information that a
partner will use to allocate and apportion
its interest expense for FDII purposes.
Interest deductions are apportioned to
gross DEI and FDDEI based ordinarily on
the tax book value of the taxpayer’s
assets. See Regulations section
1.861-9T(g)(1)(i). A taxpayer can use
either the tax book value or the alternative
tax book value of its assets. See
Regulations section 1.861-9(i). Under both
methods, the partner uses the
partnership's inside basis in its assets,
including adjustments required under
sections 734(b) and 743(b). See
Regulations sections 1.861-9(e)(2)
and -9(e)(3). When reporting the asset
that is the basis of stock in nonaffiliated
10%-owned corporations, adjust such
amount for E&P. See Regulations section
1.861-12(c)(2)(i)(A).
The total interest deductions for the
members of the corporation's affiliated
group are allocated and apportioned to the
statutory and residual groupings under
proposed, final, and Temporary
Regulations sections 1.861-8 through
1.861-14.
A corporate partner 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).
Note. The Total Column is not a sum of
DEI and FDDEI but rather refers to the
partnership’s specific line totals (that is,
that would also include non-DEI).
Line 14A. Enter the amount of the
average of the beginning-of-year and
end-of-year inside basis in the
partnership's assets. See Regulations
section 1.861-9(g)(2)(i)(A).
Line 14B. Enter the amount of the
average of the beginning-of-year and
end-of-year inside basis adjustments
under sections 734(b) and 743(b).
Lines 14C and 14D. Enter the amount of
the reductions in the partnership's asset
values to reflect the partnership's directly
allocable interest under Regulations
section 1.861-10(e) and Temporary
Regulations section 1.861-10T. See also
Temporary Regulations section
1.861-9T(e)(1).
Line 14E. Enter the amount of the
average value of assets excluded from the
apportionment formula. See section
864(e)(3).
Lines 15 and 16. R&E expenses apportionment factors. These lines require
the partnership to report information that a
partner will use to allocate and apportion
its R&E expense for FDII purposes. R&E
expenses deducted under section 174 are
definitely related to all income reasonably
connected with relevant broad product
categories of the taxpayer and are
allocable to all items of gross income as a
class related to such product categories.
The product categories are generally
determined by reference to the three-digit
SIC code. R&E expenses are apportioned
between the statutory and residual
groupings based on an analysis of the
taxpayer’s gross receipts from certain
sales, leases, licenses, and services. See
Regulations section 1.861-17. The
exclusive apportionment rule in
Regulations section 1.861-17(b) does not
apply for purposes of apportioning R&E to
gross DEI and gross FDDEI.
R&E expenses are allocated and
apportioned by the partner. This requires
that the partnership report to its partners
the gross receipts related to certain
income within the statutory and residual
groupings within a SIC code and the
partner’s distributive share of the
partnership’s R&E deductions, if any,
connected with the SIC codes.
Line 15. R&E gross receipts by SIC
code. Enter the gross receipts that
resulted in gross income for each
category, DEI, FDDEI, and then Total
Gross Receipts. Note that the Total
Column is not a sum of DEI and FDDEI but
rather refers to all the partnership’s gross
receipts. Such gross receipts include both
the partnership's sales and certain other
parties' sales. See Regulations section
1.861-17(d). Gross receipts from certain
transactions of parties both controlled or
uncontrolled by the partnership may be
included in line 15. See generally
Regulations section 1.861-17(d).
Line 16. Enter the amount of the amount
of R&E expense by SIC code.
Schedule K-2, Part V, and
Schedule K-3, Part V
(Distributions From Foreign
Corporations to Partnership)
Note. Certain partners will use the
following information, in combination with
other information known to the partners,
including Form 5471, Schedule P, to
exclude from gross income distributions to
the extent that they are attributable to
PTEP in their annual PTEP accounts and
report foreign currency gain or loss with
respect to the PTEP on Forms 1040 and
1120. If eligible, partners will also use this
information to figure and claim a dividends
received deduction under section 245A on
Form 1120.
Use Part V of Schedule K-2 to report
the distributions made by foreign
corporations to the partnership.
Use Part V of Schedule K-3 to report
the partner's share of the amounts
reported on Part V of the Schedule K-2.
Rows A—O. Use rows A-O to report
information with respect to each
distribution by a foreign corporation with
respect to its stock that the partnership
(directly or through pass-through entities)
owns (within the meaning of section 958)
other than solely by reason of applying
section 318(a)(3) (providing for downward
attribution) as provided in section 958(b).
Each row should relate to the
partnership’s direct ownership of stock in
the foreign corporation or direct ownership
of the ownership interests in a
pass-through entity that (directly or
through other pass-through entities) owns
(within the meaning of section 958) stock
in the foreign corporation other than solely
by reason of applying section 318(a)(3)
(providing for downward attribution) as
provided in section 958(b). For example, if
a partnership (upper-tier partnership)
directly owns 50% of the foreign
corporation's stock and owns 50% of the
foreign corporation's stock through
another partnership (lower-tier
partnership), then distributions by the
foreign corporation to both the upper-tier
partnership and the lower-tier partnership
are to be reported on separate rows on the
upper-tier partnership's Part V of
Schedules K-2 and K-3 (Form 1065). If the
partnership owns stock of a foreign
corporation through another partnership
(lower-tier partnership) from which it
receives a Part V of Schedule K-3 (Form
1065 or 8865), the partnership must
replicate each line of the Part V,
Schedule K-3 (Form 1065 or 8865) on its
Part V of Schedules K-2 and K-3 (Form
1065). Rows for distributions with respect
to a partnership's direct ownership of
foreign corporation stock should be listed
before rows for distributions with respect
to a partnership's ownership through a
-16-
pass-through entity of foreign corporation
stock.
If the partnership is a domestic
partnership, the partnership may have
annual PTEP accounts with respect to the
foreign corporation, or the foreign
corporation may have E&P that, when
distributed, are excludable from the
partnership’s gross income under section
1293(c). Do not report distributions to the
extent that they are attributable to PTEP in
annual PTEP accounts of the partnership
or to E&P that are excludable from the
partnership’s gross income under section
1293(c). Distributions by the foreign
corporation to the partnership that are
attributable to PTEP in annual PTEP
accounts of the partnership should be
properly reflected on the Schedules J
(Form 5471) for the foreign corporation.
The partnership should provide this
information to its partners as appropriate.
However, to the extent a distribution is
attributable to PTEP in an annual PTEP
account of the partnership with respect to
a foreign corporation, or attributable to
E&P that are excludable from the
partnership’s gross income under section
1293(c), that corresponds to a tax year of
the foreign corporation that ended with or
within a tax year of the partnership (i) that
began after December 31, 2012, and (ii)
for which an election under Regulations
section 1.1411-10(g) was not made by the
partnership (such PTEP, “NII PTEP”),
append Worksheet 3 to Schedule K-2 and
Worksheet 4 to each K-3 in the format
shown, adding additional rows as
necessary for each distribution by a
foreign corporation. For more information
about net investment income and net
investment income tax relating to CFCs
and QEFs, see Regulations section
1.1411-10.
Note. If additional rows are required,
attach statements to Schedules K-2 and
K-3 that look like the current version of
Schedules K-2, Part V, and Schedule K-3,
Part V, respectively.
Column (b). Enter the EIN or reference
ID number of the distributing foreign
corporation. Do not enter "FOREIGNUS"
or "APPLIED FOR." For basic information
about reference ID numbers (including the
requirements as to the characters
permitted), see the Instructions for Form
1118.
Column (c). Enter the year, month, and
day in which the distribution was made
using the format YYYYMMDD.
Column (d). Enter the applicable
three-character alphabet code for the
foreign corporation’s functional currency
using the ISO 4217 standard. These
codes are available at ISO.org/ISO-4217currency-codes.html.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Worksheets 3 and 4
Worksheet 3 (Schedule K-2)
(a) Name of
distributing foreign
corporation
(b) EIN or reference
ID number
(c) Date of distribution (d) Functional
currency of
distributing foreign
corporation
(e) Amount of NII
PTEP in functional
currency
(f) Spot rate
(functional currency
to U.S. dollars)
(g) Amount of NII
PTEP in U.S. dollars
(e) Partner’s share of (f) Spot rate
NII PTEP in functional (functional currency
currency
to U.S. dollars)
(g) Partner’s share of
NII PTEP in U.S.
dollars
Worksheet 4 (Schedule K-3)
(a) Name of
distributing foreign
corporation
(b) EIN or reference
ID number
(c) Date of distribution (d) Functional
currency of
distributing foreign
corporation
Note. Columns (e) and (f) are reported in
functional currency.
Column (e). This represents the
partnership’s share of the amount
distributed in functional currency. See
Form 5471, Schedule R, column (c).
Column (f). This represents the
partnership's share of the amount of E&P
distributed in functional currency. See
Form 5471, Schedule R, column (d). The
total of the amounts reported in column (f)
with respect to a distributing foreign
corporation should equal the partnership's
share of the total reported on line 9 of all
Schedules J on a separate category of
income basis as reported in Form 5471
Schedule J TOTAL filed with respect to
the distributing foreign corporation.
Column (g). Enter the exchange rate on
the date of distribution used to translate
the amount of the distribution in functional
currency to U.S. dollars. See section
989(b)(1). Report the exchange rate using
the "divide-by convention" specified under
Reporting exchange rates on Form 5471
in the Instructions for Form 5471.
Column (h). Enter the amount of the
distribution in U.S. dollars. Translate
column (e) using the spot rate reported in
column (g).
Column (i). Enter the amount of E&P
distributed in U.S. dollars. Translate
column (f) using the spot rate reported in
column (g).
Column (j). If the distributing foreign
corporation is a qualified foreign
corporation, determined without regard to
section 1(h)(11)(C)(iii)(I), check the box.
See section 1(h)(11)(C).
Schedule K-2, Part VI
(Information on Partners’
Section 951(a)(1) and Section
951A Inclusions), and
Schedule K-3, Part VI
(Information on Partner’s
Section 951(a)(1) and Section
951A Inclusions)
Note. Certain partners will use the
following information to complete Form
8992 and Forms 1040 and 1120 with
respect to income inclusions under
section 951(a) (subpart F income
inclusions), section 951(a)(1)(B)
inclusions, and section 951A inclusions.
Schedules K-2 and K-3, Part VI must be
completed with respect to a CFC if the
partnership owns (within the meaning of
section 958) stock of the CFC, unless the
partnership owns stock of the CFC solely
by reason of applying section 318(a)(3)
(providing for downward attribution) as
provided in section 958(b).
Generally, a foreign corporation is a
CFC if more than 50% of either the total
combined voting power of all classes of
stock entitled to vote, or the total value of
the stock of the corporation, is owned
(within the meaning of section 958(a)) or is
considered as owned by applying the
rules of section 958(b) by U.S.
shareholders. For this purpose, a U.S.
shareholder is a U.S. person (as defined
in section 957(c)) who owns (within the
meaning of section 958(a)), or is
considered as owning by applying the
rules of ownership of section 958(b), 10%
or more of the total combined voting
power of all classes of stock entitled to
vote, or 10% or more of the total value of
shares of all classes of stock of such
foreign corporation.
If the partnership is a domestic
partnership that applies Proposed
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-17-
Regulations section 1.958-1(d)(1) to treat
it as not owning stock of a foreign
corporation within the meaning of section
958(a) for purposes of section 951, or the
partnership is not a U.S. shareholder of a
foreign corporation, the subpart F income
inclusions and section 951(a)(1)(B)
inclusions that are reported in
Schedule K-2, Part VI, columns (e) and (f),
are not inclusions of the partnership.
Schedule K-3, Part VI, columns (e) and (f)
report the information partners’ will need
to figure and report their subpart F income
inclusions and section 951(a)(1)(B)
inclusions.
Note. If the partnership is a domestic
partnership that does not apply Proposed
Regulations section 1.958-1(d)(1) and is a
U.S. shareholder of a foreign corporation,
then any subpart F income inclusions and
section 951(a)(1)(B) inclusions are
inclusions of the partnership, which are
therefore not reported in Schedules K-2
and K-3, Part VI, columns (e) and (f), and
are instead reported in Schedules K and
K-1, line 11, Other income (loss).
Exception. Schedules K-2 and K-3,
Part VI do not need to be completed with
respect to a CFC if the partnership knows
that it does not have a direct or indirect
partner (through pass-through entities
only) that is a U.S. shareholder of the CFC
required to include in gross income a
subpart F income inclusion and/or section
951(a)(1)(B) inclusion with respect to the
CFC, or figure section 951A inclusions by
taking into account GILTI items (defined
below) of the CFC.
Use Schedule K-2, Part VI, to report
information the partners need to figure
their subpart F income inclusions, section
951(a)(1)(B) inclusions, and their shares
of items of CFCs needed to determine the
partners' GILTI inclusions, with respect to
CFCs owned (within the meaning of
section 958) by the partnership.
Use Schedule K-3, Part VI, to report the
partner's share of the amounts needed to
figure its subpart F income inclusions,
section 951(a)(1)(B) inclusions, and its
share of items of CFCs needed to
determine the partner's GILTI inclusion,
with respect to CFCs owned (within the
meaning of section 958) by the
partnership.
If the partnership must complete Part VI
of Schedules K-2 and K-3 with respect to
a CFC, then the partnership must
complete Part VI of Schedules K-2 and
K-3 by assuming that each partner in the
partnership is a U.S. shareholder of the
CFC and is required to include in gross
income its share of the CFC's subpart F
income, an amount determined under
section 956 with respect to the CFC
(section 951(a)(1)(B) inclusion), and its
GILTI.
A partner's GILTI is figured based upon
its share of the following amounts for each
CFC with respect to which it is a U.S.
shareholder: tested income, tested loss,
QBAI, tested loss QBAI amount, tested
interest income, and tested interest
expense (collectively, GILTI items) (a
CFC's subpart F income and GILTI items,
CFC items).
A partner's share of a CFC's subpart F
income, amounts used to determine its
section 956 amount with respect to a CFC,
and a CFC's GILTI items may not be
limited to the partner's share of such
income, amounts, or items through its
ownership in the partnership. However, for
purposes of completing Part VI of
Schedules K-2 and K-3, use only the
partner's share of a CFC's subpart F
income, amounts used to determine its
section 956 amount with respect to a CFC,
and a CFC's GILTI items through the
partner's ownership in the partnership.
A partner's share through its ownership
in the partnership of subpart F income and
GILTI items is generally anticipated to be
figured by multiplying the percentage in
column (d) by the amount of subpart F
income or GILTI item, respectively. For
example, in general, a partner's share
through its ownership interest in the
partnership of tested income in column (i)
is anticipated to be figured by multiplying
the percentage in column (d) by the
amount of tested income in column (g). If
the partner’s share through its ownership
in the partnership of subpart F income or
GILTI items is not figured by multiplying
the percentage in column (d) by the
amount of subpart F income or GILTI item,
respectively (for example, because of
special allocations), then, instead of
entering a percentage in column (d) for
that CFC, attach a statement to Schedules
K-2 and K-3 explaining the partner’s share
through its ownership in the partnership of
the CFC’s subpart F and GILTI items.
Line a. Complete a separate Part VI for
each applicable separate category of
income. However, all GILTI items must be
reported on only one Part VI. If GILTI items
include passive category income, report
all GILTI items on the Part VI completed
for passive category income; otherwise,
report all GILTI items on the Part VI
completed for general category income.
Enter the appropriate code on line a.
Note. The other reporting requirements of
a partnership with respect to reporting
income by separate category do not
change by reason of the partnership
reporting GILTI items that include general
category income on a Part VI completed
for passive category income.
Codes for Categories of Income
Code
Category of Income
PAS
Passive Category
Income
901j
Section 901(j) Income
GEN
General Category
Income
Line b. If any portion of a CFC item is
U.S. sourced, complete a separate Part VI
for U.S.-sourced CFC items, and check
the box on line b on such separate Part VI.
Line 1. Use lines A—K to report
information with respect to CFCs owned
(within the meaning of section 958) by the
partnership, and for which Part VI of
Schedules K-2 and K-3 must be
completed. If the partnership owns a CFC
through another partnership (lower-tier
partnership) from which it receives a Part
VI of Schedule K-3 (Form 1065 or 8865),
the partnership must replicate each line of
Part VI, Schedule K-3 (Form 1065 or
8865) that is related to the CFC on its Part
VI, Schedule K-2 (Form 1065). For
example, if a partnership directly owns
50% of the CFC's stock and owns 50% of
the CFC's stock through a lower-tier
partnership, the CFC should be listed on
two lines with one line related to the
partnership's direct ownership and the
other line related to the partnership's
ownership through the lower-tier
partnership. Lines related to a
partnership's direct ownership of CFCs
should be listed before lines related to a
partnership's non-direct ownership of
CFCs. If additional lines are required,
attach a statement to Schedules K-2 and
K-3 that looks like the current version of
Part VI.
Column (a). Enter the name of each
CFC for which Part VI must be completed.
Column (b). Enter the EIN or reference
ID number of the CFC. Do not enter
"FOREIGNUS" or "APPLIED FOR." For
basic information about reference ID
-18-
numbers (including the requirements as to
the characters permitted), see the
Instructions for Form 1118.
Column (c). Enter the end of the CFC’s
tax year using the format YYYYMMDD.
Column (d). Enter the partners' share of
CFC items through the partners'
ownership in the partnership (aggregate
share). See Regulations sections
1.951-1(b), 1.951-1(e), and 1.951A-1(d)
(1) for rules on determining the partners'
share.
Note. A domestic partnership that does
not apply Proposed Regulations section
1.958-1(d)(1) and is a U.S. shareholder of
a foreign corporation listed in column (a)
does not report amounts in columns (e) or
(f).
Column (e). Enter the aggregate share
of the amount of the CFC's subpart F
income, if any. Note that an amount
determined under section 956(a) is not
considered subpart F income. For
guidance on computing a CFC's subpart F
income and the partners' share of a CFC's
subpart F income, see Worksheet A in the
Instructions for Form 5471.
Column (f). Enter the amount
determined under section 956 with
respect to the partners that relate to the
partners’ ownership in the partnership.
Thus, in determining the section 956
amount, use only the partners’ share
through their ownership in the partnership
of:
• The average of the amounts of U.S.
property held (directly or indirectly) by the
CFC as of the close of each quarter of the
CFC’s tax year, and
• The applicable earnings of the CFC.
Do not reduce the amount reported in
column (f) for any reduction to the
partners’ section 956 amount under
Regulations section 1.956-1(a)(2). For
guidance on computing the partners’
share of a CFC’s earnings invested in U.S.
property, see Worksheet B in the
Instructions for Form 5471.
Column (g). Enter the CFC’s tested
income, if any, from line 6 of Schedule I-1
(Form 5471) for each CFC.
Column (h). Enter the CFC’s tested
loss, if any, from line 6 of Schedule I-1
(Form 5471) for each CFC.
Column (i). Enter the aggregate share of
the tested income listed in column (g) for
each CFC with tested income.
Column (j). Enter the aggregate share of
the tested loss listed in column (h) for
each CFC with tested loss.
Column (k). If the CFC has a tested loss
in column (h), enter zero. If the CFC has
tested income in column (g), enter the
aggregate share of QBAI. A CFC’s QBAI
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
is reported on line 8 of Schedule I-1 (Form
5471).
and for which the partnership is not filing a
Form 8621.
Column (l). If the CFC has tested income
in column (g), enter zero. If the CFC has a
tested loss in column (h), enter the
aggregate share of the CFC's tested loss
QBAI amount. See Regulations section
1.951A-4(b)(1)(iv). A CFC's tested loss
QBAI amount is reported on line 9c of
Schedule I-1 (Form 5471) which must be
translated to U.S. dollars.
Use Schedule K-3, Part VII to report the
partner's share, through its ownership in
the partnership, of the amounts reported
on Schedule K-2, Part VII.
Column (m). Enter the aggregate share
of the CFC’s tested interest income. A
CFC’s tested interest income is reported
on line 10c of Schedule I-1 (Form 5471).
Column (n). Enter the aggregate share of
the CFC’s tested interest expense. A
CFC’s tested interest expense is reported
on line 9d of Schedule I-1 (Form 5471).
Schedule K-2, Part VII, and
Schedule K-3, Part VII
(Information to Complete Form
8621)
Note. Partners will use the following
information to complete Form 8621 and/or
determine income inclusions with respect
to the PFICs reported on Schedules K-2
and K-3, Part VII.
Except as otherwise provided,
Schedules K-2 and K-3, Part VII must be
filed by every partnership that owns PFIC
stock, directly or indirectly, unless the
partnership knows it has no direct or
indirect partners that are U.S. persons,
including U.S persons that own an indirect
interest in the partnership through one or
more foreign entities. However, a
domestic partnership that has elected to
treat a PFIC as a pedigreed qualified
electing fund (QEF), made a
mark-to-market (MTM) election with
respect to a PFIC applicable to the
partnership’s tax year, or made a
qualifying insurance corporation (QIC)
election with respect to a PFIC for the
partnership’s tax year is not required to
complete Schedules K-2 and K-3, Part VII
with information regarding such PFIC if the
partnership files Form 8621 for that PFIC.
Additionally, a domestic partnership that
satisfies the deemed election
requirements of Regulations section
1.1297-4(d)(5)(iv) with respect to a PFIC
eligible for a QIC election is not required to
complete Schedules K-2 and K-3, Part VII
with respect to such PFIC.
Use Schedule K-2, Part VII to report
certain information with respect to any
PFIC owned, directly or indirectly, by the
partnership for which reporting is required,
including PFICs with respect to which no
QEF or MTM election has been made, and
unpedigreed QEFs (section 1291 funds),
and PFICs with respect to which
pedigreed QEF, MTM, QIC, or other
elections have been, or may be, made,
Complete only one line on both
Sections 1 and 2 for each PFIC for which
reporting on Schedule K-2, Part VII and
Schedule K-3, Part VII is required. Each
line completed for a PFIC in Section 1
should correspond to the same line on
Section 2. If there is no information to
report with respect to a PFIC in Section 2,
columns (c) through (o), only complete the
name and EIN of the PFIC in Section 2,
columns (a) and (b), and leave columns
(c) through (o) blank for that PFIC. For
additional information on determining
indirect ownership of PFICs, see
Regulations section 1.1291-1(b)(8).
The partnership may have additional
required information with respect to a
PFIC for certain columns (for example,
scenarios where the partnership may have
multiple different events with respect to
the PFIC in the same tax year, such as
multiple dates of acquisitions of, or
distributions with respect to, the PFIC
stock). In that case, complete Schedules
K-2 and K-3, Part VII with the first of such
entries for a PFIC and attach a statement
including the remaining entries for each
such PFIC to Schedule K-2, Part VII and
its corresponding Schedules K-3, Part VII
with the information contained in Table 4
and/or Table 5.
Codes for Classes of PFIC Shares
Code
Class of PFIC Shares
COM
Common or Ordinary
Shares
PRE
Preferred Shares
OTH
Other Equity Interest
VAR
Multiple Classes of
Shares or Equity
Interests
Column (g). If the partnership acquired
any PFIC shares during its tax year,
provide the date(s) of acquisition of such
shares using the format YYYYMMDD. If
the partnership acquired no shares in a
particular PFIC during its tax year, leave
this column blank with respect to that
PFIC.
Note. If the partnership acquired shares
in a PFIC on multiple dates during the tax
year, attach a statement with the
information contained in Table 4 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing such dates.
Table 4
Additional Information for Section 1, Part VII
General Information
(a)
Name of PFIC
(b)
EIN or
reference ID
number
Annual
Information
(g)
Dates PFIC
shares
acquired during
tax year (if
applicable)
If the partnership has additional PFICs
for which to report information that do not
fit on single Schedules K-2 and K-3, Part
VII, it can attach additional Parts VII of
Schedules K-2 and K-3, as needed.
Section 1. General Information on
Passive Foreign Investment
Company (PFIC), Qualified
Electing Fund (QEF), or Qualifying
Insurance Corporation (QIC)
Columns (a) through (c). Enter the
name, U.S. EIN or reference ID number,
and address of each PFIC held directly or
indirectly by the partnership during its tax
year. Do not enter “FOREIGNUS”or
“APPLIED FOR.”
For basic information about reference
ID numbers (including the requirements as
to the characters permitted), see the
Instructions for Form 8621.
Columns (d) and (e). Enter the
beginning and end of the PFIC's tax year
using the format YYYYMMDD.
Column (f). Enter each class of shares
in the PFIC owned by the partnership
using the following codes.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-19-
Column (h). Enter the total number of all
classes of shares of the PFIC the
partnership owned at the end of its tax
year.
Column (i). Enter the total value of all
shares in the PFIC held by the partnership
at the end of its tax year. If the PFIC
shares are not publicly traded, the
partnership may rely upon periodic
account statements provided at least
annually to determine the value of a PFIC
unless the partnership has actual
knowledge or reason to know based on
readily accessible information that the
statements do not reflect a reasonable
estimate of the PFIC’s value and the
information provides a more reasonable
estimate of the PFIC’s value.
Note. A partner may need additional
information not required to be reported on
this Schedule K-2, Part VII (or the
partner’s Schedule K-3, Part VII) from the
partnership with respect to the value of the
PFIC shares as of a particular date to aid
the partner in making certain elections
under Regulations section 1.1291-10,
1.1297-3, or 1.1298-3.
Column (j). If the partnership is a
domestic partnership and has made any
of the following elections with respect to
the PFIC, indicate which election was
made using the following codes. If the
partnership has not made an election with
respect to the PFIC, leave this column
blank with respect to that PFIC.
Partnership Election Codes
Code
Partnership 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, and the partnership files Form
8621 for that PFIC, it is not required to
report information regarding that PFIC on
Schedule K-2 or K-3, Part VII.
Column (k). Check the box if the foreign
corporation has indicated that it has
documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations
section 1.1297-4 for additional information
on QICs.
Column (l). Check the box if the PFIC
has indicated that its shares are
“marketable stock.” See section 1296(e)
and Regulations section 1.1296-2 for
additional information on “marketable
stock.”
Column (m). Check the box if the PFIC
also constitutes a CFC within the meaning
of section 957 (PFIC/CFC).
Note. If the PFIC is a PFIC/CFC, a
partner may need certain additional
information with respect to the PFIC/
CFC’s E&P not required to be reported on
this Schedule K-2, Part VII (or the
partner’s Schedule K-3, Part VII) from the
partnership to aid the partner in making
certain elections under Regulations
section 1.1291-9, 1.1297-3, or 1.1298-3.
Column (n). Complete column (n) in the
following manner.
Completing column (n), Section 1, Part VII
IF...
THEN...
• this is the first year of
the partnership's
holding period in stock
of the foreign
corporation, and
• the partnership has
determined (directly or
otherwise) that the
foreign corporation is a
PFIC under the income
test or asset test of
section 1297(a),
check the box.
• the foreign corporation check the box.
was a PFIC in a prior
tax year of the
partnership's holding
period, and
• the partnership has
not determined (directly
or otherwise) the
foreign corporation is a
"former PFIC" within the
meaning of Regulations
section 1.1291-9(j)(2)
(iv),
• the foreign corporation do not check the box.
was a PFIC in a prior
tax year of the
partnership's holding
period, and
• the partnership has
determined (directly or
otherwise) the foreign
corporation is a "former
PFIC" within the
meaning of Regulations
section 1.1291-9(j)(2)
(iv),
Note. If the foreign corporation is a
“former PFIC” within the meaning of
Regulations section 1.1291-9(j)(2)(iv), a
partner may need additional information
not required to be reported on this
Schedule K-2, Part VII (or the partner’s
Schedule K-3, Part VII) from the
partnership with respect to the PFIC to aid
the partner in making certain elections
under Regulations section 1.1298-3.
Section 2. Additional Information
on PFIC or QEF
General Information
Columns (a) and (b). Enter the name
and U.S. EIN (or reference ID number) of
each PFIC held directly or indirectly by the
partnership during its tax year. Do not
enter "FOREIGNUS" or "APPLIED FOR."
QEF Information
Columns (c) and (d). Enter the
partnership's share of the total ordinary
earnings and net capital gain (as defined
in Regulations section 1.1293-1(a)(2)) of
the PFIC for the partnership’s tax year in
-20-
which or with which the tax year of the
PFIC ends in columns (c) and (d),
respectively. The PFIC should provide the
partnership with a statement that provides
information to assist the partnership in
determining these amounts. See
Regulations section 1.1295-1(g) for
additional information on annual PFIC
statements.
A domestic partnership must provide
this information for any PFIC with respect
to which it has made a pedigreed QEF
election but for which it does not file Form
8621, and for any PFIC it has elected to
treat as an unpedigreed QEF. A foreign
partnership must provide this information if
it has received an annual information
statement with respect to the PFIC, unless
the partnership knows that no direct or
indirect partner has made, or intends to
make, a QEF election with respect to the
PFIC; the partnership may obtain this
knowledge in any reasonable manner,
provided the partnership retains a written
record in its books and records.
Note. If the partnership is a domestic
partnership and has made a pedigreed
QEF election with respect to a PFIC, and if
the partnership files Form 8621 for that
PFIC, the partnership is not required to
report information regarding that PFIC on
Schedule K-2 or K-3, Part VII. The
partnership should report its inclusion of
its share of the QEF’s ordinary earnings
and net capital gain on Form 1065,
Schedule K, and report the partners’
shares of such amounts on Schedule K-1,
Part III. However, certain partners which
receive a distributive share of the
partnership’s QEF inclusions may be
entitled to claim foreign tax credits under
section 960 with respect to such
inclusions. See the instructions for
Schedules K-2 and K-3, Part VIII,
regarding deemed paid foreign tax credits
under section 960, including for inclusions
with respect to a QEF under section
1293(f).
Note. Certain partners may need
additional information not required to be
reported on this Schedule K-2, Part VII (or
the partner’s Schedule K-3, Part VII) from
the QEF with respect to its computation of
its net capital gain (as defined in
Regulations section 1.1293-1(a)(2)) to
perform certain computations under
section 1061 or the regulations
thereunder. The partnership may aid in
obtaining such information from the QEF,
though the QEF is not required to provide
such information. See section 1061 and
Regulations sections 1.1061-4 and
1.1061-6 for more information.
MTM Information
Columns (e) and (f). Enter the fair
market value of the PFIC stock at the
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Table 5
Additional Information for Section 2, Part VII
General Information
(a)
Name of PFIC
(b)
EIN or
reference ID
number
Section 1291 and Other Information
(g)
Dates PFIC
shares were
acquired
(h)
Amount of
cash and fair
market value
of property
distributed by
PFIC during
the current
tax year (if
applicable)
beginning and end of the partnership’s tax
year in columns (e) and (f), respectively. If
any shares of the PFIC were acquired
during the tax year for which the Form
1065 is being filed, the fair market value in
column (e) should reflect the fair market
value of those shares as of the date of
acquisition. A domestic partnership must
provide this information for any PFIC with
respect to which it has made an MTM
election but for which it does not file Form
8621. A foreign partnership must provide
this information unless it knows that no
direct or indirect partner has made, or
intends to make, an MTM election with
respect to the PFIC; the partnership may
obtain this knowledge in any reasonable
manner, provided the partnership retains a
written record in its books and records.
Note. If the partnership is a domestic
partnership and has made an MTM
election with respect to a PFIC, and if the
partnership files Form 8621 for that PFIC,
the partnership is not required to report
information regarding that PFIC on
Schedule K-2 or K-3, Part VII. The
partnership should report its MTM gain or
loss on Form 1065, Schedule K, and
report the partners’ shares of such
amounts on Schedule K-1, Part III.
Note. If the partnership is a domestic
partnership that has made an MTM
election with respect to a PFIC but does
not file Form 8621 for that PFIC, a partner
may need additional information not
required to be reported on this
Schedule K-2, Part VII (or the partner’s
Schedule K-3, Part VII) regarding its share
of the partnership’s adjusted tax basis in
the partnership’s MTM PFIC stock in order
to complete Form 8621.
(i)
Dates of
distribution
(j)
Total
creditable
foreign taxes
attributable to
distribution by
PFIC
(l)
Dates PFIC
shares
disposed of
during tax
year (if
applicable)
Section 1291 and Other
Information
Note. Generally, this information is to
assist shareholders of section 1291 funds
in satisfying any information reporting
obligations and in computing income
inclusions with respect to section 1291
funds. However, this information may be
relevant to PFICs with respect to which a
pedigreed QEF, MTM, or other election
has been made by the partnership,
partner, or other indirect PFIC
shareholder. Accordingly, the partnership
must complete columns (g) through (o)
with respect to each PFIC for which
reporting on Schedules K-2 and K-3, Part
VII is required. However, note the
instructions for column (k) regarding
reporting distributions from PFICs with
respect to which the partnership has made
a pedigreed QEF or MTM election and for
which the partnership does not file Form
8621.
Column (g). Enter the date(s) on which
the partnership initially acquired each
block of stock in the PFIC using the format
YYYYMMDD.
Note. If the partnership initially acquired
various blocks of stock in a PFIC on
multiple dates, attach a statement with the
information contained in Table 5 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing such dates.
Column (h). Enter the amount of each
distribution of cash and/or the fair market
value of any other property distributed to
the partnership by the PFIC during the tax
year, if any.
Note. Deemed distributions by QEFs do
not need to be reported on this
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-21-
(m)
Amount
realized on
disposition of
PFIC shares
(n)
Tax basis of
PFIC shares
on date of
disposition
(o)
Gain or (loss) on
disposition of
PFIC shares
Schedule K-2, Part VII (or the partner’s
Schedule K-3, Part VII). However,
partners which have made, or intend to
make, an election under section 1294, and
which are deemed to have received a
distribution from the QEF, may require this
information to complete any computations
under section 1294 (including for Form
8621, if required). See section 1294(f) and
Regulations section 1.1294-1T for
additional information.
Note. If the partnership received
distributions from a PFIC on multiple dates
during the tax year, attach a statement
with the information contained in Table 5
to Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the amount and/or fair market
value of each distribution.
Column (i). Enter the date(s) of
distribution of the amounts entered in
column (h) using the format YYYYMMDD.
Note. If the partnership received
distributions from a PFIC on multiple dates
during the tax year, attach a statement
with the information contained in Table 5
to Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the dates of each distribution.
Column (j). Enter the total creditable
foreign taxes attributable to a distribution
from the PFIC. See section 1291(g) and
the instructions for Form 8621, Part V,
line 16d, for additional information on
creditable foreign taxes attributable to
PFIC distributions, including apportioning
creditable foreign taxes to the portion of a
distribution which constitutes an excess
distribution and certain rules related to
creditable foreign taxes on a disposition of
PFIC stock.
Note. Creditable foreign taxes entered in
column (j) do not include taxes attributable
to QEF inclusions under section 1293(f).
Enter only creditable foreign taxes within
the meaning of section 1291(g) in column
(j). See the instructions for Schedules K-2
and K-3, Part VIII regarding deemed paid
foreign tax credits under section 960,
including for inclusions with respect to a
QEF under section 1293(f).
Note. If the partnership received
distributions from a PFIC on multiple dates
during the tax year, attach a statement
with the information contained in Table 5
to Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the amount of any foreign taxes
attributable to each distribution.
Column (k). Enter the total amount of
distributions the partnership received from
the PFIC in the 3 preceding tax years, or, if
shorter, the total amount of distributions
the partnership received during its holding
period of the PFIC stock. However, do not
enter any amount in this column with
respect to a PFIC for which the
partnership has made a pedigreed QEF or
MTM election and for which the
partnership does not file Form 8621.
Column (l). Enter the date(s) on which
the partnership disposed of any block of
stock in the PFIC during the partnership's
tax year, if any, using the format
YYYYMMDD.
Note. If the partnership disposed of stock
in a PFIC on multiple dates during the tax
year, attach a statement with the
information contained in Table 5 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the dates of each disposition.
Column (m). If the partnership disposed
of any block of stock in the PFIC during
the partnership's tax year, enter the
amount realized by the partnership on
each disposition.
Note. If the partnership disposed of stock
in a PFIC on multiple dates during the tax
year, attach a statement with the
information contained in Table 5 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the amount realized by the
partnership on each disposition.
Column (n). If the partnership disposed
of any block of stock in the PFIC during
the partnership's tax year, enter the
partnership's tax basis in the shares of the
PFIC on the date of disposition.
Schedule K-3. Enter the partner's
share, through its ownership in the
partnership, of the partnership's tax basis
in the PFIC shares. The partner's share of
the basis in the PFIC shares should
include any applicable adjustments
specific to the partner, such as section
743(b) adjustments or adjustments made
under the PFIC regime. See sections
1293(d) and 1296(b), and Regulations
sections 1.1291-9, 1.1291-10, 1.1297-3,
and 1.1298-3 for adjustments made under
the PFIC regime.
Note. If the partnership disposed of stock
in a PFIC on multiple dates during the tax
year, attach a statement with the
information contained in Table 5 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the tax bases to the partnership
and partner with respect to each
disposition.
Column (o). Enter the partnership's gain
or loss on the disposition of PFIC shares.
This equals column (m) minus column (n).
Note. If the partnership disposed of stock
in a PFIC on multiple dates during the tax
year, attach a statement with the
information contained in Table 5 to
Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII
providing the gain or loss to the
partnership and partner on each
disposition.
Schedule K-2, Part VIII
(Partnership’s Interest in
Foreign Corporation Income
(Section 960)), and
Schedule K-3, Part VIII
(Partner’s Interest in Foreign
Corporation Income (Section
960))
Note. Certain partners will use the
following information to figure a deemed
paid foreign tax credit on Form 1118.
Reporting currency. Report all amounts
on Part VIII in functional currency.
The partnership must complete a
separate Schedule K-2, Part VIII, for each
CFC with respect to which it has a direct
or indirect interest, unless the partnership
does not have a direct or indirect partner
that is a domestic corporation that is a
U.S. shareholder or that is eligible to make
a section 962 election to claim a deemed
paid foreign tax credit with respect to such
CFC. An indirect interest is one that the
partnership owns through other
pass-through entities. Indirect partners are
partners who own the partnership through
a foreign corporation or through a
pass-through entity.
Schedule K-3, Part VIII, must be
completed and provided to (a) direct
partners that are domestic corporation
U.S. shareholders or that may be eligible
to make a section 962 election to claim a
deemed paid foreign tax credit and (b)
direct partners who may have direct or
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indirect partners who may be eligible to
claim the indirect credit.
A partnership that does not have or
receive sufficient information or notice
regarding a direct or indirect partner must
presume the partner is eligible to claim the
indirect credit and must complete the
Schedules K-2 and K-3, accordingly.
In general, a domestic corporate U.S.
shareholder of a CFC is deemed to pay all
or a portion of the foreign income taxes
paid 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 its 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 if they make an
election under section 962.
To figure the foreign taxes deemed
paid by a corporate U.S. shareholder, the
income, deductions, and taxes of the CFC
must be assigned to separate categories
of income and then included in income
groups within those separate categories
using Form 5471, Schedule Q. See
Regulations section 1.960-1(c)(1). The
applicable separate categories of income
are general category income, passive
category income, and section 901(j)
income. The income groups include the
subpart F income groups, 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)(2)
with respect to the PTEP groups. The
PTEP groups are not reported on this Part
VIII.
Line 1 through 4. The partnership’s
share of the CFC’s net income in each of
the subpart F income groups, tested
income group, and residual income group
by unit is reported on lines 1 through 4.
The CFC has already figured its net
income in each of these groups on Form
5471, Schedule Q, and the partnership
need only report its share of such amount
on Schedule K-2 and the partner’s share
of such amounts on Schedule K-3.
However, do not include in line 1 (or
lines 1(a) through (i), lines (1), (2), etc.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
under line 1) any amounts excluded from
subpart F income under the high-tax
exception in section 954(b)(4) (“subpart F
high-tax exception”); these amounts are
reported in line 4 (and on lines (1), (2),
etc., under line 4).
Also, do not include in line 3 (or lines
(1), (2), etc. under line 3) any amounts
excluded under the GILTI high-tax
exclusion in Regulations section
1.951A-2(c)(7) (“GILTI high-tax
exclusion”), these amounts are reported in
line 4 (and on lines (1), (2), etc., under
line 4).
The PTEP groups are not reported on
this Part VIII. Do not report by unit with
respect to the following subpart F income
groups: (i) international boycott income,
(ii) bribes, kickbacks, and other payments,
and (iii) section 901(j) income. Also do not
report by unit with respect to the
recaptured subpart F income group.
Columns (i) and (ii). On Schedule K-2,
Part VIII, the partnership reports in column
(ii) its share of the CFC's net income by
income groups and by units as reported in
column (xi) of Schedule Q (Form 5471). In
column (i), consistent with the reporting
requirement on Form 1118, enter the
two-letter code (from the list at IRS.gov/
CountryCodes) of each foreign country
and U.S. possession within which income
is sourced and/or to which taxes were
paid or accrued. Do not enter “various” or
“OC” for the country code. Do not enter a
country in column (i) of line 5. See the
instructions for line D for further
information.
On Schedule K-3, Part VIII, the
partnership reports each partner's share of
the net income in the income group by unit
and country.
Column (iii). Do not enter amounts in
column (iii).
Line A. On line A, enter the EIN or
reference ID number of the CFC as listed
on Form 5471. Do not enter
"FOREIGNUS" or "APPLIED FOR." The
partnership must check box 8 on Part I
and attach to the Schedules K-2 and K-3 a
Form 5471 for each CFC with respect to
which it has a direct or indirect interest.
Line B. The partnership must file
separate Schedules K-2 and K-3, Part VIII,
to report the net income or loss of the CFC
in each separate category. Use the
applicable code from the table below.
Category of Income Codes
Code
Category of Income
PAS
Passive Category
Income
901j
Section 901(j) Income
GEN
General Category
Income
Line C. With respect to passive category
income, separate Schedules K-2 and K-3,
Part VIII, must be completed for each
applicable grouping under Regulations
section 1.904-4(c). This includes the
groups in Regulations section 1.904-4(c)
(3) reported on Schedule Q (Form 5471).
The partnership should use the
following codes to report each of these
groupings for each QBU.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
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Passive Group Codes
Code
Passive Group
i
All passive income received during the tax
year that is subject to a withholding tax of
15% or greater must be treated as one item
of income. Regulations section 1.904-4(c)(3)
(i).
ii
All passive income received during the tax
year that is subject to a withholding tax of
less than 15% (but greater than zero) must
be treated as one item of income.
Regulations section 1.904-4(c)(3)(ii).
iii
All passive income received during the tax
year that is subject to no withholding tax or
other foreign tax must be treated as one
item of income. Regulations section
1.904-4(c)(3)(iii).
iv
All passive income received during the tax
year that is subject to no withholding tax but
is subject to foreign tax other than a
withholding tax must be treated as one item
of income. Regulation section 1.904-4(c)(3)
(iv).
Example 6. In Year 1, USP, a
domestic partnership, wholly owns foreign
corporation CFC, with reference ID
number 1234, and the CFC owns a foreign
disregarded entity organized in Country X.
CFC has two separate units, the foreign
disregarded entity and the CFC itself. See
Tables for Example 6.
USP also completes Schedule K-3,
Part VIII, with each partner's share of the
partnership's net income in each income
group.
Tables for Example 6
Example 6. Foreign Source Income
For the Year 1 tax year, the separate units have the following foreign source income.
Tax
Country Code
Net Income
Country X Foreign Disregarded Entity
(FDE) Passive Interest Income
20% withholding tax
XX
100u
CFC Passive Rental Income
10% withholding tax
YY
50u
No tax
ZZ
300u
CFC General Category Tested Income
Example 6. Partnership USP’s 1st Schedule K-2, Part VIII
USP completes Part VIII of Schedule K-2, as follows.
A
1234
B
PAS
C
i
1
Subpart F Income Groups
a
Dividends, interest, rents, royalties & annuities (Total)
1
Country X FDE
(i) Country Code
(ii) Partnership’s Share of Net Income
XX
100u
Example 6. Partnership USP’s 2nd Schedule K-2, Part VIII
USP completes another Part VIII of Schedule K-2, as follows.
A
1234
B
PAS
C
ii
1
Subpart F Income Groups
a
Dividends, interest, rents, royalties & annuities (Total)
1
CFC
(i) Country Code
(ii) Partnership’s Share of Net Income
YY
50u
Example 6. Partnership USP’s 3rd Schedule K-2, Part VIII
USP completes a third Part VIII of Schedule K-2, as follows.
A
1234
B
GEN
3
Tested Income Group (Total)
1
CFC
Line D. If net income in an income group
is sourced from more than one country,
check the box on line D, and attach a
statement to indicate that you have
expanded Part VIII to report these
additional countries on both Schedules
K-2 and K-3.
Example 7. In Year 1, USP, a
domestic partnership, wholly owns foreign
corporation, CFC, with reference ID
number 1234. USP has two domestic
corporate partners. CFC has only one
QBU, the CFC itself, and no other
separate units. CFC has general category
foreign source foreign base company
(i) Country Code
(ii) Partnership’s Share of Net Income
ZZ
300u
sales income (FBCSI) sourced in Country
A of 100u and general category foreign
source FBCSI sourced in Country B of 50u
and general category foreign source
FBCSI sourced in Country C of 30u. The
country code for Country A is "AA," the
country code for Country B is "BB," and
the country code for Country C is “CC.”
See Tables for Example 7.
Example 7 Attachment (Expansion).
USP also completes Schedule K-3, Part
VIII, with each partner's share of the
partnership's net income in each subpart F
income group. USP attaches to
Schedule K-3 the same schedule it
-24-
attaches to Schedule K-2, however, with
each partner’s share of the income in each
subpart F income group, by country.
Line E. The partnership should check
the box and complete a separate Part VIII
for U.S. source income in each separate
category.
Line F. If the foreign corporation has
foreign oil and gas extraction income
(FOGEI) or foreign oil related income
(FORI), the partnership should check the
box and complete a separate Part VIII
indicating the amount of FOGEI and FORI
in each grouping. The partnership should
check box 2 on Part I and complete
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Tables for Example 7
Example 7
USP completes Schedule K-2, Part VIII, as follows.
A
1234
B
GEN
D
(i) Country Code
(ii) Partnership’s Share of Net Income
1
Subpart F Income Groups
f
Foreign base company sales income (total)
(1)
CFC
AA
100u
(2)
CFC
BB
50u
180u
Example 7 Attachment (Expansion)
USP attaches to Schedule K-2 the following schedule to expand 1f to include another line under 1f.
A
1234
B
GEN
D
(i) Country Code
1
Subpart F Income Groups
f
Foreign base company sales income (total)
(3)
CFC
Schedule I (Form 1118). See the
Instructions for box 2, Part I.
Schedule K-2, Part IX (Partners'
Information for Base Erosion
and Anti-Abuse Tax (Section
59A)), and Schedule K-3, Part
IX (Partner’s Information for
Base Erosion and Anti-Abuse
Tax (Section 59A))
Note. Certain partners will use the
following information to complete Form
8991. This Part IX of Schedules K-2 and
K-3 must be completed by a partnership to
assist its corporate partners in determining
if they are subject to the Base Erosion and
Anti-Abuse Tax (BEAT), and to figure their
base erosion and anti-abuse tax, if any.
This information includes the partner's
share of the partnership's gross receipts,
the partner's amount of base erosion
payments made through the partnership,
and the partner's base erosion tax
benefits. The BEAT is generally levied on
certain large corporations that have
deductions and certain other items paid or
accrued to foreign related parties (a base
erosion payment) that are 3% of their total
deductions or higher (2% in the case of
certain banks or registered securities
dealers), a determination referred to as
the base erosion percentage test.
Partnerships are not subject to the BEAT;
however, corporate partners of a
partnership that are applicable taxpayers
(ii) Partnership’s Share of Net Income
180u
CC
30u
under Regulations section 1.59A-2 may
be subject to the BEAT. Except for
purposes of determining a partner's base
erosion tax benefits under Regulations
section 1.59A-7(d)(1), and whether a
taxpayer is a registered securities dealer,
BEAT determinations are made by the
partner. See Regulations section 1.59A-7
for further information regarding the
application of section 59A to partnerships
and the Instructions for Form 8991 for
additional information on whether a
corporate partner is an applicable
taxpayer subject to the BEAT.
For the partnership to complete
Schedules K-2 and K-3, Part IX, the
foreign related parties of each partner
must be identified, subject to the
exception for small partners. It is expected
that the partnership will collaborate with its
partners to identify the foreign related
parties of each partner. A foreign related
party with respect to the partner is a
foreign person that is:
• Any 25% owner of the applicable
taxpayer (as defined in Regulations
section 1.59A-1(b)(17)(ii)(A)),
• Any person who is related (within the
meaning of section 267(b) or 707(b)(1)) to
the applicable taxpayer or any 25% owner
of the applicable taxpayer, or
• Any other person who is related to the
applicable taxpayer within the meaning of
Regulations section 1.59A-1(b)(17)(i)(C).
Exception for small partners. Part
IX of Schedule K-3 is not required to be
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-25-
prepared by the partnership for small
partners meeting the following three
requirements.
1. The partner's interest in the
partnership represents less than 10% of
the capital and profits of the partnership at
all times during the tax year.
2. The partner is allocated less than
10% of each partnership item of income,
gain, loss, deduction, and credit for the tax
year.
3. The partner's interest in the
partnership has a fair market value of less
than $25 million on the last day of the
partner's tax year, determined using a
reasonable method.
See Regulations section 1.59A-7(d)(2) for
further information regarding the
application of the exception for small
partners.
Exception for certain other
partners. The partnership does not need
to complete Schedule K-3, Part IX, for a
partner that is an individual.
The partnership does not need to
complete Schedule K-3, Part IX, for a
corporate partner that is an S corporation.
The partnership should complete
Section 1, lines 1-4 of Schedule K-3, Part
IX for partners that are RICs and REITs
but does not need to complete Section 2
for these partners.
Section 1. Applicable Taxpayer
Lines 1a through 4a. Enter the
partnership's total gross receipts for the
current year and each of the 3 preceding
tax years. The determination of the
partnership's gross receipts is made in
accordance with Regulations section
1.448-1T(f)(2)(iv).
Lines 1b through 4b. Complete lines 1b
through 4b if the partnership has a foreign
partner or has reason to know it has a
foreign partner through a partner that is a
pass-through entity. Enter the
partnership’s total gross ECI receipts for
the current year and each of the 3
preceding tax years which the foreign
partner(s) would take into account as ECI.
If the foreign partner(s) is subject to tax on
a net basis pursuant to an applicable
income tax treaty of the United States,
enter the gross receipts that would be
attributable to transactions taken into
account in determining its net taxable
income.
Lines 1c through 4c. Enter the total
non-ECI gross receipts as the difference
between Column A and Column B.
Schedule K-3. For purposes of
section 59A, each partner in a partnership
includes on its Schedule K-3, Part IX, the
share of partnership gross receipts in
proportion to the partner's distributive
share (as determined under sections
704(b) and (c)) of items of gross income
that were taken into account by the
partnership under section 703 or 704(c)
(such as remedial or curative items under
Regulations section 1.704-3(c) or (d)).
Line 5a. Amounts included in the denominator of the base erosion percentage as described in Regulations
section 1.59A-2(e)(3). Enter the amount
of deductions and other items allocated to
the partners from the partnership that will
be included in the denominator of the
partners' base erosion percentage. For a
description of deductions that are not
included in the denominator, see
Regulations section 1.59-2(e)(3)(ii).
Section 2. In General, Base
Erosion Payments and Base
Erosion Tax Benefits
Column (b). Base erosion payments.
For purposes of determining whether a
payment or accrual by a partnership is a
base erosion payment, any amount paid
or accrued by the partnership is treated as
paid or accrued by each partner based on
the partner's distributive share of the item
of deduction with respect to that amount.
A partner that is an applicable taxpayer
has a base erosion payment for any
amount paid or accrued by the partnership
to a foreign person (as defined in
Regulations section 1.59A-1(b)(10)) that is
a related party to the partner (as defined in
Regulations section 1.59A-1(b)(12)) with
respect to which a deduction is allowable
under chapter 1 and for certain other items
in lines 13 and 15. See Regulations
section 1.59A-3 and the Instructions for
Form 8991 for more information on the
definition of a base erosion payment.
Column (c). Base erosion tax benefits.
A partner's distributive share of any
deduction or reduction in gross receipts
attributable to a base erosion payment is
the partner's base erosion tax benefit. A
partner's base erosion tax benefits are
determined separately for each asset,
payment, or accrual, as applicable, and
are not netted with other items. A partner's
base erosion tax benefit may be more than
the partner's base erosion payment (for
example, in the case of special allocations
made by the partnership). See the
instructions for Form 8991 and
Regulations section 1.59A-7(d) for further
information concerning a partner's base
erosion tax benefits.
General. For line 8, columns (b) and (c);
line 9, columns (b) and (c); line 10(a),
columns (b) and (c); line 11, columns (b)
and (c); line 12, columns (b) and (c);
line 13, columns (b) and (c); line 14(a),
columns (b) and (c); line 15, columns (b)
and (c); and line 16, columns (b) and (c),
do not include amounts that a partner
does not take into account pursuant to the
exception for certain small partners. See
Regulations section 1.59A-7(d)(2) and
Exception for small partners, discussed
earlier. For Schedule K-2, Part IX, report
the total allocated to all partners, and for
Schedule K-3, Part IX, report the amount
allocated to each individual partner.
Line 8. Purchase or creation of property rights for intangibles (patents,
trademarks, etc.).
Column (a). Enter the amount paid or
accrued by the partnership in connection
with the acquisition or creation of
intangible property rights (patents,
copyrights, trademarks, trade secrets,
etc.) that is subject to the allowance for
depreciation (or amortization in lieu of
depreciation) for the tax year.
Column (b). Enter the amount paid or
accrued to all foreign persons that are a
related party of any of the partners in
connection with the acquisition or creation
of intangible property rights (patents,
copyrights, trademarks, trade secrets,
etc.) that is subject to the allowance for
depreciation (or amortization in lieu of
depreciation).
Column (c). Enter the amount of the
partners' base erosion tax benefits
attributable to deductions allowed under
chapter 1 for the tax year for depreciation
(or amortization in lieu of depreciation)
with respect to intangible property rights
-26-
acquired in the current or prior years from
all foreign persons that are a related party
of any of the partners.
Line 9. Rents, royalties, and license
fees.
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
for the use or right to use tangible or
intangible property resulting in rents,
royalties, and/or license fees.
Column (b). Enter the amount paid or
accrued to all foreign persons that are a
related party of any of the partners for the
use or right to use tangible or intangible
property resulting in rents, royalties,
and/or license fees.
Column (c). Enter the amount of the
partners’ base erosion tax benefits
attributable to amounts paid or accrued to
all foreign persons that are a related party
of any of the partners for the use or right to
use tangible or intangible property that
results in rents, royalties, and/or license
fees.
Line 10a. Compensation/consideration
paid for services NOT excepted by
section 59A(d)(5).
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
as compensation or consideration for
services, excluding any amount that
qualifies for the services cost method
exception in section 59A(d)(5).
Column (b). Enter the amount paid or
accrued to all foreign persons that are a
related party of any of the partners as
compensation or consideration for
services, excluding any amount that
qualifies for the services cost method
exception in section 59A(d)(5).
Column (c). Enter the amount of the
partners’ base erosion tax benefits
attributable to amounts paid or accrued to
all foreign persons that are a related party
of any of the partners representing
compensation or consideration paid for
services, excluding amounts qualifying for
the services cost method exception in
section 59A(d)(5).
Line 10b. Compensation/consideration
paid for services excepted by section
59A(d)(5).
Column (a). Enter the amounts paid
or accrued by the partnership to any
foreign person that is a related party of
any of the partners for services qualifying
for the services cost method exception in
section 59A(d)(5).
Line 11. Interest expense.
Column (a). Enter the amount of
interest paid or accrued by the partnership
for the tax year (excluding interest paid or
accrued in a prior year treated as paid or
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
accrued in the current year under section
163(j) or similar provisions).
Column (b). Enter the amount of
interest expense paid or accrued to all
foreign persons that are a related party of
any of the partners (excluding interest paid
or accrued in a prior year treated as paid
or accrued in the current year under
section 163(j) or similar provisions).
Column (c). Enter the amount of the
partners’ base erosion tax benefits
attributable to interest expense paid or
accrued by the partnership that is allowed
as a deduction in the current tax year. If
the partner is a foreign person, include the
individual lines from column (c) of
Worksheet A on the applicable
Schedule K-3.
Schedule K-3. When completing
line 11 on the Schedule K-3, if the partner
is a foreign person, enter the total from
column (a) of Worksheet A on the
partner’s Schedule K-3 in column (a) of
line 11, enter the total from column (b) of
Worksheet A on the Schedule K-3 in
column (b) of line 11 and enter the total
from column (c) of Worksheet A on the
Schedule K-3 in column (c) of line 11.
The partnership is required to complete
Worksheet A for all partnership related
items and complete a Worksheet A for
each foreign partner’s share of the
amounts reported on the partnership
Worksheet A and attach a statement
containing the partner’s share of the
information in Worksheet A to the
partner’s Schedule K-3.
Line 12. Payments for the purchase of
tangible personal property.
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
for the purchase of tangible personal
property.
Column (b). Enter the amount paid or
accrued to all foreign persons that are a
related party of any of the partners for the
purchase of tangible personal property.
Column (c). Enter the amount of base
erosion tax benefits attributable to
amounts paid or accrued to any foreign
persons that are a related party of any of
the partners for the purchase of tangible
property.
Line 13. Premiums and/or other considerations paid or accrued for reinsurance as covered by section 59A(d)
(3) and section 59A(c)(2)(A)(iii).
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
for reinsurance.
Column (b). Enter the amount of any
premiums or other consideration paid or
accrued to all foreign persons that are a
related party of any of the partners for
reinsurance taken into account under
section 803(a)(1)(B) (relating to return
premiums and premiums or other
consideration arising out of indemnity
reinsurance that reduces life insurance
gross income) or section 832(b)(4)(A)
(relating to amounts deducted from gross
premiums written on insurance contracts
for return premiums and premiums paid
for reinsurance).
Column (c). Enter the amount of the
partners’ base erosion tax benefits
attributable to premiums or other
consideration as described in section
Worksheet A
Interest Paid or Accrued 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) Interest Expense on
Liabilities Described in
Regulations section
1.882-5(A)(1)(ii)(A) or (B)
(Direct Allocations)
(2) Interest Paid on U.S.
Booked Liabilities under
Regulations section
1.882-5(d)(2)(vii)
Line 14a. Nonqualified derivative payments.
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
attributable to derivative contracts as
defined in section 59A(h)(4).
Column (b). Enter the amount paid or
accrued to all foreign persons that are a
related party of any of the partners with
respect to derivative contracts that are not
eligible for the qualified derivative
payment exception under section 59A(h)
and Regulations section 1.59A-6. Do not
include any amount paid that is a qualified
derivative payment on line 14a, column
(b).
Column (c). Enter the amount of
base erosion tax benefits attributable to
nonqualified derivative payments paid or
accrued to any foreign person that is a
related party of any of the partners.
Line 14b. Qualified derivative payments excepted by section 59A(h).
Enter the total amount of qualified
derivative payments paid or accrued by
the partnership. Generally, a qualified
derivative payment is any payment made
by the taxpayer pursuant to a derivative
contract, provided that the taxpayer
recognizes gain or loss on the derivative
contract as if it were sold for its fair market
value on the last business day of the tax
year; treats the gain or loss as ordinary;
and treats the character of all other items
of income, deduction, gain, or loss with
respect to a payment pursuant to the
derivative as ordinary. A payment is not a
qualified derivative payment if the
payment would be treated as a base
erosion payment if it were not made
pursuant to a derivative (such as interest,
royalty, or services income). With respect
to a contract with both derivative and
nonderivative components, a payment is
not a qualified derivative payment if it is
properly allocable to the nonderivative
component.
For tax years beginning after June 7,
2021, a partnership will need to attach to
its Schedule K-2 (and each Schedule K-3)
a written representation that all payments
satisfy the requirements of Regulations
section 1.59A-6(b)(2) to meet the
reporting requirement of Regulations
sections 1.59A-6(b)(2) and 1.6038A-2(b)
(7)(ix).
Line 15. Payments reducing gross receipts made to surrogate foreign corporation.
(3) Interest Paid on all
Other Liabilities of the
Partnership
Column (a). Enter the amount paid or
accrued by the partnership for the tax year
to certain expatriated entities described in
section 59A(d)(4)(C)(i).
Totals. Combine line (1)
through line (3)
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
59A(c)(2)(A)(iii) paid or accrued to any
foreign person that is a related party of
any of the partners for reinsurance.
-27-
Worksheet B
Part IX, Section 2, Line 18, Column (c)
A
B
C
D
E
Type of base
erosion payment
Amount of base
erosion tax
benefit
Treaty—reduced
withholding rate
Divide column C
by 30% (0.30)
(round to 4
decimal places)
Multiply column B
by column D
Note. Certain partners will use the
following information to figure and report
their U.S. tax liability on Forms 1040-NR
and 1120-F, or other applicable forms.
%
%
%
%
%
Add the amounts in column E and enter the total on line 18, column (c)
Column (b). Enter the amount paid or
accrued to certain expatriated entities that
results in a reduction of the gross receipts
of the partnership. This amount includes
payments to a surrogate foreign
corporation that is a related party to the
partner, but only if the entity first became a
surrogate foreign corporation after
November 9, 2017. The amount also
includes payments to a foreign person that
is a member of the same expanded
affiliated group, as defined in section
7874(c)(1), as the surrogate foreign
corporation. A surrogate foreign
corporation is defined in section 7874(a)
(2)(B) but does not include a foreign
corporation that is treated as a domestic
corporation under section 7874(b).
Column (c). Enter the base erosion
tax benefits attributable to amounts paid or
accrued to certain expatriated entities
described in column (b) resulting in a
reduction of gross receipts of the
partnership.
Line 16. Other payments—specify.
Column (a). Enter the amount paid or
accrued for the tax year by the partnership
that has not been included on lines 8
through 15 above.
Column (b). Enter the amount paid or
accrued to any foreign person that is a
related party of any of the partners that is
a base erosion payment that has not
otherwise been included on lines 8
through 15 above.
Column (c). Enter the amount of the
partners’ base erosion tax benefits related
to other specified base erosion payments
not listed in any of the categories on lines
8 through 15 above.
Attachment. For amounts reported
on line 16, attach a statement to both
Schedules K-2 and K-3 (for distributive
share) describing the type and amount of
other payments, using the same column
headings as specified in this schedule:
“Total Base Erosion Payment,” “Total
Base Erosion Tax Benefit.” For each type
of payment, the attachment must identify
the relationship of a partner to the foreign
related party consistent with the
categories and instructions for columns (b)
and (c) of this schedule.
Line 17(c)—Base erosion tax benefits
related to payments reported on lines
6 through 16, on which tax is imposed
by section 871 or 881, with respect to
which tax has been withheld under
section 1441 or 1442 at 30% (0.30)
statutory withholding tax rate. Enter
the aggregate amount of the partners’
base erosion tax benefits, reported on
lines 8 through 16, on which tax is
imposed under section 871 or 881 and
with respect to which tax has been
deducted and withheld under section 1441
or 1442 at a 30% statutory withholding tax
rate.
Line 18(c)—Portion of base erosion
tax benefits reported on lines 8
through 16, on which tax is imposed
by section 871 or 881, with respect to
which tax has been withheld under
section 1441 or 1442 at a reduced
withholding rate pursuant to an income tax treaty. Multiply ratio of percentage withheld divided by 30%
(0.30) times base erosion tax benefit.
The partnership is required to provide the
information in Worksheet B for all
partnership related items and attach a
statement containing the information in
Worksheet B to the Schedule K-3 for each
partner’s share of the amounts reported
on the partnership Worksheet B.
Complete Worksheet B to determine
the portion of the base erosion tax
benefits, reported on lines 8 through 16,
on which tax is imposed under section 871
or 881 and with respect to which tax has
been deducted and withheld at a reduced
withholding tax rate (but not exempt from
tax) pursuant to a U.S. income tax treaty.
Keep a copy of the completed Worksheet
B for the partnership’s records.
-28-
Schedule K-2, Part X (Foreign
Partners' Character and Source
of Income and Deductions),
and Schedule K-3, Part X
(Foreign Partner’s Character
and Source of Income and
Deductions)
In general, the Schedules K-2 and K-3,
Part X, must be filed by every partnership
that has a foreign partner, or if a foreign
person has a U.S. income tax reporting
obligation with respect to any item of
partnership income, deduction, gain, or
loss.
A partnership may rely on IRS Forms
W-8 and W-9 from its partners to
determine whether it has a foreign partner.
If a partner is a flow-through entity, the
partner, or its authorized representative,
may notify the partnership as to whether or
not there is a foreign person with a U.S.
income tax reporting obligation with
respect to a partnership item.
A partnership that does not have or
receive sufficient information or notice
regarding a partner should presume the
partner is foreign or that a foreign person
has a U.S. income tax reporting obligation
with respect to a partnership item and
complete the Schedules K-2 and K-3, Part
X accordingly.
Example 8. A partnership does not
receive notice from a pass-through partner
regarding whether or not the pass-through
partner has any partners or owners that
are foreign persons and does not
otherwise have the information necessary
to make this determination. Because the
partnership cannot determine whether a
foreign person has a U.S. income tax
reporting obligation with respect to a
partnership item, it must complete
Schedules K-2 and K-3, Part X for the
flow-through partner.
Any foreign person that earns ECI from
U.S. or foreign sources or U.S. source
FDAP may have a U.S. tax obligation for
its applicable tax year. Furthermore, the
applicable tax rates and reporting
requirements are different for ECI and
U.S. source FDAP. The partnership's
reporting on Schedules K-2 and K-3, Part
X, is necessary for a foreign person with a
direct or indirect interest in the partnership
to properly report and figure its U.S.
income tax liability on any required U.S.
income tax returns (for example, Form
1120-F, Form 1040-NR, and other
applicable forms). Therefore, a
partnership must report to its partners, as
needed, on Schedule K-3, Part X, their
distributive shares of any U.S. or foreign
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
source partnership effectively connected
items, any U.S. source FDAP, and any
income that is not effectively connected or
FDAP of the partnership but that may be
effectively connected to the foreign
person's conduct of a U.S. trade or
business.
In addition, unless otherwise noted, the
partnership must complete Schedule K-3,
Part X, to report each partner's distributive
share of the amounts reported on
Schedule K-2, Part X.
Section 1. Gross Income
The partnership uses Section 1 of this
Schedule K-2, Part X, to report each item
of the partnership's gross income as one
of the following.
1. ECI derived from U.S. sources.
2. Foreign source ECI.
3. Income from U.S. sources that is
FDAP and is not income effectively
connected with the partnership’s conduct
of a U.S. trade or business (“non-ECI).”
4. Other U.S. source non-ECI.
5. Foreign source non-ECI.
The partnership must generally report
items of gross income as either U.S.
source ECI in column (c), foreign source
ECI in column (d), U.S. source non-ECI
(FDAP) in column (e), U.S. source (Other)
in column (f), or foreign source non-ECI in
column (g). Each line in this section of the
schedule corresponds to a line on the
Form 1065, Schedule K, lines 1 through
11. For a more detailed description of the
types of income listed in each line, see the
instructions for Form 1065, Schedule K.
Column (a). Total. For each line in
Section 1, enter in column (a) the total
amount of the applicable gross income.
For instance, if the partnership had $100
of Other income (loss) on line 11 of Form
1065, Schedule K, enter $100 in column
(a) of line 20.
Column (b). Partner determination.
For each line, enter in column (b) the
amount of the applicable gross income the
source of which must be determined by
each partner individually. This includes
income from the sale of most personal
property other than inventory, depreciable
property, and certain intangible property.
Note. The source of income is important
in determining how to report income on
Part X of the Schedules K-2 and K-3. Each
type of income has its own sourcing rules.
For more information on sourcing rules for
particular items of income, see Pub. 514
and section 865.
Schedule K-3. For each line in
Section 1, enter in column (b) the partner's
distributive share of the applicable gross
income the source of which needs to be
determined by the partner. For each item
of income in column (b), attach a
statement identifying the column [(c), (e),
or (f)] in which the income would be
reported by the partnership if it were U.S.
source and the column [(d) or (g)] in which
the income would be reported by the
partnership if it were foreign source. For
example, if you have income from the sale
of personal property the source of which is
based on the tax home of the partner
under section 865, the statement should
indicate both how the income should be
characterized (as ECI, FDAP, or other) if it
were U.S. source, and how it should be
characterized (as ECI or non-ECI) if it
were foreign source.
Column (c). U.S. source ECI. For each
line in Section 1, enter the amounts of the
applicable U.S. source gross income, as
determined by the partnership, that are, or
treated as, effectively connected with the
partnership's conduct of a U.S. trade or
business.
If the partnership conducts a U.S. trade
or business, report in column (c) any U.S.
source income other than FDAP or capital
gains.
Report U.S. source items of FDAP or
capital gains as ECI in column (c) only if
the asset-use test, the business-activities
test, or both tests (explained below) are
met. If neither test is met, such items are
generally not ECI. For more information,
see section 864(c)(2) and Regulations
section 1.864-4(c).
Note. See Regulations section 1.864-4(c)
(5) for special rules relating to banking,
financing, or similar business activities.
Such rules apply to certain stocks and
securities of a banking, financing, or
similar business in lieu of the asset-use
and business-activities test.
Asset-use test. FDAP and capital gains
are ECI if such items are derived from
assets used in, or held for use in, the
conduct of U.S. trade or business. For
example, the following items are ECI.
• Income earned on a trade or note
receivable acquired in the conduct of the
U.S. trade or business.
• Interest income earned from the
temporary investment of funds needed in
the U.S. trade or business.
Business-activities test. FDAP and
capital gains are ECI if the activities of the
U.S. trade or business were a material
factor in the realization of the passive
income items.
Other income treated as U.S. source
ECI. If a partnership is not engaged in a
U.S. trade or business during the tax year,
it will report amounts in column (c) if the
partnership:
• Had current year income or gain from a
sale or exchange of property or from
performing services (or any other
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-29-
transaction) in any other tax year that
would have been ECI if received by a
foreign person in that other tax year (see
section 864(c)(6)),
• Had current year income or gain from a
disposition of property that is no longer
used or held for use in conducting a U.S.
trade or business within the 10-year period
before the disposition that would have
been ECI immediately before such
cessation (see section 864(c)(7)), or
• Had gain or loss from disposing of a
U.S. real property interest as defined in
section 897(c).
Note. Such amounts are always U.S.
source ECI and should never be reported
in any other column.
If income is reported in column (c) see the
Instructions for Form 8804 for any Form
8804 filing obligations.
Do not include gross rental real
estate income in column (c) on the
CAUTION Schedule K-2, Part X, that is not
ECI to the partnership. Even if a foreign
partner elects to treat the income as ECI,
report these amounts in column (e) of
Schedule K-2, Part X. However, the
partnership should report the income as
ECI in column (c) of Schedule K-3, Part X.
!
Schedule K-3. In addition to the
partner’s distributive share of the amounts
reported in column (c) of Schedule K-2,
Part X, report in column (c) of
Schedule K-3, Part X, any U.S. source
income that is subject to withholding under
section 1446 based on a partner’s Form
W-8 ECI including U.S. source gross
rental real estate income that the foreign
partner elected to treat as ECI.
Column (d). Foreign source ECI. Enter
in this column the amounts of the
applicable gross income that are foreign
source ECI. Foreign source income is ECI
only in limited circumstances. If the
partnership has an office or other fixed
place of business in the United States, the
following types of foreign source income it
receives from that U.S. office are ECI.
• Rents or royalties received for the use
outside the United States of intangible
personal property described in section
862(a)(4) if derived from the active
conduct of a U.S. trade or business.
• Gains or losses on the sale or
exchange of intangible personal property
located outside the United States or from
any interest in such property if such gains
or losses are derived in the active conduct
of the trade or business in the United
States.
• Dividends, interest, or amounts
received for the provision of a guarantee
of indebtedness, issued after September
27, 2010, if derived from the active
conduct of a U.S. banking, financing, or
similar business or if the principal
business of the partnership is trading in
stocks or securities for its own account.
• Income from the sale or exchange of
inventory outside the United States
through the U.S. office, unless the
property is sold or exchanged for use,
consumption, or disposition outside the
United States and an office of the
partnership in a foreign country materially
participated in the sale. See section 865
for additional information regarding the
source of this income.
• Any income or gain that is equivalent to
any item of income or gain listed above
must be treated in the same manner as
such item for purposes of determining
whether that income is foreign source ECI.
See section 864(c)(5)(A) and Regulations
section 1.864-7 for the definition of office
or other fixed place of business in the
United States. See sections 864(c)(5)(B)
and (C) and Regulations section 1.864-6
for special rules for determining when
foreign source income is from an office or
other fixed place of business in the United
States.
If income is reported in column (d) see the
Instructions for Form 8804 for any Form
8804 filing obligation.
Column (e). U.S. source non-ECI
(FDAP). For each line, enter in column
(e) amounts of the applicable gross
income if all of the following apply.
• The amount is FDAP (described
below).
• The amount is includible in gross
income. Therefore, receipts that are
excluded from income (for example,
interest income received on state and
local bonds that is excluded under section
103) would not be reported.
• The amount is received from U.S.
sources.
• The amount received is non-ECI.
Amounts that are ECI should be reported
in column (c) or column (d).
• The amount received is not exempt (by
the Code) from taxation. For example,
interest on deposits that are exempted by
section 881(d) would not be included as
income by a foreign partner. In addition,
certain portfolio interest is not taxable for
obligations issued after July 18, 1984. See
section 881(c) for more details.
Amounts that are FDAP include the
following.
• Interest (other than original issue
discount (OID) as defined in section
1273), dividends, rents, royalties, salaries,
wages, premiums, annuities,
compensation, and other passive gains,
profits, and income.
• Gains described in section 631(b) or
(c), relating to disposal of timber, coal, or
domestic iron ore with a retained
economic interest.
• Gains on a sale or exchange of an OID
obligation, the amount of the OID accruing
while the obligation was held unless this
amount was taken into account on a
payment.
• On a payment received on an OID
obligation, the amount of the OID accruing
while the obligation was held, if such OID
was not previously taken into account and
if the tax imposed on the OID does not
exceed the payment received less the tax
imposed on any interest included in the
payment received. This rule applies to
payments received for OID obligations
issued after March 31, 1972. Certain OID
is not taxable for OID obligations issued
after July 18, 1984. See section 881(c) for
more details. For rules that apply to other
OID obligations, see Pub. 515.
• Gains from the sale or exchange of
patents, copyrights, and other intangible
property if the gains are from payments
that are contingent on the productivity,
use, or disposition of the property or
interest sold or exchanged.
For more information, see section 881(a)
and Regulations section 1.881-2.
If the partnership had U.S. source
rental real estate income that was
CAUTION not ECI to the partnership, include
such amounts in column (e) on the
Schedule K-2, Part X. Foreign partners
that have elected to treat any such
amounts as ECI are required to report and
figure their U.S. income tax liabilities in
accordance with their ECI elections. This
income is reported in column (c) on the
Schedule K-3, Part X for such partners.
!
If income is reported in column (e) see
the Instructions for Forms 1042 and
1042-S for any filing obligation.
Schedule K-3. For each line in
Section 1, enter in column (e) the partner's
distributive share of the applicable income
that is U.S source FDAP and not ECI. Do
not include income subject to withholding
under section 1446 based on a partner’s
Form W-8 ECI or rental real estate income
which a foreign partner has elected to
treat as ECI. That income should instead
be reported in column (c).
Column (f). U.S. source non-ECI (other). Include in this column U.S. source
gross income amounts that are not ECI
and would not be subject to tax in the
hands of a foreign corporation under
section 881 or in the hands of a
nonresident alien under section 871(a).
Such amounts include, for example,
tax-exempt portfolio interest or municipal
bond interest, U.S. source capital gains,
and transportation income subject to tax
under section 887.
Schedule K-3. Report the partner’s
distributive share of the amounts in
column (f) of Schedule K-2, Part X. For
any amount that is transportation income
subject to tax under section 887, also
provide the partner the statement
-30-
described in the Instructions for Form
1040-NR, line 58.
Column (g). Foreign source non-ECI.
For each line, enter amounts of gross
income which are neither U.S. source nor
ECI.
Section 2. Deductions, Losses,
and Net Income
In computing a foreign corporation's or
nonresident alien's ECI, deductions are
allowed only if they are connected to
income that is 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 Form 1120-F,
Schedule I. For additional guidance for
nonresident aliens, see the Instructions for
Form 1040-NR.
Use Section 2 to report the
partnership's deductions and losses that
will be utilized to determine the foreign
partner's ECI. The line items on Section 2
generally correspond to the deductions
separately reported on Form 1065,
Schedule K. On Schedule K-3, Part X,
report the partner's share of the amounts
reported by the partnership on
Schedule K-2, Part X.
Column (b). Partner determination.
Certain deductions and losses must be
allocated and apportioned by the partner,
for example, R&E expenses and interest
expense.
Columns (c) and (d). Partnership determination—ECI. Enter deductions
definitely related and allocated to ECI
under, for example, Regulations sections
1.861-8 through 1.861-20 and Temporary
Regulations sections 1.861-8T and -9T.
Do not include deductions
attributable to gross rental real
CAUTION estate income in column (c) on the
Schedule K-2, Part X, that is not ECI to the
partnership. Even if a foreign partner
elects to treat the income as ECI, report
these deductions in column (e) of
Schedule K-2, Part X. However, the
partnership should report the deductions
in column (c) of Schedule K-3, Part X.
!
Columns (e) through (g). Partnership
determination—non-ECI. Enter
deductions definitely related and allocated
to non-ECI under, for example,
Regulations sections 1.861-8 through
1.861-20 and Temporary Regulations
sections 1.861-8T and -9T.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
Line 2. R&E expense. In general, R&E
expenses are allocated and apportioned
by the partner and reported in column (b).
Line 7. Interest expense on U.S.
booked liabilities. The partnership
reports its interest expense on U.S.
booked liabilities as described in
Regulations section 1.882-5(d)(2)(vii).
This is relevant for determining the foreign
corporation’s interest expense allocable to
ECI.
Line 10. Section 59(e)(2) expenditures.
Do not include R&E expenses on this line.
Rather, include R&E expenses that are
also section 59(e)(2) expenditures on
line 2.
Line 15. Other losses. If there are more
than two other losses during the year,
attach a statement to both Schedules K-2
and K-3 to expand the lines to report the
amount of each additional loss. Do not
report the total of the other losses on
line 15.
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. Charitable contribution
deductions are apportioned solely to U.S.
source gross income. See Regulations
section 1.861-8(e)(12). Include amounts
reported on line 16 in column (c).
Lines 17 and 18. Other deductions.
Enter other types of deductions not
described in the prior line items. If the
partnership has more than one other type
of deduction, separately identify each type
of deduction on lines 17 and 18. If there
are more than two types of other
deductions, attach a statement to both
Schedules K-2 and K-3 to expand the
schedule to include information on Section
2 identifying the amount and type of
deduction.
Section 3. Allocation and
Apportionment Methods for
Deductions
Section 3 provides information a partner
may use to apportion deductions to ECI or
non-ECI. See, for example, Regulations
sections 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.
On Schedule K-3, Part X, report the
partner’s share of the amounts reported by
the partnership on Schedule K-2, Part X.
Line 1a. Gross ECI. Enter the
partnership’s gross ECI from Section 1,
line 21, sum of columns (c) and (d).
Line 1b. Worldwide gross income.
Enter the partnership’s worldwide gross
income from Section 1, line 21, column
(a).
Line 2a. Average U.S. assets (inside
basis). Report the partnership’s basis in
the partnership assets that generate ECI
so that if the partner apportions its
deductions based on the partnership’s
basis of assets, the partner will have this
information. This is not the same asset
value used for interest expense
apportionment under Regulations section
1.882-5.
Line 2b. Worldwide assets. Report the
partnership’s basis in its worldwide assets.
Line 3a. U.S.-booked liabilities of the
partnership. Enter the partnership's
U.S.-booked liabilities as defined in
Regulations section 1.882-5(d)(2).
Line 3b. Directly allocated partnership
indebtedness. Enter the partnership’s
indebtedness that meets the requirements
of Temporary Regulations section
1.861-10T(b) or (c), as limited by
Temporary Regulations section
1.861-10T(d)(1), as described in
Regulations section 1.882-5(a)(1)(ii)(B).
Line 4a. Personnel of U.S. trade or
business. Enter on line 4a the number of
personnel who worked in the partnership's
U.S. trade or business during the tax year.
The partnership may use any reasonable
method to determine the number of
personnel, including data that is already
prepared and used by the partnership for
a non-tax business purpose. For example,
if the partnership maintains headcount
data (such as weighted average
headcount data) in its personnel records
or for other purposes such as budgeting,
planning, and control, such numbers may
be used in the numerator.
Line 5. For purposes of determining ECI,
R&E expenses are definitely related to
gross intangible income reasonably
connected with relevant broad product
categories of the taxpayer and are
allocable to gross intangible income as a
class related to such product categories.
The product categories are determined by
reference to the three-digit classification of
the SIC code. In general, the R&E
expenses are apportioned based on gross
receipts. See Regulations section
1.861-17. Because R&E expenses are
allocated and apportioned by the partner,
the partnership reports to its partners the
gross receipts generating ECI by SIC
code.
For each SIC code, in line 5, column
(ii), enter the gross receipts that resulted
in ECI, and in line 5, column (iii), enter the
worldwide gross receipts. Such gross
receipts include both the partnership's
gross receipts and certain other controlled
or uncontrolled parties' gross receipts.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-31-
See Regulations section 1.861-17(d)(3)
and (d)(4).
If there are more than two SIC codes,
attach a statement to Schedules K-2 and
K-3 to expand the schedule to include
information on line 5 for the additional SIC
codes.
Lines 7 and 8. Report other
apportionment keys than those identified
in lines 1 through 5, as applicable. See, for
example, Regulations section 1.861-8
through -20 and Temporary Regulations
section 1.861-8T and -9T.
For example, a partnership might enter
ECI COGS in column (i), line a, and total
COGS in column (i), line b. If ECI COGS is
$100, the partnership would enter $100 in
column (ii), line a, and if COGS is $200,
the partnership would enter $200 in
column (ii), line b. If there are more than
two other types of apportionment keys,
attach a statement to Schedules K-2 and
K-3 to expand the schedule to include all
of the information for those apportionment
keys.
Section 4. Reserved
Schedule K-2, Part XI (Section
871(m) Covered Partnerships),
and Schedule K-3, Part XI
(Section 871(m) Covered
Partnerships)
Note. Certain partners that enter into
section 871(m) transactions referencing
units in the partnership will use the
information 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.
Schedules K-2 and K-3, Part XI, must
be completed if you are 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 partnership that is a covered
partnership, regardless of whether the
partners are domestic or foreign.
Line 1. If the partnership is a PTP and a
covered partnership or directly or
indirectly hold an interest in a lower-tier
partnership that is a covered partnership,
check the box on Part XI, line 1, of both
Schedules K-2 and K-3. A covered
partnership is a partnership that carries on
a trade or business of dealing or trading in
securities or holds significant investments
in securities. A partnership holds a
significant investment in securities for this
purpose if either (A) 25% or more of the
value of the partnership's assets consist of
underlying securities or potential section
871(m) transactions, or (B) the value of
the underlying securities or potential
section 871(m) transactions equals or
exceeds $25 million. Generally, an
underlying security is any interest in an
entity that could give rise to a U.S. source
dividend (such as shares of stock of a
domestic corporation), and a potential
section 871(m) transaction is a securities
lending or sale-repurchase transaction, a
notional principal contract, or any other
financial transaction that references one or
more underlying securities. See
Regulations section 1.871-15 for
additional information, including the
definitions of underlying securities and
potential section 871(m) transactions.
Line 2. On Schedule K-2, specify the total
number of units the partnership has issued
and outstanding. On Schedule K-3,
specify the number of units of the
partnership held by the partner.
Line 3. On both Schedules K-2 and K-3,
for each allocation period, specify when
the allocation period begins and ends, as
well as the dividends, dividend
equivalents, and the total of the dividends
and dividend equivalents for the
applicable period. On Schedule K-2, the
information is for all the issued and
outstanding units of the partnership. On
Schedule K-3, the information is for the
units of the partner to which the
Schedule K-3 relates. The allocation
period should be determined in
accordance with section 706 and the
Regulations thereunder. The value of a
partnership's assets is equal to their fair
market value, except that the value of any
notional principal contract, futures
contract, forward contract, option, and any
similar financial instrument held by the
partnership is deemed to be the value of
the notional securities referenced by the
transaction. See Regulations section
1.871-15 for additional information
regarding dividend equivalents. You can
add additional lines if needed. The
amounts for the dividends, dividend
equivalents, and total in columns (iii), (iv),
and (v) should be reported to the fourth
decimal point, rounding up for any excess
amount. For example, if the amount of a
dividend was .12344, the reported amount
should be .1235.
Schedule K-3, Part XIII (Foreign
Partner's Distributive Share of
Deemed Sale Items on Transfer
of Partnership Interest)
Note. Certain partners will use the
following information to complete Form
4797, Sales of Business Property, and
Form 8949, Sales and Other Dispositions
of Capital Assets.
Note. There is not a corresponding part
on Schedule K-2 with respect to
Schedule K-3, Part XIII. This part provides
the information for a foreign partner to use
to determine the gain or loss it reports on
its return from the transfer of an interest in
the partnership.
This part generally applies to a partnership
that is directly or indirectly engaged in the
conduct of a trade or business in the
United States (U.S. trade or business) and
had a foreign partner if either:
1. The foreign partner transferred an
interest in the partnership (including a
distribution that results in the recognition
of gain or loss to a partner (see
Regulations section 1.731-1(a)), or
2. The partnership directly or
indirectly transferred an interest in a
partnership that engaged in a U.S. trade or
business.
The partnership must complete lines 1
through line 3 of this part if it is notified or
otherwise knows that a transfer subject to
section 864(c)(8) has occurred. A
partnership that makes a distribution is
treated as having actual knowledge of the
transfer. See Regulations section 1.864(c)
(8)-2(a)(1) and Pub. 541 for the rules
regarding foreign transferor notifications.
If the transfer was a section 751(a)
exchange, the partnership must also file a
Form 8308, Report of a Sale or Exchange
of Certain Partnership Interests. See
Regulations section 1.6050K-1.
Tiered partnerships. If a foreign
transferor transferred an interest in an
upper-tier partnership that holds, directly
or indirectly through one or more
partnerships, an interest in a lower tier
partnership engaged in U.S. trade or
business, then the upper-tier partnership
must include in the foreign transferor’s
aggregate deemed sale EC items the
items derived from the lower-tier
partnership. See Regulations section
1.864(c)(8)-2(b)(2)(i). Therefore, to
complete this part the upper-tier
partnership will need to obtain the amount
of the upper-tier partnership’s distributive
share of deemed sale effectively
connected gain or loss from the lower-tier
partnership. Under these circumstances,
the lower-tier partnership may provide that
information to the upper-tier partnership
using Part XIII even though the upper-tier
partnership did not actually transfer its
interest in the lower-tier partnership. A
lower-tier partnership that uses Part XIII
should complete it as though the
upper-tier partnership transferred its entire
interest in the lower-tier partnership. Part
XIII may be used by each tier of
partnerships until it reaches the
uppermost tier whose interest was
transferred. To indicate that there was no
actual transfer by an upper-tier partnership
of its interest in a lower-tier partnership,
the lower-tier partnership should leave
Item A blank. When the upper-tier
partnership receives the information from
the lower-tier partnership, whether
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reported on Part XIII or in some other
manner, it should use this information to
complete the Part XIII it issues to its
foreign transferor.
Item A. Date of transfer of the partnership interest. Enter the date that the
foreign partner transferred an interest in
the partnership or the date that the
partnership transferred an interest in a
partnership that engaged in a U.S. trade or
business. The partner's notification should
provide this date to you. If there are
multiple transfers during the tax year with
respect to a foreign partner, complete a
separate schedule for each transfer. If
there are multiple classes of partnership
interests, complete a separate schedule
for each class of interest transferred and
complete each schedule based on the
portion of the class transferred.
Item B. Identify the number of units or
the percentage interest in the partnership transferred. Enter the percentage
interest in the partnership or the number of
units in the partnership that the partner
transferred in item B1 or B2, respectively.
Enter zero for item B if a partnership is
completing this part for a partner that is
treated as transferring an interest in the
partnership because it received a
distribution but whose ownership interest
in the partnership remains unchanged.
Item C. Check the box in Item C that
identifies the type of interest the partner
transferred in the partnership.
Line 1. Total ordinary gain or (loss)
that would be recognized on the
deemed sale of section 751 property.
Enter the amount of income or loss from
section 751(a) property that would have
been allocated to the foreign partner with
respect to the interest transferred if the
partnership had sold all of its property in a
fully taxable transaction for cash in an
amount equal to the fair market value of
the property immediately before the
partner's transfer of the interest in the
partnership. See Regulations section
1.751-1(a).
Lines 2 and 3. Aggregate effectively
connected ordinary gain or (loss) that
would be recognized on the deemed
sale of section 751 property, and Aggregate effectively connected capital
gain or (loss) that would be recognized on the deemed sale of non-section 751 property. Determining the
amount to report on line 2 and line 3
requires a three-step process. These
instructions provide an overview of that
process. For more information, see
Regulations section 1.864(c)(8)-1. First,
with respect to each asset the partnership
holds, determine the amount of gain or
loss that the partnership would recognize
in connection with a deemed sale to an
unrelated party in a fully taxable
transaction for cash equal to the asset’s
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
fair market value immediately before the
partner’s transfer of its partnership
interest. Second, determine the amount of
that gain or loss that would be treated as
effectively connected gain or loss
(“deemed sale effectively connected gain”
and “deemed sale effectively connected
loss”). Third, determine the partner’s
distributive share of these deemed sale
gain or loss amounts.
• Enter on line 2 the foreign transferor’s
distributive share of deemed sale
effectively connected ordinary gain or loss
recognized on the transfer of section
751(a) property.
• Enter on line 3 the foreign transferor’s
distributive share of deemed sale
effectively connected capital gain or loss
recognized on the transfer of non-section
751(a) property.
Line 4. Gain or (loss) that would be
recognized under section 897(g) on
the deemed sale of U.S. real property
interests. Section 897(a) treats gain or
loss from the disposition of a U.S. real
property interest (as defined in section
897(c)) by a nonresident alien or foreign
corporation as gain or loss that is
effectively connected to a trade or
business within the United States. Section
897(g) generally provides that, under
regulations prescribed by the Secretary,
the amount of any money, and the fair
market value of any property, received by
a nonresident alien individual or foreign
corporation in exchange for all or part of its
interest in a partnership, trust, or estate
shall, to the extent attributable to U.S. real
property interests, be considered as an
amount received from the sale or
exchange in the United States of such
property. A partnership must complete
line 4 if it holds U.S. real property interests
and the transfer of an interest in the
partnership is not subject to section 864(c)
(8). Under these circumstances, the
partnership must enter on line 4 for
purposes of section 897(g) the foreign
transferor’s distributive share of the
partnership’s gain or loss on the deemed
sale of the U.S. real property interests.
Line 5. Check this box if the amount
provided on line 2 or 3 is determined
(in whole or in part) under Regulations
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2021)
-33-
section 1.864(c)(8)-1(c)(2)(ii)(E) (material change in circumstances rule for a
deemed sale of the partnership's inventory property or intangibles). As
part of the three-step process for
determining the amount to report on lines
2 and 3, Regulations section 1.864(c)(8)-1
provides certain look-back rules that apply
for purposes of sourcing the deemed sale
gain or loss with respect to inventory
property and intangibles held by a
partnership. However, if a material change
in circumstances during the look-back
period causes these rules to reach an
inappropriate sourcing result, Regulations
section 1.864(c)(8)-1(c)(2)(ii)(E) allows, in
certain cases, the relevant look-back rule
for inventory property or intangibles to be
applied by reference to the date on which
the material change in circumstances
occurs. The partnership must check the
box provided on line 5 if the material
change in circumstances rule is used to
determine the amount provided on line 2
or line 3.
Index
A
Allocation and apportionment
methods for deductions 31
B
Base erosion and anti-abuse
tax (Section 59A) 25
Base erosion payments and
base erosion tax
benefits 26
C
Capital gains and losses 8
Category of income codes 23
Charitable contributions 31
Codes for classes of PFIC
shares 19
Codes for types of tax 11
Compensation/consideration
paid for services excepted
by section 59A(d)(5) 26
Compensation/consideration
paid for services NOT
excepted by section 59A(d)
(5) 26
Computer-generated
Schedules K-2 2
Country codes 4, 8
Currency 2
D
Deductions 9
Deductions, other 9
DEI and QBAI on Form
8993 13
Distributions from foreign
corps. to partnership 16
Dividends, ordinary and
qualified 8
Dual consolidated loss 6
E
EIN 3
Example 1
Example 2
Example 3
Example 4
Example 5
4
8
12
12
14
Example 6 23
Example 7 24
Example 8 28
Excluded foreign source
income 22
F
FDII deduction apportionment
factors 11
Foreign branch category
income 7
Foreign-derived DEI on Form
8993 15
Foreign-derived gross
receipts 15
Foreign oil and gas taxes 3
Foreign partners’ character
and source of income and
deductions 28
Foreign partner’s distributive
share of deemed sale
items 32
Foreign taxes 9
Foreign taxes deductible but
not creditable 12
Foreign taxes paid or accrued
to sanctioned countries 11
Foreign taxes related to PTEP
resourced by treaty 11
Foreign tax translation 4
Form 5471 information 5
Form 8621, information for 19
Form 8858 information 5
G
Gains on sales personal
property 3
General property 15
Gross income 8
H
High-taxed income 4
I
Identifying info., partners 3
Identifying info., partnership 3
Income resourced by treaty 8
Interest expense
apportionment factors 10
Interest expense on U.S.
booked liabilities 31
Interest expense specifically
allocable under Reg.
1.861–10 and -10T 9
International transactions 6
N
Name of partnership 3
Net income (or loss) 30
O
Other income 9
Other international
transactions 3
Other tax information 12
P
Part applicability 3
Partner determination 8
Partner loan transactions 6
Partnership determination 7
Partnership election codes 20
Partnership’s interest in foreign
corporation 22
Parts of Sch. K-2 and Sch.
K-3, in general 2
Passive group codes 23
PFIC, QEF general
information 19
Purchase or creation of
property rights for
intangibles 26
Q
Qualified derivatives dealer 3
R
R&E expense apportionment
factors 9
R&E expenses 9
Rental income 8
Rents, royalties, and license
fees 26
S
Section 1291 and other
Information 21
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Section 250 deduction re
FDII 13
Section 267A disallowed
deduction 5
Section 59(e)(2)
expenditures 31
Section 871(m) covered
partnerships 31
Section 901(j) income 7
Section 951(a)(1) and section
951A inclusions 17
Section 951(a) inclusions 9
Section 951A category
income 7
Section 986(c) gain and loss 8
Section 987 gain and loss 9
Section 988 gain and loss 9
Splitter arrangements 4
T
Table 1. Information on
Personal Property Sold 4
Table 2. Downstream loans 6
Table 3. Upstream loans 6
Table 4. Additional Information
for Section 1, Part VII 19
Table 5. Additional Information
for Section 2, Part VII 21
Taxes assigned to section
951A category 11
Tiered partnerships 32
Total deductions 25
Total gross income 9
W
When to file 2
Where to file 2
Withholding foreign
partnership 3
Worksheet A, Interest Paid or
Accrued by the
Partnership 27
Worksheet B, Part IX, Sec. 2,
line 18, col. (c) 28
Worksheets 1 and 2 for Sch.
K-2 5
Worksheets 3 and 4 for Sch.
K-2 and Sch. K-3 17
| File Type | application/pdf |
| File Title | 2021 Partnership Instructions for Schedules K-2 and K-3 (Form 1065) |
| Subject | Partnership Instructions for Schedules K-2 and K-3 (Form 1065) , Partners’ Distributive Share Items—International Partner’s Shar |
| Author | W:CAR:MP:FP |
| File Modified | 2021-09-21 |
| File Created | 2021-08-25 |