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

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2022

Partnership Instructions for
Schedules K-2 and K-3
(Form 1065)

Department of the Treasury
Internal Revenue Service

DRAFT AS OF
December 2, 2022

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 . . . . . . . . . . . . . . . .

Future Developments

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Revised reporting for Part I, box 1. Table 1 in Part I, box 1,
has been revised to require reporting of gains rather than both
proceeds and basis. Also, instead of reporting the date of sale of
the property, if the gain is capital, the partnership will now report
whether the gain is long-term or short- term. Finally, the
partnership may combine stock sales by country instead of
listing each stock sale separately for that country.
Boxes 7, 8, and 9 on Part I. The instructions clarify the
reporting with respect to Forms 5471, Information Return of U.S.
Persons With Respect to Certain Foreign Corporations; 8621,
Information Return by a Shareholder of a Passive Foreign
Investment Company or Qualified Electing Fund; 8858,
Information Return of U.S. Persons With Respect to Foreign
Disregarded Entities (FDEs) and Foreign Branches (FBs); and
8865, Return of U.S. Persons With Respect to Certain Foreign
Partnerships; and other forms.
New box 12 on Schedule K-3, Part I, for Form 8865. If the
partnership transferred property to a foreign partnership that
would subject one or more of its domestic partners to reporting
under section 6038B and Regulations section 1.6038B-2(a)(2)
but did not file Schedule O (Form 8865), Transfer of Property to
a Foreign Partnership (Under Section 6038B), containing all the
information required under Regulations section 1.6038B-2, with
respect to the transfer, the partnership must provide the
necessary information for each partner to fulfill its reporting
requirements under Regulations section 1.6038B-2.

. . . 37

New box 13 on Part I for other items of international tax
relevance. The instructions clarify additional reporting that may
be required with respect to box 13 (formerly box 12).

. . . 42

Country codes. The instructions clarify the use of country
codes and add a new code “XX.”

. . . 42

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
New exception to completing Schedules K-2 and K-3.
These instructions add a new exception for filing and furnishing
Schedules K-2 and K-3 for tax years beginning in 2022. See the
domestic filing exception.
Nov 29, 2022

Reporting by domestic partnerships with solely domestic
activity and U.S. partners. The instructions provide further
guidance and examples concerning the need for reporting by
domestic partnerships with solely domestic activity and with
partners that are U.S. persons.

Capital gains and losses. The instructions clarify the reporting
of capital gains and losses in Parts II and X.
Research and experimental expense apportionment. The
instructions clarify when a partnership must complete Part III,
Section 1; Part IV, Section 3, lines 15 and 16; and Part X,
Section 3, line 5, with respect to the apportionment factors for
research & experimental (R&E) expense.
Interest expense and stewardship expense apportionment.
The instructions clarify how to report information on Part II,
Section 2, and Part III, Section 2, and expand the section to
cover stewardship expense.
Part III, Sections 3 and 4. The instructions clarify the
partnerships required to report information in these sections.

Cat. No. 74375Q

Exceptions to Part VII added and clarified. The instructions
add an exception to completing Part VII for any partnership that
knows all of its direct and indirect partners that are U.S. persons
are either not subject to the PFIC rules under section 1297(d),
are certain tax-exempt entities, or are pass-through entities with
no taxable domestic owners. The instructions also add an
exception to completing Part VII for partnerships that mark to
market stock of a PFIC as described in Regulations section
1.1291-1(c)(4) and clarify when reporting is required for foreign
corporations that may be treated, or may deemed to be treated,
as qualifying insurance corporations.

Foreign tax redeterminations. The instructions clarify the
reporting of foreign tax redeterminations on Part III, Section 4,
line 3. In addition, the instructions describe new reporting
concerning contested taxes that partnerships need to provide to
their partners for the partners to elect to claim a provisional
credit for contested taxes under Regulations section 1.905-1(f)
(2), published on January 4, 2022.
Final regulations apply aggregate treatment to domestic
partnerships for certain purposes. Final regulations under
section 958, published on January 25, 2022, treat a domestic
partnership as an aggregate of its partners for purposes of
sections 951, 951A, and 956(a), and for purposes of any
provision that specifically applies by reference to any of those
sections or the regulations thereunder. See Regulations section
1.958-1(d)(1). Under the final regulations, except for purposes of
determining U.S. shareholder, controlling domestic shareholder,
and controlled foreign corporation (CFC) statuses, a domestic
partnership is not treated as owning the stock of a foreign
corporation within the meaning of section 958(a). For purposes
of determining the persons that own stock of a foreign
corporation under section 958(a), stock of a foreign corporation
owned by a domestic partnership is treated in the same manner
as stock of a foreign corporation owned by a foreign partnership.
The final regulations apply to tax years of foreign corporations
beginning on or after January 25, 2022, and to tax years of U.S.
persons in which or with which such foreign corporations’ tax
years end. However, a domestic partnership may apply the final
regulations to tax years of a foreign corporation beginning after
December 31, 2017, and to tax years of the domestic
partnership in which or with which such tax years of the foreign
corporation end, provided certain consistency requirements are
met. See Regulations section 1.958-1(d)(4)(i). For tax years of
foreign corporations beginning on or after January 25, 2022, or if
the partnership applies the final regulations to tax years of
foreign corporations beginning after December 31, 2017, but
before January 25, 2022, the partnership will provide the
information necessary for its partners to determine any section
951(a) income inclusions on Part VI of Schedule K-3 (with the
aggregate amounts for all partners reported on Part VI of
Schedule K-2). For tax years of foreign corporations beginning
before January 25, 2022, and to which the partnership does not
apply the final regulations, the partnership should, with respect
to foreign corporations of which it is a U.S. shareholder, report
as follows: section 951(a) income inclusions on Schedules K
and K-1, line 11, Other income (loss) (see the instructions for
line 11, code H, and line 20, code Y); for foreign tax credit
limitation purposes, the partnership will also need to report
section 951(a) income inclusions on Part II of Schedule K-2 (and
Part II of Schedule K-3 for the partner’s distributive share of such
inclusions); and for foreign-derived intangible income purposes,
the partnership will need to report section 951(a) income
inclusions on Part IV of Schedule K-2 (and Part IV of
Schedule K-3 for the partner’s distributive share of such
inclusions).

DRAFT AS OF
December 2, 2022

Updates to references to mark-to-market (MTM) elections
in Part VII. The instructions clarify that MTM elections for PFICs
referenced in the instructions generally refer to elections under
section 1296 and not any other section of the Code or
regulations. Additionally, the instructions provide guidance on
how to report information on Schedules K-2 and K-3, Part VII, for
PFICs with respect to which an election under section 1296 is
being made in the current tax year if the current tax year is not
the first year of the partnership’s holding period in the PFIC
stock.
Subpart F income groups added to Part VIII. In tax year
2022, new line 1f is added to Part VIII to allow the partnership to
report foreign personal holding company income under section
954(c)(1)(F) (income from notional principal contracts), section
954(c)(1)(G) (payments in lieu of dividends), and section 954(c)
(1)(H) (personal service contracts). The instructions also clarify
other reporting on Part VIII in relation to Form 5471.
Part IX revisions. The instructions clarify the reporting
required on Section 1, lines 1c through 4c.
Reporting to foreign partners. The instructions clarify when a
partnership must report information to foreign partners on Part X
and how to report certain amounts (including original issue
discount) on Part X.

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 for tax years beginning in
2022.

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 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, if applicable.

Foreign-derived intangible income deduction. The
instructions clarify the reporting on Part IV, Section 1, line 1; and
Section 3, line 13.

Who Must File

Any partnership required to file Form 1065 that has items
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.

Exceptions added to Part V. The instructions add an
exception to completing Part V of the Schedule K-2 with respect
to distributions by a foreign corporation and an exception to
completing Part V of the Schedules K-3 for a partner with
respect to distributions by a foreign corporation.
Exceptions added to Part VI. The instructions add an
exception to completing Part VI of the Schedule K-2 with respect
to a CFC and an exception to completing Part VI of the
Schedules K-3 for a partner with respect to a CFC.

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

7701(a)(2) and (4)) does not need to (a) complete and file with
the IRS the Schedules K-2 and K-3, or (b) furnish to a partner
the Schedule K-3 (except where requested by a partner after the
1-month date (defined in criteria number 4, below)) if each of the
following four criteria are met with respect to the partnership’s
tax year 2022.
1. No or limited foreign activity. During a domestic
partnership’s tax year 2022, the domestic partnership either has
no foreign activity (as defined below), or, if it does have foreign
activity, such foreign activity is limited to (a) passive category
foreign income (determined without regard to the high-taxed
income exception under section 904(d)(2)(B)(iii)); (b) upon
which not more than $300 of foreign income taxes allowable as a
credit under section 901 are treated as paid or accrued by the
partnership; and (c) such income and taxes are shown on a
payee statement (as defined in section 6724(d)(2)) that is
furnished or treated as furnished to the partnership.
Foreign activity. For purposes of the domestic filing exception,
foreign activity means any of the following. (a) foreign income
taxes paid or accrued (as defined in section 901 and the
regulations thereunder); (b) foreign source income or loss (as
determined in sections 861 through 865, and section 904(h), and
the regulations thereunder); (c) ownership interest in a foreign
partnership (as defined in sections 7701(a)(2) and (5)); (d)
ownership interest in a foreign corporation (as defined in
sections 7701(a)(3) and (5)); (e) ownership of a foreign branch
(as defined in Regulations section 1.904-4(f)(3)(vii)); (f)
ownership interest in a foreign entity that is treated as
disregarded as an entity separate from its owner (as defined in
Regulations section 301.7701-3).
2. U.S. citizen/resident alien partners. During tax year
2022, all the direct partners in the domestic partnership are: (a)
individuals that are U.S. citizens; (b) individuals that are resident
aliens (as defined in section 7701(b)(1)(A) and the regulations
thereunder); (c) domestic decedent’s estates (that is,
decedent’s estates that are not foreign estates as defined in
section 7701(a)(31)(A)), with solely U.S. citizen and/or resident
alien individual beneficiaries; (d) domestic grantor trusts (that is,
trusts described under sections 671 through 678) that are not
foreign trusts as defined in section 7701(a)(31)(B)) and that have
solely U.S. citizen and / or resident alien individual grantors and
solely U.S. citizen and / or resident alien individual beneficiaries;
(e) domestic non-grantor trusts (that is, trusts subject to tax
under section 641 that are not foreign trusts as defined in section
7701(a)(31)(B)) with solely U.S. citizen and/or resident alien
individual beneficiaries; (f) S corporations with a sole
shareholder; or (g) single-member LLCs, where the LLC’s sole
member is one of the persons in subparagraphs (a) through (f),
and the LLC is disregarded as an entity separate from its owner
(as defined in Regulations section 301.7701-3).
3. Partner notification. With respect to a partnership that
satisfies criteria 1 and 2, partners receive a notification from the
partnership at the latest when the partnership furnishes the
Schedule K-1 to the partner. The notice can be provided as an
attachment to the Schedule K-1. The notification must state that
partners will not receive Schedule K-3 from the partnership
unless the partners request the schedule.
4. No 2022 Schedule K-3 requests by the 1-month date.
The partnership does not receive a request from any partner for
Schedule K-3 information on or before the 1-month date. The
“1-month date” is 1 month before the date the partnership files
the Form 1065. For tax year 2022 calendar year partnerships,
the latest 1-month date is August 15, 2023, if the partnership
files an extension.

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 and file 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.

DRAFT AS OF
December 2, 2022

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 13 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).

Note. A partnership with no foreign source income, no assets
generating foreign source income, no foreign partners, and no
foreign taxes paid or accrued may still need to report information
on Schedules K-2 and K-3. For example, if the partner claims a
credit for foreign taxes paid or accrued by the partner, the
partner may need certain information from the partnership to
complete Form 1116 or 1118. Also, a partnership that has only
domestic partners may still be required to complete Part IX when
the partnership makes certain deductible payments to foreign
related parties of its domestic partners. The information reported
in Part IX will assist any domestic corporate partner in
determining the amount of base erosion payments made
through the partnership, and in determining if the partners are
subject to the base erosion and anti-abuse tax (BEAT). Further,
if the domestic partnership with no foreign activity or foreign
partners has direct or indirect domestic corporate partners, Part
IV (concerning foreign-derived intangible income (FDII)) must be
completed. A domestic or foreign publicly traded partnership as
defined in section 7704(b) (PTP) with no foreign activity or
foreign partners may need to complete Part XI. See each part for
applicability.
Example 1. BEAT Example. Foreign corporation wholly
owns DC, a domestic corporation, and foreign corporation
(“foreign subsidiary”). DC satisfies the gross receipts test. See
Regulations section 1.59A-2(d). In Year 1, DC owns a 50%
interest in a domestic partnership, USP. An unrelated domestic
corporation owns the remaining 50% interest in USP. DC’s
investment in USP does not qualify for the small partner
exception. See Regulations section 1.59A-7(d)(2).
In Year 1, USP pays the foreign subsidiary $100 for services.
The services are not eligible for the services cost method
exception. See Regulations section 1.59A-3(b)(3)(i). DC’s
distributive share of the $100 payment to the foreign subsidiary
is $50.
For purposes of determining whether a payment or accrual by
a partnership is a base erosion payment, any amount paid or
accrued by USP 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. See Regulations section 1.59A-7(d)
(2). Therefore, DC is treated as having paid $50 to the foreign
subsidiary.
DC must complete Form 8991 to compute its base erosion
minimum tax amount (if any); therefore, USP must complete the
relevant portions of Part IX of Schedules K-2 and K-3.

Note. If a partnership receives a request from a partner for the
Schedule K-3 information after the 1-month date and has not
received a request from any other partner for Schedule K-3
information on or before the 1-month date, the domestic filing

Domestic filing exception (exception to filing Schedules
K-2 and K-3). A domestic partnership (as defined under section
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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need to complete, attach, or file any parts or sections relevant to
husband and wife. USP must provide a copy of the filed
Schedule K-3 to A on the date that USP files its Form 1065. USP
does not need to furnish a Schedule K-3 to husband and wife.

exception is met and the partnership is not required to file the tax
year 2022 Schedules K-2 and K-3 with the IRS or furnish the tax
year 2022 Schedule K-3 to the non-requesting partners.
However, the partnership is required to provide tax year 2022
the Schedule K-3, completed with the requested information, to
the requesting partner on the later of the date on which the
partnership files the Form 1065 or 1 month from the date on
which the partnership receives the request from the partner. See
Example 4. The partnership must complete and file tax year
2023 Schedules K-2 and K-3 with respect to the requesting
partner by the tax year 2023 Form 1065 filing deadline.

Example 4. The facts are the same as in Example 3 except
that USP receives the request from A on August 20, 2023. USP
qualifies for the domestic filing exception because A requested
the Schedule K-3 after the 1-month date. USP is not required to
file the tax year 2022 Schedules K-2 and K-3 with the IRS or
furnish the Schedule K-3 to husband and wife. However, USP is
required to provide the Schedule K-3, completed with the
requested information, to A on September 20, 2023, the later of
the date on which USP files the Form 1065 or 1 month from
August 20, 2023. Because A requested a Schedule K-3 for tax
year 2022, USP must file tax year 2023 Schedules K-2 and K-3
with the IRS with respect to the information requested by A.

DRAFT AS OF
December 2, 2022

Note for partnerships that satisfy criteria 1 through 3, but
do not satisfy criterion 4. If the partnership received a
request from a partner for Schedule K-3 information on or before
the 1-month date and therefore the partnership does not satisfy
criterion 4, the partnership is required to file the Schedules K-2
and K-3 with the IRS and furnish the Schedule K-3 to the
requesting partner. The Schedules K-2 and K-3 are required to
be completed only with respect to the parts and sections
relevant to the requesting partner. For example, if a partner
requests the information reported on Part III, Section 2 (Interest
Expense Apportionment Factors), the partnership is required to
complete and file Schedule K-2, Part III, Section 2 with respect
to the partnership’s total assets and Schedule K-3, Part III,
Section 2 with respect to the requesting partner’s distributive
share of the assets. On the date that the partnership files
Schedules K-2 and K-3 with the IRS, the partnership must
provide a copy of the filed Schedule K-3 to the requesting
partner. The partnership does not need to complete, attach, file,
or furnish any other parts or sections of the Schedules K-2 and
K-3 to the IRS, the requesting partner, or any other partner. The
partnership should keep records of the information requested by
the partner. See Example 3.
If a partnership receives requests from partners for
Schedule K-3 information both on or before the 1-month date
and after the 1-month date, the partnership is required to file
Schedules K-2 and K-3 as described in the prior paragraph only
with respect to the partner requests received on or before the
1-month date. With respect to requests received after the
1-month date, the partnership is required to provide the
Schedule K-3, completed with that partner’s requested
information, on the later of the date on which partnership files the
Form 1065 or 1 month from the date on which the partnership
receives the request from the partner. See Examples 3 and 4.

Note. If a partnership does not meet the domestic filing
exception, it may meet the Form 1116 Exemption to filing the
Schedules K-2 and K-3. See below.

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

Example 2. Husband and wife, U.S. citizens, each own a
50% interest in USP, a domestic partnership. USP and husband
and wife each have a tax year end of December 31. USP invests
in a regulated investment company (RIC). With respect to tax
year 2022, USP receives a Form 1099 from the RIC reporting
$100 of creditable foreign taxes paid or accrued on passive
category foreign source income. USP does not have any foreign
activity other than that from the RIC. Husband and wife receive
notification from USP on an attachment to Schedule K-1 that
they will not receive the Schedule K-3 unless they so request.
Husband and wife do not request Schedule K-3 from USP for tax
year 2022. USP qualifies for the domestic filing exception, and,
as such, USP need not complete Schedules K-2 and K-3.

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/2021-43_IRB#REVPROC-2021-42. The procedures relevant to Form 1065 and
Schedule K-1 (Form 1065) apply for purposes of Schedules K-2
and K-3.

Example 3. The facts are the same as in Example 2 except
that husband and wife each own a 40% interest in USP, and A, a
U.S. citizen, owns a 20% interest in USP. A requests
Schedule K-3 from USP for tax year 2022 and USP receives this
request on February 1, 2023. After requesting an extension,
USP files Form 1065 on August 31, 2023. USP does not qualify
for the domestic filing exception because A requested the
Schedule K-3 by the 1-month date (July 31, 2023). As such,
USP must complete and file with the IRS the parts and sections
of the Schedules K-2 and K-3 that are relevant to A. With respect
to the Schedules K-2 and K-3 filed with the IRS, USP does not
-4-

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

How To Complete Schedules K-2 and K-3

Form 8621 and to provide partners with information to determine
income inclusions with respect to the passive foreign investment
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 (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 PTP 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; Form 6252, Installment Sale Income; and Form 8949,
Sales and Other Dispositions of Capital Assets.

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.

DRAFT AS OF
December 2, 2022

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 R&E expense,
interest expense, and the foreign-derived intangible income
(FDII) deduction for purposes of 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 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 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 Form 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Specific Instructions
If the information required in a given section exceeds the
space provided within that section, do not write “See
CAUTION 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 to 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 employer identification number (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 Rev. Proc. 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.

-5-

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. See section 865(e)(1).
If the partnership has income from the sale of personal
property (other than inventory, depreciable personal property,
and certain intangible property excepted from the general rule of
section 865(a)), and the partnership pays income tax to a foreign
country with respect to income from the sale or the income is
eligible for re-sourcing under an applicable treaty, 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. The partnership may combine sales of stock property
by country. Otherwise, do not combine sales of property. Each
item of property sold must be listed separately with the
information shown in Table 1. In column (b), if the gain is capital,
enter “long-term” or “short-term.” 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.

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, file, or attach
to the Form 1065 or Schedule K-3 the inapplicable parts.

DRAFT AS OF
December 2, 2022

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.

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.

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

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

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,
Table 1

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

(b) Long-term /
short-term

(c) Gains

(d) Amount of tax paid
in local currency

-6-

(e) Amount of tax paid
in U.S. dollars

(f) Taxing country
(enter two-letter
country code)

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

relate to that portion of the related income if determinable by the
partnership.

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 the 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.

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.

DRAFT AS OF
December 2, 2022

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. See
Regulations section 1.904-4(c)(3).
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 5. In Year 1, USP, a domestic partnership, has two
domestic corporate partners with equal interests in the
partnership. In Year 1, USP receives $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
foreign 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 to
Schedule K-2.

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 the partnership).
3. Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement in the origin year of the
splitter arrangement.
4. Amount of related income on which such taxes were paid
or accrued in the origin year of the splitter arrangement.
5. The two-letter code for the country to which the taxes
were paid or accrued from the list at IRS.gov/CountryCodes. Do
not enter “various” or “OC” for the country code.
6. The separate category and source of income to which the
taxes are assigned 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

USP completes the same worksheets with the distributive
shares and attaches those worksheets to each Schedule K-3
provided to the partners.
Box 6. Section 267A disallowed deduction. Check box 6 if
the partnership paid or accrued any interest or royalty for which
the partnership knows, or has reason to know, that one or more
of its partners are 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/faqsfor-Form-1065-Schedule-B-Other-Information-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
-7-

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

DRAFT AS OF
December 2, 2022

Worksheet 2

Reference: Regulations section 1.904-4(c)(4)
A

Name of foreign QBU: _______________________________________________________________

(Complete a separate Worksheet 2 for each
foreign QBU)
B

Passive income subject to withholding tax of 15%
or more

C

Passive income subject to withholding tax of less
than 15% but greater than zero

D

Passive income not subject to any foreign tax

E

Passive income subject to no withholding tax, but
subject to other foreign tax

I. Passive Income Net of Allocable Expenses

II. Taxes

I. Passive Income Net of Allocable Expenses

II. Taxes

Worksheets for Example 5
Worksheet 1 for Example 5
Reference: Regulations section 1.904-4(c)(3)
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

I. Passive Income Net of Allocable Expenses

II. Taxes

Worksheet 2 for Example 5
Reference: Regulations section 1.904-4(c)(4)
A

Name of foreign QBU: _________Country X QBU_____________
(Complete a separate Worksheet 2 for each
foreign QBU)

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

-8-

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

Exception for Form 8621. With respect to Schedule K-3,
the partnership should check box 9 if the partnership checked
box 9 on the Schedule K-2. The partnership should indicate in
an attachment to the Schedule K-3 that Form(s) 8621 is
attached to Schedule K-2. The partnership need not attach Form
8621 to the Schedule K-1 or K-3.

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.

Form 8990. 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. See the instructions for
Schedule K-1 (Form 1065), line 20, code AH.
See Other Forms, Returns, and Statements That May Be
Required in the Instructions for Form 1065.

DRAFT AS OF
December 2, 2022

When completing other parts of Schedules K-2 and K-3
(for example, a line in Part II, Section 2; or Part IX,
CAUTION Section 2), list an amount without regard to whether the
partner is disallowed a deduction under section 267A for the
amount.

!

Note. If the partnership attached any of the forms identified in
boxes 7, 8, and 9 to the Form 1065, the partnership need not
attach them again to the Schedule K-2.

Note for boxes 7, 8, and 9. If the filer meets an exception,
such as the multiple filer exception, to filing Forms 5471, 8865,
and/or 8858, the filer is not required to complete and attach
those forms. However, the filer must still attach to the Form 1065
any required statements to qualify for the exception to filing the
Forms 5471, 8865, and/or 8858. Further, in the case of the Form
5471 multiple filer exception, the partnership must provide on the
Schedule K-3 to its partners any information that the partnership
receives from the person required to file the Form 5471 and that
is requested by the instructions for Schedules K-2 and K-3, such
as Schedule Q (Form 5471) information, if applicable.

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.

Box 7. Form 8858 information. If the partnership filed one or
more Forms 8858, or if another person filed the Form(s) 8858 on
behalf of the partnership, check box 7 and ensure that Form(s)
8858 is attached to the Form 1065. With respect to
Schedule K-3, the partnership should check box 7 if the
partnership checked box 7 on the Schedule K-2. The partnership
need not attach Form 8858 to the Schedules K-1 or K-3.

Table 2. Downstream Loans

Box 8. Form 5471 information. If the partnership filed one or
more Forms 5471, or if the partnership received Form(s) 5471 as
an attachment to a Schedule K-3 issued to the partnership,
check box 8 and attach the form(s). The Form 5471 does not
need to be attached to the Schedules K-1 or K-3 if the
partnership knows or has reason to know that its direct partner
(and any indirect partners) does not need the information on
Form 5471 to prepare its tax return. For example, the
partnership would not need to attach the Form 5471 to
Schedules K-3 for certain tax-exempt partners. A pass-through
entity partner that receives a Form 5471 with a Schedule K-1 or
K-3 must provide the relevant portions of Form 5471 to its
partner unless the pass-through entity knows or has reason to
know that its direct partner (and any indirect partners) does not
need the information on the Form 5471 to prepare its tax return.
If a partner only needs certain information from the Form 5471,
such as the Schedule Q, the partnership need only attach that
portion to the Schedule K-3 and not the complete Form 5471.

Name of
Lender

Date
of
Loan

Amount
of
Loan

Interest
Expense
for the
Year

If there are any partners in the same affiliated group as the
lender, attach 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.
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.

Box 9. Other forms. If the partnership filed any other
international tax forms, or if another person filed these forms on
behalf of the partnership, or if the partnership received these
forms as an attachment to a Schedule K-1 or K-3 issued to the
partnership, check box 9 and attach those forms to Form 1065
and Schedule K-1, if applicable to the partner. 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.

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

Lender’s
TIN

Table 3. Upstream Loans
Name of
Borrower

-9-

Borrower’s
TIN

Date
of
Loan

Amount
of
Loan

Interest
Income
for the
Year

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

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.

Note. Certain partners will use the following information to claim
and figure a foreign tax credit on Form 1116 or 1118. If the
partnership does not qualify for the domestic filing exception,
Schedules K-2 and K-3, Parts II and III, must be completed
unless (a) the partnership does not have a direct or indirect
partner that is eligible to claim a foreign tax credit or (b) no direct
or indirect partner would have to file a Form 1116 or Form 1118
to claim the foreign tax credit.

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 RIC, a real estate investment trust
(REIT), 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).

DRAFT AS OF
December 2, 2022

Partners eligible to claim credit. A partner that is eligible to
claim a foreign tax credit includes a domestic corporation, a U.S.
citizen or resident, U.S. citizen or resident beneficiaries of
domestic 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. See sections 960 and 1293(f).
Form 1116 exemption exception. Under section 904(j),
certain partners are not required to file a Form 1116 (“Form 1116
exemption”). Also see Foreign Tax Credit—How to Figure the
Credit. A domestic partnership is not required to complete
Schedules K-2 and K-3 if all partners are eligible for the Form
1116 exemption and the partnership receives notification of the
partners’ eligibility for such exemption by the 1-month date (as
defined above). If a partnership receives notification from only
some of the partners that they are eligible for the Form 1116
exemption, the partnership need not complete the Schedule K-3
for those exempt partners but must complete the Schedules K-2
and K-3 with respect to the other partners to the extent that the
partnership does not qualify for the domestic filing exception.

Box 12. Reserved for future use (Schedule K-2). (Form
8865 information (Schedule K-3)). If the partnership
transferred property to a foreign partnership that would subject
one or more of its domestic partners to reporting under section
6038B and Regulations section 1.6038B-2(a)(2) but did not file
Schedule O (Form 8865), Transfer of Property to a Foreign
Partnership (Under Section 6038B), containing all the
information required under Regulations section 1.6038B-2, with
respect to the transfer, the partnership must provide the
necessary information for each partner to fulfill its reporting
requirements under Regulations section 1.6038B-2. The
partnership should check box 12 on Schedule(s) K-3 and attach
the relevant information, as applicable to each partner. Box 12
should not be checked on Schedule K-2.

Example 6. Husband and wife, U.S. citizens, each own a
50% interest in USP, a domestic partnership. Husband and wife
and USP each have a calendar tax year. USP invests in a RIC.
USP receives a Form 1099 from the RIC reporting $400 of
creditable foreign taxes paid or accrued on passive category
foreign source income. USP’s only foreign activity is that from
the RIC. Husband and wife do not pay or accrue any foreign
taxes other than their distributive share of USP’s foreign taxes.
Husband and wife also do not have any other foreign source
income. Husband and wife qualify for the Form 1116 exemption
and notify USP by the 1-month date that they do not need the
Schedule K-3. Even though USP does not qualify for the
domestic filing exception because the creditable foreign taxes
treated as paid or accrued by USP are greater than $300,
because husband and wife notify USP by the 1-month date that
they do not need the Schedule K-3 under the Form 1116
exemption, USP need not complete Schedules K-2 and K-3.
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
Schedules K-2 and K-3, including Parts II and III, accordingly.

Box 13. 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 attached to
Schedules K-2 and K-3 and check box 13.
Do not report with respect to box 13:
• Form 8804, Annual Return for Partnership Withholding Tax;
and
• Form 8805, Foreign Partner’s Information Statement of
Section 1446 Withholding Tax.
These forms are separately filed with the IRS.
Do report with respect to box 13:
• Form 926, Return by a U.S. Transferor of Property to a
Foreign Corporation;
• Information a partner (whether direct or indirect) that is a U.S.
shareholder of a CFC needs to complete the Form 5471;
• Information a filer needs to complete Form 8865 to the extent
that one of the partners (whether direct or indirect) is an entity for
which there is a Form 8865 filing requirement.
• When the gain deferral method, as described in Regulations
section 1.721(c)-3, is being applied, a partnership that is a
section 721(c) partnership will attach to the Schedule K-1
provided to a U.S. transferor the information required under
Regulations sections 1.721(c)-6(b)(2) and (3).

Partnerships with no foreign partners and limited or no foreign activity. In many instances, a partnership with no foreign
partners, no foreign source income, no assets generating foreign
source income, and no foreign taxes paid or accrued may still
need to report information on Schedules K-2 and K-3. For
example, if the partner claims the foreign tax credit, the partner
generally needs certain information from the partnership on
Schedule K-3, Parts II and III, to complete Form 1116 or 1118.
This information should have been reported in prior years,
including before the Tax Cuts and Jobs Act, with the Schedules
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Example 7. U.S. citizens A and B own equal interests in
USP, a domestic partnership. USP has no foreign activity. In
Year 1, A pays $2,000 of foreign income taxes on passive
category income other than capital gains reported to A on a
payee statement. A has interest expense of $5,000 and USP
does not have interest expense. None of A’s interest expense is
directly allocable. A does not have an overall domestic loss in
tax year 2022.
Because A must complete Form 1116 to claim a foreign tax
credit, A requests a Schedule K-3 by the 1–month date, and
therefore the domestic filing exception does not apply to USP
with respect to A. USP must complete the relevant portions of
Parts II and III of Schedules K-2 and K-3 (for A). The tax book
value of USP’s assets is $100,000 (reported on Schedule K-2,
Part III, Section 2, column (a)) and A’s share of those assets is
$50,000 (reported on Schedule K-3, Part III, Section 2, column
(a)). Not including its distributive share of the assets of USP, the
tax book value of A’s assets is $50,000. Of A’s assets, $10,000
generate passive category foreign source income and $40,000
generate U.S. source income. A has passive category foreign
source taxable income before interest expense of $8,000. A’s
U.S. tax rate is 25%. A’s interest expense and USP’s assets are
characterized in the same category under sections 163 and 469
for purposes of Regulations section 1.861-9T(d). A uses the tax
book value (as opposed to the alternative tax book value) to
allocate and apportion interest expense.
A’s interest expense is apportioned between U.S. source and
foreign source income ratably based on the tax book value of A’s
U.S. source and foreign source assets. Without taking into
account the distributive share of USP’s assets, the amount of A’s
interest expense that would reduce passive category foreign
source income is $1,000 ($5,000 x (10,000/50,000)). Therefore,
A’s passive category foreign source taxable income would be
$7,000 ($8,000 − $1,000). At a 25% U.S. tax rate, A may only
use $1,750 (25% x $7,000) of the $2,000 of foreign taxes. See
section 904.
Taking into account the distributive share of USP’s assets,
the amount of A’s interest expense that reduces passive
category foreign source income is $500 ($5,000 x
(10,000/100,000)). Therefore, A’s passive category foreign
source taxable income would be $7,500 ($8,000 − $500). At a
25% U.S. tax rate, A may use $1,875 (25% x $7,500) of the
$2,000 of foreign taxes—an additional foreign tax credit amount
of $125 after taking into account A’s share of the tax book value
of the partnership assets. B does not request a Schedule K-3
from USP for tax year 2022. Under the domestic filing exception,
USP does not need to complete Schedule K-3 for B.

K and K-1, and is information the partner needs to compute the
foreign tax credit limitation, which determines the amount of
foreign tax credit available to the partner.
Exception. See the domestic filing exception.
Section 904 generally limits the foreign tax credit to the
portion of U.S. tax liability attributable to foreign source taxable
income. Foreign source taxable income is foreign source gross
income less allocable expenses. In general, the partnership
must complete the Schedules K-2 and K-3, Parts II and III,
because the partnership’s gross income, gross receipts,
expenses, assets, and foreign taxes paid may affect the foreign
tax credit available to the partner. The source of certain gross
income and gross receipts is determined by the partner. In
addition, some expenses of the partnership are allocated and
apportioned by the partner. Because of this partner
determination, it is not possible for the partner to assume that all
income of the partnership is U.S. source and all expenses of the
partnership reduce U.S. source income. Also, the allocation and
apportionment of certain partner expenses take into account
distributive shares of assets and income of the partnership that
are not otherwise reported in the specified format on the
Schedule K-1.
For example, for sourcing purposes, personal property sold
by the partnership is treated as sold by the partners. See section
865(i)(5). Generally, income from the sale of certain personal
property (excluding inventory) is sourced according to the
residence of the seller. In cases in which the partner is a
pass-through entity, the partnership might not know the ultimate
residence of the first non-pass-through partner. The partnership
is not required to separately state gain from the sale of personal
property on Schedules K and K-1 because it is generally
included in ordinary income. However, the gain is separately
reported on Schedules K-2 and K-3, Part II.
As another example, the partner’s R&E expense (which
includes the distributive share of the partnership’s R&E expense)
is allocated and apportioned by the partner. See Regulations
section 1.861-17(f). R&E expense is allocated and apportioned
based on the gross receipts by SIC code. R&E expense by SIC
code is not required reporting on Schedules K and K-1 but is
reported on Schedules K-2 and K-3, Part II. The partner needs
Schedule K-3, Part III, Section 1, for the partner’s share of the
partnership’s gross receipts by SIC code for purposes of
allocating and apportioning R&E expense.
In some cases, the partner will be able to use the information
reported on Parts II and III to increase the foreign tax credit
limitation, and the amount of available foreign tax credit to the
partner. For example, Part III, Section 2, provides the partner
with the tax book value of the assets of the partnership. In
general, a partner apportions interest expense to reduce U.S.
source income or foreign source income based on the tax book
value of its assets, including its distributive share of the
partnership’s interest expense and assets. See section 864(e)
(2) and Regulations section 1.861-9(e). Taking into account the
assets of a domestic partnership generating solely U.S. source
income would result in more expense allocated to reducing U.S.
source income and less expense allocated to reduce foreign
source income. Additional foreign source income increases the
partner’s foreign tax credit limitation and the ability of the partner
to claim foreign tax credits. The regulations provide exceptions
to asset method apportionment for certain less-than-10% limited
partners, and the instructions take this into account by excepting
the partnership from completing certain portions of the
Schedules K-2 and K-3 with respect to these partners.
Schedules K and K-1 contain net amounts but do not include
separately stated reporting for the partnership’s interest expense
for international tax reporting purposes, or the tax book value of
the assets. See Regulations section 1.861-9(e). See later
instructions for further guidance.

DRAFT AS OF
December 2, 2022

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

Example 8. The facts are the same as in Example 7, except
that A has $5,000 of deductions that are not definitely related to
any gross income as described in Regulations section
1.861-8(e)(9), and A and USP have no other expenses. Further,
A’s share of USP’s gross income is $50,000. Not including its
distributive share of the income of USP, A’s gross income is
$50,000. Of A’s gross income, $5,000 is passive category
foreign source gross income and $45,000 is U.S. source gross
income. USP does not have any gross income the source of
which is determined by the partner.
A’s expenses must be ratably apportioned based on A’s
gross income (including its distributive share of the income of
USP). See Regulations section 1.861-8(c)(3). Therefore, USP
must complete Schedule K-2, Part II, and Schedule K-3, Part II
(for A). Before taking into account the distributive share of USP’s
gross income, the amount of A’s expenses described in
Regulations section 1.861-8(e)(9) that reduce foreign source
income is $500 ($5,000 x (5,000/50,000)). Therefore, A’s foreign
source taxable income would be $4,500 ($5,000 − $500). At a
25% U.S. tax rate, A may only use $1,125 (25% x $4,500) of the
$2,000 of foreign taxes. See section 904.
-11-

completing the Schedule K-3 for the less-than-10% limited
partners, the partner's distributive share of 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. Regulations
section 1.904-4(n)(1)(ii)(A). 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 foreign taxes paid or accrued
on foreign source income as passive category income in Part III,
Section 4, column (d).
If the partnership knows that some of its partners are limited
partners that own less than 10% of a capital and profits interest
in the partnership, do not complete Schedule K-3, Part III,
Section 2, for these partners. See Regulations section
1.861-9(e)(4)(i).

Taking into account the distributive share of USP’s gross
income, the amount of A’s expenses described in Regulations
section 1.861-8(e)(9) that reduce foreign source income is $250
($5,000 x (5,000/100,000). Therefore, A’s foreign source taxable
income would be $4,750 ($5,000 − $250). At a 25% U.S. tax
rate, A may use $1,187.50 (25% x $4,750) of the $2,000 of
foreign taxes in Year 1, which is an additional foreign tax credit
amount of $62.50 after taking into account A’s distributive share
of the gross income of USP.
Because A and USP do not have R&E expense or interest
expense, and because USP did not pay or accrue any foreign
taxes, USP does not need to complete Schedules K-2 and K-3,
Part III.

DRAFT AS OF
December 2, 2022

Note. A partner may need the distributive share of the
partnership’s gross income for purposes of allocating and
apportioning expenses other than those described in
Regulations section 1.861-8(e)(9).

Foreign branch category income. A domestic partnership
itself does not have foreign branch category income. However,
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.

General filing instructions. 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 and gross
receipts. 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.

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.

Partnership determination. The source and separate
category of certain gross receipts, 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.
Schedule K-3. If the partnership knows that some of its
partners are limited partners that own less than 10% of the value
of the partnership and that do not hold their interest in the
ordinary course of the partner's active trade or business, when

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); Part III, Section 3, column
(d); 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 re-sourced 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) or 951A and re-sourced as foreign source income
under a treaty.
-12-

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

possession within which the gross income and gross receipts
are sourced. If a type of income is sourced from more than three
countries, attach a schedule with the information required on
Schedule K-2, Part II, and Schedule K-3, Part II, for that type of
income.
If income is U.S. source, enter “US.” Do not enter “various” or
“OC” for the country code.

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.”

Note. For Part II, column (f), enter the code “XX” if the
partnership cannot determine the country or U.S. possession
with respect to which the gross income and gross receipts are
sourced because the source is determined by the partner.
However, do not enter the code “XX” for Part II, column (f), 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
sections 865(e) and 865(g). Instead, enter for Part II, column (f),
the foreign country to which the partnership paid the tax of at
least 10% of the gain.
Each gross income and gross receipts item (for example,
sales vs. interest income) may have different countries listed on
A, B, C, etc., given that the partnership might not have sales
income and interest income, for example, from the same
country. Line 24 should sum each country’s total income
reported on Part II, regardless of the line on which such income
is reported, whether A, B, C, etc.

DRAFT AS OF
December 2, 2022

Partner determination. In Schedule K-2, Part II, Section 1,
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. Attach a statement to
the Form 1065 to identify the separate category of income under
section 904(d) of the amounts listed in Part II, Section 1, column
(f). In Schedule K-2, Part II, Section 2, 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 on Schedule K-3, Parts II
and III.

Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. possession with
respect to RICs and section 863(b). See the instructions to the
Forms 1116 and 1118 for these exceptions that apply in
completing the Schedules K-2 and K-3, Parts II and III. Do not
enter a foreign country or U.S. possession (to report on a
country-by-country basis) for lines 16 through 18.
Note. Schedules K-2 and K-3 request that gross income and
gross receipts be reported by country or U.S. possession
because such information is requested on Forms 1116 and
1118. Income and taxes are reported by country on the Forms
1116 and 1118 so that, for example, the IRS may initially
evaluate whether taxpayers are claiming credits for compulsory
payments to foreign governments.

Schedule K-2, Part II, and Schedule K-3, Part II
(Foreign Tax Credit Limitation)
Section 1. Gross Income, Lines 1 Through 24

Example 9. 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 AA 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.

Schedule A (Form 1118) requires a corporation to separately
report certain types of gross income and gross receipts by
source and separate category. Separate reporting is required
because each type of gross income and gross receipts 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 and gross receipts 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 and gross receipts separately reported on Form
1065, Schedule K.

Example 9 Table
(d)

A

AA

$10,000

B

YY

$15,000

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.

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

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

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 and gross receipts are sourced. On lines
1 through 24, for each gross income and gross receipts 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.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Description

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but rather total section 986(c) gains for the year are reported on
line 16. Total section 986(c) losses for the year are reported on
line 46.

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.

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.

DRAFT AS OF
December 2, 2022

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 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. This is not reported as a net
amount but rather total section 987 gains for the year are
reported on line 17. Total section 987 losses for the year are
reported on line 47.

Example 10. Partnership has the following amounts
for the tax year 2022:

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).

Short-term capital gains/losses

Total

$900

U.S. Source

$1,000

Passive category (France)

$400

Passive category (Canada)

($300)

Passive category (Haiti)

($200)

Line 19. Section 951(a) inclusions. Report section 951(a)
inclusions if the domestic partnership takes into account such
income. A domestic partnership does not have a section 951(a)
inclusion with respect to a foreign corporation for tax years of the
foreign corporation that begin on or after January 25, 2022. A
domestic partnership may not have a section 951(a) inclusion
with respect to a foreign corporation for tax years of the foreign
corporation that begin before January 25, 2022, if, pursuant to
Regulations section 1.958-1(d)(4), it applies Regulations section
1.958-1(d)(1) through (3) to be treated 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.

Partnership reports these amounts on Schedule K-2,
Part II, Section 1, line 11, as follows:
(a) U.S. source

(b) Foreign source
passive

Line 11
A US

$1,000

B FR

$400

C CA

($300)

D HA

($200)

Line 20. Other income. Attach a statement to both Schedules
K-2 and K-3 describing the amount and type of other income.
The statement must conform to the format of Part II.

Line 12. Net long-term capital gain. Do not include gains
reported on lines 13, 14, and 15 on line 12.

Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then, add the gross income
on lines 1 through 23 by country or possession and enter the
total by country in rows A, B, and C (and additional rows if more
than three countries). The sum of the amounts in rows A, B, C,
etc., does not need to equal the amount on line 24, given that not
every gross income amount is required to be reported by
country.

Line 13. Collectibles (28%) gain. Report collectibles gain on
line 13 and not line 12.
Line 14. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 14 and not on line 12. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 14 and not on line 15, but
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.

Section 2. Deductions, Lines 25 Through 54

Line 15. Net section 1231 gain. Report net section 1231 gain
on line 15 and not on line 12 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 14.

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 -10T. 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

Line 28. Net long-term capital loss. Do not include losses
reported on line 29.
Line 29. Collectibles loss. Report collectibles loss on line 29
and not on line 28.
Lines 16 and 46. Section 986(c) gain and loss. Include the
partnership’s share of a lower-tier pass-through entity’s section
986(c) gain or loss, and the amount of section 986(c) gain or
loss on distributions of PTEP sourced from an annual PTEP
account of the partnership. This is not reported as a net amount
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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.
Section 2 also generally corresponds to the deductions
separately reported on Form 1065, Schedule K.

See Regulations sections 1.861-9(e)(4)(i) and 1.904-4(n)(1)(ii)
for more information.
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, earlier.

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). See osha.gov/data/sic-manual.

Note. Interest expense is always included on lines 39 through
43 and not on other lines.
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.

DRAFT AS OF
December 2, 2022

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.

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).

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

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).

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.

Lines 41 through 43. Other interest expense. A partner’s
distributive share of a partnership’s interest expense that is not
directly allocable to income from specific partnership property is
generally allocated and apportioned by the partner, subject to
certain exceptions, and included in column (f). See Temporary
Regulations section 1.861-9T(e)(1).
Interest expense incurred by certain individuals, estates, and
trusts is characterized based on the categories of interest
expense in sections 163 and 469: active trade or business
interest, investment interest, or passive activity interest, adjusted
for any interest expense directly allocated under Temporary
Regulations section 1.861-10T. See Regulations section
1.861-9T(d). The amounts in each category of interest expense
are reported on lines 41 through 43. See Example 11, later. 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. With respect to limited partners that each own
less than 10% of the capital and profits interests of the
partnership, and such interests are not owned in the ordinary
course of the partner’s active trade or business, the partnership
reports the partners’ distributive share of interest expense as
reducing passive category foreign source income. Because a
partnership cannot enter interest expense in column (c), attach a
statement to the Schedules K-2 and K-3 indicating that the
amounts reported in column (f) reduce passive category income
as a result of this rule. However, if the partnership interest is held
in the ordinary course of the partner's active trade or business, a
partner's share of the partnership’s interest expense (other than
partnership interest expense that is directly allocated to
identified property under Regulations section 1.861-10T) is
apportioned in accordance with the partner's relative distributive
share of gross foreign source income in each separate category
and of gross domestic source income from the partnership.
Because a partnership cannot enter interest expense in columns
(a) through (e), attach a statement to the Schedules K-2 and K-3
indicating that the amounts reported in column (f) are
apportioned to the respective columns as a result of this rule.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

A partnership is not required to complete Section 1 of Part III
unless either (1) the partnership incurs R&E expense; or (2) the
partner is expected to license, sell, or transfer its intangible
property to the partnership (as provided in Regulations section
1.861-17(f)(3)).
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

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uncontrolled party can reasonably be expected to benefit from
the R&E expense.

Line 2. On Schedule K-2, report the partnership’s average of
the beginning-of-year and end-of-year inside basis adjustments
under sections 734(b) and 743(b). On Schedule K-3, report the
partner’s distributive share of the adjustments reported on
Schedule K-2.

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.

Lines 3 and 4. On Schedule K-2, 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). On Schedule K-3, report the
partner’s distributive share of the reductions in asset values
reported on Schedule K-2.

DRAFT AS OF
December 2, 2022

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

Note. The SIC code for line 2B(i) does not need to be the same
SIC code for line 2A(i).

Line 5. On Schedule K-2, report the average value of
partnership assets excluded from the apportionment formula.
See section 864(e)(3). On Schedule K-3, report the partner’s
distributive share of the excluded assets reported on
Schedule K-2. Include on line 5, assets without directly
identifiable yield referred to in Regulations section 1.861-9T(g)
(3)(iii).”

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.

Line 6. Individual partners who are general partners or who are
limited partners with an interest in the partnership of 10% or
more follow the same rules as corporate partners whose interest
in the partnership is 10% or more except that their interest
expense must be apportioned according to the interest expense
classifications under sections 163 and 469. See Regulations
section 1.861-9T(d). 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 6b through 6d, or Schedule K-3, Part III,
Section 2, lines 6b through 6d. The partnership includes the total
amount on line 6a.
Line 6a is the sum of lines 1 and 2 less the sum of lines 3, 4,
and 5. Line 6a is divided into the types of assets on lines 6b, 6c,
and 6d if the partnership has individual, estate, and certain trust
partners (whether direct or indirect through a pass-through
entity).

Complete this Section 2 only if the partnership or the partners
have interest or stewardship expenses.
Stewardship expenses. In the case of the partner’s
stewardship expenses incurred to oversee the partnership, the
partnership's value is determined and characterized under the
asset method in Regulations section 1.861-9 (taking into
account any adjustments under sections 734(b) and 743(b)).
See Regulations section 1.861-8(e)(4)(ii)(C). Therefore, the
instructions with respect to Part III, Section 2, for interest
expense apportionment factors apply generally to the partner’s
stewardship expense apportionment.
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).

Example 11. A, a U.S. citizen, has a 10% interest in USP, a
domestic partnership. USP is engaged in the active conduct of a
U.S. trade or business. USP’s business generates only domestic
source income. USP also has an investment portfolio consisting
of several less-than-10% stock investments. USP has a bank
loan. The proceeds of the bank loan were divided equally
between the business and the investment portfolio. A’s only
interest expense is that from its distributive share of the USP
loan.
A’s share of the interest expense with respect to the loan for
USP’s business is $2,000. It is apportioned on the basis of
business assets. Because all business income is domestic
source, the business assets are domestic assets and reported
on Schedules K-2 and K-3, Part III, Section 2, column (a),
line 6b. A’s $2,000 share of the interest expense is reported on
Schedule K-3, Part II, column (f), line 41. It is apportioned to U.S.
source income by the partner.
The interest expense for A’s share of the loan for USP’s
investments is $2,000 and is reported on Schedule K-3, Part II,
column (f), line 42. The investment interest must be apportioned
on the basis of investment assets. Applying the asset method,
$80,000 of USP’s adjusted basis in its investment portfolio stock
generates domestic source income and $120,000 of USP’s
adjusted basis in the stock generates foreign source passive
income. USP reports these amounts on Schedule K-2, Part III,
Section 2, line 6c, columns (a) and (c), respectively. A’s
distributive share of the adjusted basis in USP’s stock is $8,000
with respect to the stock generating domestic source income
and $12,000 with respect to the stock generating foreign source
passive income. Such amounts are reported on Schedule K-3,
Part III, Section 2, line 6c, columns (a) and (c), respectively. With

Note. Attach to Form 1065 a second Part III, Section 2, if the
partnership reports both the tax book value and the alternative
tax book value of its assets to the partners
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).
Line 1. On Schedule K-2, report the average of the
beginning-of-year and end-of-year inside basis in the
partnership’s total assets. See Regulations section 1.861-9(g)(2)
(i)(A). On Schedule K-3, report the partner’s distributive share of
the assets reported on Schedule K-2. Include on line 1, assets
without directly identifiable yield referred to in Regulations
section 1.861-9T(g)(3)(iii).

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

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.

respect to the interest expense on the loan for USP’s
investments, $800 ((8,000/20,000) x $2,000) is apportioned to
domestic source income and $1,200 ((12,000/$20,000) x
$2,000) is apportioned to foreign source passive income.
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 6b through 6d.
Include the total distributive share on line 6a.

DRAFT AS OF
December 2, 2022

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 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 on lines 6b through 6d (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 will generally not have the
information to apply the stock characterization rules described in

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

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

Do not complete this Section 3 if the partnership knows that it
has no domestic corporate partners (whether direct or indirect).
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 (FDDEI) (as defined in section 250(b)
(4)) and is apportioned within the class, if necessary, ratably
between the statutory grouping (or among the statutory
groupings) of gross income and the residual grouping of gross
income based on the relative amounts of FDDEI in each
grouping. See Regulations section 1.861-8(e)(13). If the partner
is a member of a consolidated group, see Regulations section
1.861-14(e)(4). Accordingly, this section requires 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
Do not complete this Section 4 if the partnership does not pay or
accrue 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.
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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.”

Attachment. As previously mentioned in the instructions for
Schedule K-2, Part I, box 4, and Schedule K-3, Part I, box 4 (for
distributive share), for each of the amounts listed in lines 1
through 3, attach to the Schedules K-2 and K-3 a statement
reporting the following information.
• The dates on which the taxes were paid or accrued.
• The exchange rates used.
• The amounts in both foreign currency and U.S. dollars. See
section 986(a).

DRAFT AS OF
December 2, 2022

Column (a). Enter the code for the type of tax.

Line 1. Enter in U.S. dollars the total foreign taxes (described in
section 901 or section 903) that were paid or accrued by the
partnership (according to its method of accounting for such
taxes). Do not reduce the amount that you report on line 1 by the
reductions reported on line 2. Do not report redetermined taxes
on line 1. Report such taxes on line 3.
If the partnership uses the cash method of accounting, check
the "Paid" box and enter foreign taxes paid during the tax year
on line 1. Report each partner's share on Schedule K-3, Part III,
Section 4, line 1.
If the partnership uses the accrual method of accounting,
check the “Accrued” box and enter foreign taxes accrued on
line 1. Report each partner's share on Schedule K-3, Part III,
Section 4, line 1.

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

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.
Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. possession with
respect to RICs and section 863(b).

If there are multiple types of tax for the same country,
generate multiple alpha rows for the same country, one row for
each type of tax. For example, see below:

Description

(a) Type of tax

A

AA

WHTD

B

AA

OTH

Example 12. The facts are the same as in Example 9,
discussed earlier. USP uses the cash method of accounting and
pays taxes of $1,000 and $3,000 to Countries AA and YY,
respectively. USP completes Part III, Section 4, line 1, as
follows.

Example 12 Table

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.

Direct (901/903)
foreign taxes

Paid

(a)

(e)

Type of tax

Foreign

A

AA

OTHR

1,000

B

YY

OTHR

3,000

Line 2. Enter on line 2 as negative number, 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 and 8865 (section
6038(c)).
E. Foreign income taxes paid or accrued during the current
tax year with respect to splitter arrangements under section
909.
F. Foreign taxes on foreign corporate distributions. For
example, report taxes on dividends eligible for a deduction
under section 245A and ineligible for credit under section
245A(d). Also, include taxes on a distribution of PTEP

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

approximation of the final foreign income tax liability and,
therefore, is not considered an amount of tax paid for purposes
of section 901 until the contest is resolved. Thus, a partnership
generally does not take into account a contested liability as a
creditable foreign tax expenditure until the contest is resolved
and the liability has been paid. See Regulations section
1.905-1(f)(1). However, to the extent that a partnership has
remitted a contested foreign income tax liability to a foreign
country, partners may elect to claim a provisional foreign tax
credit for their distributive share of such contested foreign
income tax liability. See Regulations section 1.905-1(f)(2).
Partnerships that are contesting a foreign income tax liability
with a foreign country but that have remitted all or a portion of
such contested liability should report information about the
contested tax on line 3, and check the “Contested tax” box. In
addition, partnerships should attach a statement and include
information necessary for partners to complete Form 7204 and
Schedule L (Form 1118) (for direct or indirect corporate
partners), or Schedule C (Form 1116) (for direct or indirect
individual, trust, or estate partners), including a description of the
contest and a description of the contested foreign income tax. If
it is unknown whether the partners are corporations, individuals,
estates, or trusts, provide the information necessary for the
partners to complete both Schedule L (Form 1118), Parts I and II
(as applicable), and Schedule C (Form 1116), Parts I and II (as
applicable).

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.

DRAFT AS OF
December 2, 2022

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.
Exception. Partnerships subject to subchapter C of
chapter 63 of the Code (BBA Partnerships) are generally
required to file an administrative adjustment request (AAR)
under Regulations section 1.905-4(b)(2)(ii) to account for a
foreign tax redetermination. If an AAR is filed with respect to a
foreign tax redetermination (or if an AAR will be timely filed), do
not report the foreign tax redetermination on line 3.

Note. Payment of additional foreign taxes that relate to an
earlier tax year by a partnership that uses the cash method of
accounting does not result in a foreign tax redetermination. See
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
is 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.

Section 5. Other Tax Information
This section provides other tax information that a partner needs
to figure its foreign tax credit limitation.
Column (b). Do not report any amounts in this column.
Column (f). As of the date of these instructions, this column will
only include the section 901(j) category and the countries
relevant to that category. See the Instructions for Form 1118 for
the potential countries to be listed with the section 901(j)
category of income. No credit is allowed for taxes paid or
accrued to a country described in section 901(j). However, a
deduction is generally allowed with respect to a tax described in
section 901(j).
Line 1. For partnerships other than PTPs, report the total of all
partners’ shares of the net positive income adjustments resulting
from all section 743(b) basis adjustments. Net positive income
adjustments from all section 743(b) basis adjustments means
the excess of all section 743(b) adjustments allocated to the
partner that increase the partner's taxable income over all
section 743(b) adjustments that decrease the partner's taxable
income.
Attach to 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.

Exceptions. The instructions for Forms 1116 and 1118
specify exceptions from the requirement to report gross income
and gross receipts by foreign country or U.S. possession with
respect to RICs and section 863(b). Do not enter “various” or
“OC” for the country code.
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.
In addition, if the direct or indirect partners are corporations,
attach a statement that includes the information on Schedule L
(Form 1118), Parts I and II, as applicable, with respect to each
foreign tax redetermination. If the direct or indirect partners are
individuals, estates or trusts, attach a statement that includes the
information on Schedule C (Form 1116), Parts I and II, as
applicable, with respect to each foreign tax redetermination. If
the indirect partners are unknown, attach a statement that
includes both the information on Schedule L (Form 1118), Parts I
and II, as applicable, and Schedule C (Form 1116), Parts I and II,
as applicable.

Line 2. For partnerships other than PTPs, 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

Contested taxes. In general, a contested foreign income tax
liability does not accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
contested foreign income tax liability is not a reasonable
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

-19-

USP has $100 in gross receipts from services, $50 in cost of
services, and $25 in properly allocated and apportioned
deductions (none of which are interest or R&E expenses).
Because the performance of these services results in DOGEI, it
does not give rise to DEI, but rather the net amount ($25) is
reported on Schedule K-2 Part IV, Section 1, line 6, and 50% of
the net amount is reported to DC on the same line and section of
Schedule K-3, so that DC can treat this amount as an exclusion
from its DEI. DC’s DEI is determined without this amount by
subtracting the amount from DEI on Part I, line 2e, of Form 8993.
USP owns two properties, Asset C which has an adjusted
basis of $1,000, and Asset D which has an adjusted basis of
$1,200. Asset C is used in the production of Product A and Asset
D is used in providing the DOGEI services. Because sales of
Product A give rise to DEI, USP should report the partnership’s
adjusted basis in Asset C ($1,000) on Schedule K-2, Part IV,
Section 1, line 8 (and $500 is reported to DC on the same
section/line of Schedule K-3). This increases DC’s qualified
business asset investment (QBAI), and thereby increases DC’s
deemed tangible income return (DTIR). The increase to DTIR
decreases DC’s DII which in turn decreases its section 250
deduction for FDII. DC uses the amount to determine its DTIR
from partnerships on Part I, line 7b, of Form 8993. The services,
however, do not give rise to DEI, so USP should not include the
partnership’s adjusted basis in Asset D ($1,200) on line 8.
USP has no sales or services provided to foreign persons
and therefore no FDDEI to report on Section 2 of Part IV. Even
though the partnership has no interest or R&E deductions, in
many cases, the partnership would still have to complete Part IV,
Section 3.

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.

DRAFT AS OF
December 2, 2022

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 REITs, RICs, and
S corporations) or to a partner which is a partnership that has a
direct or indirect domestic corporate partner (other than REITs,
RICs, 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 FDDEI 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 direct or indirect 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 the instructions for 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,
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.

Example 13. DC is a domestic corporation that owns a 50%
interest in a domestic partnership, USP. USP manufactures and
sells Product A and provides services, both solely to United
States persons. The services give rise to domestic oil and gas
extraction income (DOGEI) for purposes of section 250(b)(3)(A)
(i)(V). USP has $200 in gross receipts from sales of Product A,
$100 in cost of goods sold, and $50 in properly allocated and
apportioned deductions (none of which are interest or R&E
expenses). USP reports these amounts on Schedule K-2, Part
IV, Section 1, lines 2a–2c, respectively, and 50% of these
amounts on the same section and lines of the Schedule K-3 that
USP issues to DC, because this information is necessary for DC
to compute its deduction eligible income (DEI). The net amount
increases DC’s DEI, which increases its deemed intangible
income (DII) and in turn increases its section 250 deduction for
FDII. DC uses these amounts to calculate its gross DEI on Part I,
line 4, of Form 8993.

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

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.

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 “outside
the United States.”

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.

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.

DRAFT AS OF
December 2, 2022

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

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 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

Line 1. Net income (loss). This amount may equal line 1 of
Analysis of Net Income (Loss) on page 5 of Form 1065.
Line 2a. DEI gross receipts. Enter DEI gross receipts.

Line 2b. DEI cost of goods sold. Enter the amount of cost of
goods sold attributable to the amount on line 2a.

Line 2c. DEI properly allocated and apportioned deductions. Enter the amount of deductions (including taxes) properly
allocable to gross DEI, without interest and R&E expense. 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 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 domestic partnership does not have a
section 951(a) inclusion with respect to a foreign corporation for
tax years of the foreign corporation that begin on or after January
25, 2022. A domestic partnership may not have a section 951(a)
inclusion with respect to a foreign corporation for tax years of the
foreign corporation that begin before January 25, 2022, if,
pursuant to Regulations section 1.958-1(d)(4)(i), it applies
Regulations section 1.958-1(d)(1) through (3) to such tax years,
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. See sections 959(a) and 959(d).
Note. The amount by which distributions are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner is
not taken into account for purposes of determining the CFC
dividends to be entered on line 4.
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.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

-21-

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).

specified tangible property is only partially depreciable, then only
the depreciable portion is QBAI.
Example 14. X and Y are both domestic corporations that
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.

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).

DRAFT AS OF
December 2, 2022

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.

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
foreign-derived deduction eligible income (FDDEI) as defined in
Regulations section 1.250(b)-1.

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.

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).

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.

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).

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. Generally, interest expense includes any expense
that is currently deductible under section 163 (including original
issue discount (OID)), and interest equivalents. See Temporary
Regulations section 1.861-9T(b) for the definition of interest
equivalents and Temporary Regulations section 1.861-9T(c) for
sections that disallow, suspend, or require the capitalization of
interest deductions. Include excess business interest expense
(EBIE) determined under 163(j)(4) on this line. Under
Regulations section 1.250(b)-1(d)(2)(ii), deductions are
determined without regard to sections 163(j),170(b)(2), 172,
246(b), and 250.

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
-22-

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

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.

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

DRAFT AS OF
December 2, 2022

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).

Line 15. R&E gross receipts by SIC code. Enter the gross
receipts that resulted in gross income for each category, DEI,
FDDEI, and then total gross receipts. Note that the Total column
is not a sum of DEI and FDDEI but rather refers to all the
partnership’s gross receipts. Such gross receipts include both
the partnership's sales and certain other parties' sales. See
Regulations section 1.861-17(d). Gross receipts from certain
transactions of parties both controlled or uncontrolled by the
partnership may be included on line 15. See generally
Regulations section 1.861-17(d).
Line 16. Enter the amount of 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 Schedule P (Form 5471), 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.

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).

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

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. A
partnership is not required to complete lines 15 and 16 unless
either (1) the partnership incurs R&E expense; or (2) the partner
is expected to license, sell, or transfer its intangible property to
the partnership (as provided in Regulations section 1.861-17(f)
(3)). 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

-23-

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

DRAFT AS OF
December 2, 2022
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

foreign corporation may not equal the amounts reported on Part
V of the Schedule K-2 with respect to the foreign corporation.

(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

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.

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 of 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 of foreign
corporation stock through a pass-through entity.
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

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-4217-currency-codes.html.
Note. Columns (e) and (f) are reported in functional currency.
Column (e). This represents the partnership’s share of the
amount distributed in functional currency. See Schedule R
(Form 5471), column (c).
Column (f). This represents the partnership's share of the
amount of E&P distributed in functional currency. See
Schedule R (Form 5471), 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 Schedule J (Form 5471) 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 in the Instructions for Form 5471.
-24-

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

Regulations section 1.958-1(d)(1) through (3) to such tax year,
and is a U.S. shareholder of the foreign corporation during such
tax year, then any subpart F income inclusions and section
951(a)(1)(B) inclusions with respect to the foreign corporation for
such tax year 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 on Schedules K
and K-1, line 11, Other income (loss).
Exception. Part VI of Schedule K-2 does 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.

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).

DRAFT AS OF
December 2, 2022

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.

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

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, then the domestic
partnership does not have subpart F income inclusions or
section 951(a)(1)(B) inclusions with respect to a foreign
corporation for tax years of the foreign corporation that begin on
or after January 25, 2022, under Regulations section 1.958-1(d)
(1). A domestic partnership may not have subpart F income
inclusions or section 951(a)(1)(B) inclusions with respect to a
foreign corporation for a tax year of the foreign corporation that
begins before January 25, 2022, if, pursuant to Regulations
section 1.958-1(d)(4)(i), the partnership applies Regulations
section 1.958-1(d)(1) through (3) to such tax year and, thus, is
treated 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 the foreign corporation
during such tax year. If the partnership does not have subpart F
income inclusions or section 951(a)(1)(B) inclusions with respect
to a foreign corporation for a tax year of the foreign corporation,
the subpart F income inclusions and section 951(a)(1)(B)
inclusions with respect to the foreign corporation for such tax
year 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 with respect to the CFC.
Note. If the partnership is a domestic partnership that is treated
as owning stock of a foreign corporation within the meaning of
section 958(a) for purposes of section 951 for a tax year that
begins before January 25, 2022, because it does not apply
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

-25-

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 items, 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 items, 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 income and GILTI items.

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 is treated as owning stock of
a CFC within the meaning of section 958(a) for a tax year of the
CFC that begins before January 25, 2022, because it does not,
pursuant to Regulations section 1.958-1(d)(4)(i), apply
Regulations section 1.958-1(d)(1) through (3) to such tax year,
and is a U.S. shareholder of the CFC listed in column (a), does
not report amounts with respect to that CFC for that tax year in
column (e) or (f).

DRAFT AS OF
December 2, 2022

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.

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.

Column (f). Enter the amount determined under section 956
with respect to the partners that relate to the partners’ ownership
in the partnership, as described in these instructions for column
(f) (aggregate section 951(a)(1)(B) inclusion). 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.

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

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

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

Column (h). Enter the CFC’s tested loss, if any, from line 6 of
Schedule I-1 (Form 5471) for each CFC. The loss amounts
should be shown as negative numbers.

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 of Schedule K-3
(Form 1065 or 8865) that is related to the CFC on its Part VI of
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 (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. The loss amounts
should be shown as negative numbers.
Column (k). If the CFC has a tested loss in column (h), enter
zero. If the CFC has tested income in column (g), enter the
aggregate share of QBAI. A CFC’s QBAI is reported on line 8 of
Schedule I-1 (Form 5471).
Column (l). If the CFC has tested income in column (g), enter
zero. If the CFC has a tested loss in column (h), enter as a
negative number 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.

Column (a). Enter the name of each CFC for which Part VI
must be completed.

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

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

Column (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).
-26-

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

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

partnership is making a non-initial section 1296 MTM election,
and for any foreign corporation eligible to be treated as a QIC
that is treated as a PFIC by reason of section 1298(b)(1),
regardless of whether it files Form 8621 for such PFIC. See
section 1296(j)(1)(A) and Regulations section 1.1296-1(i) for
more information related to non-initial section 1296 MTM
elections.

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. However, the following exceptions apply.
• A partnership that 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, is
not required to complete Schedules K-2 and K-3, Part VII.
• A domestic partnership that has elected to treat a PFIC as a
pedigreed qualified electing fund (QEF) or made an MTM
election under section 1296 with respect to a PFIC applicable to
the partnership’s tax year (other than a domestic partnership
making an MTM election under section 1296 with respect to
PFIC stock in the current tax year if the current tax year is not the
first year of the partnership’s holding period in such stock
(“non-initial section 1296 MTM election”)) 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. The term “pedigreed QEF” is defined in Regulations
section 1.1291-1(b)(2)(ii).
• A partnership that owns stock of a foreign corporation that is
treated as a qualifying insurance corporation (as defined in
section 1297(f)(1)) (QIC) and which is not treated as a PFIC by
reason of section 1298(b)(1), or a domestic partnership that
satisfies the deemed election requirements of Regulations
section 1.1297-4(d)(5)(iv) with respect to a foreign corporation
eligible to be treated as a QIC (and that is not treated as a PFIC
by reason of section 1298(b)(1)) is not required to complete
Schedules K-2 and K-3, Part VII with respect to such foreign
corporation.
• A partnership that knows that all of its direct and indirect
partners that are U.S. persons are either (i) not subject to the
PFIC rules with respect to the corporation under section 1297(d)
because they are subject to the subpart F rules with respect to
the corporation, (ii) tax-exempt entities that are not subject to the
PFIC rules with respect to the corporation under Regulations
section 1.1291-1(e), or (iii) pass-through entities with no direct or
indirect U.S. taxable owners is not required to complete
Schedules K-2 and K-3, Part VII with respect to the corporation.
• A partnership that marks to market stock of a PFIC as
described in Regulations section 1.1291-1(c)(4) does not need
to report information about the PFIC on Schedules K-2 and K-3,
Part VII. The partnership should report its MTM gain or loss on
Schedule K (Form 1065) and report the partners’ shares of such
amounts on Part III of Schedule K-1 (Form 1065). Note,
however, there may be instances in which the partnership will
need to provide its partners with additional information to meet
their tax obligations with respect to a PFIC the stock of which the
partnership has marked to market as described in Regulations
section 1.1291-1(c)(4), such as when the section 1291 rules
apply because the stock was not marked in the first year of the
partnership’s holding period. In such instances, the partnership
may use Part VII to provide the needed information.

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.

DRAFT AS OF
December 2, 2022

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.
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.

Codes for Classes of PFIC Shares

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 section 1296 MTM election has
been made, and unpedigreed QEFs (section 1291 funds), and
PFICs with respect to which pedigreed QEF, section 1296 MTM,
or other elections have been, or may be, made, and for which
the partnership is not filing a Form 8621.

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

Domestic partnerships must also use Schedule K-2, Part VII,
to report information for any PFIC with respect to which the
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Code

-27-

no shares in a particular PFIC during its tax year, leave this
column blank with respect to that PFIC.

QIC. See section 1297(f) and Regulations section 1.1297-4 for
additional information on QICs.

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.

Column (l). Check the box if the PFIC has indicated that its
shares are “marketable stock” as defined in section 1296(e) and
Regulations section 1.1296-2.
Column (m). Check the box if the PFIC also constitutes a CFC
within the meaning of section 957 (PFIC/CFC).

Table 4

DRAFT AS OF
December 2, 2022

Reminder. A partnership that knows that all of its direct and
indirect partners that are U.S. persons are not subject to the
PFIC rules with respect to a PFIC/CFC under section 1297(d)
because they are subject to the subpart F rules with respect to
the PFIC/CFC is not required to complete Schedules K-2 and
K-3, Part VII, with respect to the PFIC/CFC.

Additional Information for Section 1, Part VII

General Information

(a)
Name of PFIC

Annual Information

(b)
EIN or reference ID
number

(g)
Dates PFIC shares
acquired during tax year
(if applicable)

Note. If the PFIC is a PFIC/CFC, a partner may need certain
additional information with respect to the PFIC/CFC’s E&P not
required to be reported on this Schedule K-2, Part VII, (or the
partner’s Schedule K-3, Part VII) from the partnership to aid the
partner in making certain elections under Regulations section
1.1291-9, 1.1297-3, or 1.1298-3.

Column (n). Complete column (n) in the following manner.
Completing column (n), Section 1, Part VII

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 the 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.

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 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)

check the box.

• the foreign corporation 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)

do not check the box.

Partnership Election Codes
Code

Partnership Election Type

QEF

Qualified Electing Fund Election

MTM

Section 1296 Mark-to-Market Election

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.

Reminder. If the partnership is a domestic partnership and has
made a pedigreed QEF election or section 1296 MTM election
(other than a non-initial section 1296 MTM election) with respect
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. If the partnership has marked
stock in a PFIC to market as described in Regulations section
1.1291-1(c)(4), it is not required to report information regarding
that PFIC on Schedule K-2 or K-3, Part VII.

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."

Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
-28-

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

PFIC (other than a non-initial section 1296 MTM election), 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
section 1296(a) MTM gain or loss on Form 1065, Schedule K,
and report the partners’ shares of such amounts on
Schedule K-1, Part III.
If the partnership has marked stock in a PFIC to market as
described in Regulations section 1.1291-1(c)(4), it is not
required to report information regarding that PFIC on
Schedule K-2 or K-3, Part VII, though it may use Part VII to
provide its partners with additional information to meet their tax
obligations with respect to the PFIC in certain instances, such as
when the section 1291 rules apply because the partnership did
not mark the stock to market in the first year of its holding period.

QEF Information
Columns (c) and (d). Enter the partnership's share of the total
ordinary earnings and net capital gain (as defined in Regulations
section 1.1293-1(a)(2)) of the PFIC for the partnership’s tax year
in which or with which the tax year of the PFIC ends in columns
(c) and (d), respectively. The PFIC should provide 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 it retains a written record in its
books and records.

DRAFT AS OF
December 2, 2022

Note. If the partnership is a domestic partnership that has made
an MTM election under section 1296 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.

Reminder. 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).

Section 1291 and Other Information
Note. Generally, the information in columns (g) through (o) 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 election, section 1296 MTM election (including a
non-initial section 1296 MTM election), 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 election or section 1296 MTM
election (other than a non-initial section 1296 MTM election) and
for which the partnership does not file Form 8621.

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 the partner 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.

Reminder. If the partnership has additional required information
with respect to a PFIC for any of columns (g) through (j) or (l)
through (m) (for example, if the partnership received multiple
distributions with respect to stock in a PFIC), it must complete
such column with the first of such entries and attach a statement
including the remaining entries to Schedule K-2, Part VII and its
corresponding Schedules K-3, Part VII, with the information
contained in Table 5.

MTM Information

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

Columns (e) and (f). Enter the fair market value of the PFIC
stock at the beginning and end of the partnership’s tax year in
columns (e) and (f), respectively. If any shares of the PFIC were
acquired during the tax year for which the Form 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 under section
1296 but for which it does not file Form 8621 and for any PFIC
with respect to which it is making a non-initial section 1296 MTM
election. 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 under section 1296 with
respect to the PFIC; the partnership may obtain this knowledge
in any reasonable manner, provided it retains a written record in
its books and records.

Column (h). Enter the amount of each distribution of cash
and/or the fair market value of any other property distributed to
the partnership by the PFIC during the tax year, if any.
Note. Deemed distributions by QEFs do not need to be
reported on this Schedule K-2, Part VII (or the partner’s
Schedule K-3, Part VII). However, partners which have made, or
intend to make, an election under section 1294, and which are
deemed to have received a distribution from the QEF, may
require this information to complete any computations under
section 1294 (including for Form 8621, if required). See section
1294(f) and Regulations section 1.1294-1T for additional
information.

Reminder. If the partnership is a domestic partnership and has
made an MTM election under section 1296 with respect to a
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

-29-

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)

(i)
Dates of
distribution

(j)
Total
creditable
foreign taxes
attributable to
distribution by
PFIC

(l)
Dates PFIC
shares
disposed of
during tax
year (if
applicable)

(m)
Amount
realized on
disposition of
PFIC shares

(n)
Tax basis of
PFIC shares
on date of
disposition

(o)
Gain or (loss)
on disposition
of PFIC shares

DRAFT AS OF
December 2, 2022
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.

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

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

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. 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. 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.

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 election or
section 1296 MTM election (other than a non-initial section 1296
MTM election) and for which the partnership does not file Form
8621.

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.

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.

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 indirect partners who may be
eligible to claim the indirect credit.

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.
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

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.
Exception. Part VIII is not required to be completed with
respect to dormant foreign corporations (as defined in section 3
of Rev. Proc. 92-70).
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Also, do not include on 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); these amounts are
reported on 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.

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.

DRAFT AS OF
December 2, 2022

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. Enter "US" for income
sourced in the United States. 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.
Enter "US" for income sourced in the United States.

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
Schedule Q (Form 5471). 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).
Note. In tax year 2022, new line 1(f) is added to allow the
partnership to report foreign personal holding company income
under section 954(c)(1)(F) (income from notional principal
contracts), section 954(c)(1)(G) (payments in lieu of dividends),
and section 954(c)(1)(H) (personal service contracts). A
partnership must report a separate line 1(f) for income in each of
section 954(c)(1)(F), (G) and (H). Income within one of these
income groups may need to be further subdivided on separate
lines to the extent it is attributable to more than one country,
source of income, or passive grouping, etc. See the instructions
for Schedule Q (Form 5471).

Line A. On line A, enter the EIN or reference ID number of the
CFC as listed on Form 5471. Do not enter "FOREIGN US" 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, page 1,
and Schedule Q (Form 5471) for each CFC with respect to
which it has a direct or indirect interest. Form 5471, page 1,
reports the functional currency of the CFC. The Form 5471
page 1 and Schedule Q (Form 5471) information must be
attached even if the partnership meets an exception, such as the
multiple filer exception, to filing the Form 5471 with the IRS.

The tested income group consists of tested income within a
section 904 category. See Regulations section 1.960-1(d)(2)(ii)
(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 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

Lines 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’s net income and taxes in each of these
groups is figured on Schedule Q (Form 5471), and the
partnership need only report its share of the income on
Schedule K-2 and the partner’s share of such amounts on
Schedule K-3. See the instructions for Schedule Q (Form 5471)
for the meaning of unit.

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 unit.

Note. If a partnership is reporting information with respect to a
PFIC with a QEF inclusion on this Part VIII, and there are
deemed paid taxes associated with the QEF inclusion, unless
the partnership knows that the partners are not claiming foreign
tax credits or that the partner does not need to complete Form
1116 to claim a credit (section 904(j)), attach a statement that
includes the information on Schedule Q (Form 5471), with
respect to the PFIC, including the functional currency of the
PFIC. See section 1293(f) with respect to QEF inclusions from a
PFIC.
However, do not include on line 1 (or lines 1a through 1j, or
lines (1), (2), etc., under line 1) any amounts excluded from
subpart F income under the high-tax exception in section 954(b)
(4) (“subpart F high-tax exception”); these amounts are reported
on line 4 (and on lines (1), (2), etc., under line 4).
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

Code

-31-

Tables for Example 15
Example 15. Foreign Source Income
For the Year 1 tax year, the separate units have the following foreign source income.
Tax

Country Code

Net Income

Country X Foreign Disregarded Entity
(FDE) Passive Interest Income

20% withholding tax

AA

100u

CFC Passive Rental Income

10% withholding tax

YY

50u

No tax

ZZ

300u

DRAFT AS OF
December 2, 2022

CFC General Category Tested Income

Example15. 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 15. Partnership USP’s 2nd Schedule K-2, Part VIII
USP completes another Part VIII of Schedule K-2, as follows.
A

1234

B

PAS

C

ii

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 15. Partnership USP’s 3rd Schedule K-2, Part VIII
USP completes a third Part VIII of Schedule K-2, as follows.
A

1234

B

GEN

3

Tested Income Group (Total)

1

CFC

(i) Country Code

(ii) Partnership’s Share of Net Income

ZZ

300u

Example 15. 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 15.
USP also completes Schedule K-3, Part VIII, with each
partner's share of the partnership's net income in each income
group.

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. See Regulations section 1.904-4(c)(3)(i).

ii

All passive income received during the tax year that is subject to a
withholding tax of less than 15% (but greater than zero) must be
treated as one item of income. See Regulations section 1.904-4(c)(3)
(ii).

iii

All passive income received during the tax year that is subject to no
withholding tax or other foreign tax must be treated as one item of
income. See Regulations section 1.904-4(c)(3)(iii).

iv

All passive income received during the tax year that is subject to no
withholding tax but is subject to foreign tax other than a withholding
tax must be treated as one item of income. See Regulations section
1.904-4(c)(3)(iv).

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

DRAFT AS OF
December 2, 2022

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

-33-

Tables for Example 16
Example 16
USP completes Schedule K-2, Part VIII, as follows.
A

1234

B

GEN

D

DRAFT AS OF
December 2, 2022
(i) Country Code

1
f

(ii) Partnership’s Share of Net Income

Subpart F income groups

Foreign base company sales income (total)

180u

(1)

CFC

AA

100u

(2)

CFC

BB

50u

Example 16 Attachment (Expansion)

USP attaches to Schedule K-2 the following schedule to expand line 1f to include another line under line 1f.
A

1234

B

GEN

D
(i) Country Code
1

Subpart F income groups

f

Foreign base company sales income (total)

(3)

CFC

(ii) Partnership’s Share of Net Income
180u

CC

30u

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))

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 16. 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
unit, the CFC itself, and no other separate units. CFC has
general category foreign source foreign base company 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 16.

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

Example 16 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 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 Schedule I (Form 1118). See the instructions for Part I,
box 2.

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

percentage. For a description of deductions that are not included
in the denominator, see Regulations section 1.59-2(e)(3)(ii).

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 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.

Section 2. 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 on 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.

DRAFT AS OF
December 2, 2022

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.

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.

General. For line 8, columns (b) and (c); line 9, columns (b) and
(c); line 10(a), columns (b) and (c); line 11, columns (b) and (c);
line 12, columns (b) and (c); line 13, columns (b) and (c);
line 14(a), columns (b) and (c); line 15, columns (b) and (c); and
line 16, columns (b) and (c), do not include amounts that a
partner does not take into account pursuant to the exception for
certain small partners. See Regulations section 1.59A-7(d)(2)
and Exception for small partners, earlier. For Schedule K-2, Part
IX, report the total allocated to all partners, and for
Schedule K-3, Part IX, report the amount allocated to each
individual partner. Do not complete section 2 if the partnership
has determined that no amounts were 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 any partner with
respect to which a deduction is allowable under chapter 1 and
for certain other items on lines 13 and 15. The partnership’s
determination that it has not made any base erosion payment
should be based on its collaboration with its partners to identify
any foreign related parties.

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. Complete lines 1c through 4c 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 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 8. Purchase or creation of property rights for intangibles (patents, trademarks, etc.).
Column (a). Enter the amount paid or accrued by the
partnership in connection with the acquisition or creation of
intangible property rights (patents, copyrights, trademarks, trade
secrets, etc.) that is subject to the allowance for depreciation (or
amortization in lieu of depreciation) for the tax year.
Column (b). Enter the amount paid or accrued to all foreign
persons that are a related party of any of the partners in
connection with the acquisition or creation of intangible property
rights (patents, copyrights, trademarks, trade secrets, etc.) that
is subject to the allowance for depreciation (or amortization in
lieu of depreciation).
Column (c). Enter the amount of the partners' base erosion
tax benefits attributable to deductions allowed under chapter 1
for the tax year for depreciation (or amortization in lieu of
depreciation) with respect to intangible property rights acquired

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

-35-

in the current or prior years from all foreign persons that are
related parties of any of the partners.

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 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 related parties 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.

DRAFT AS OF
December 2, 2022

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 related parties 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 related parties 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 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 related parties 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 related parties of any of the partners for the purchase of
tangible property.

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 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
related parties 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

Line 11. Interest expense.
Column (a). Enter the amount of interest paid or accrued by
the partnership for the tax year (excluding interest paid or
accrued in a prior year treated as paid or accrued in the current
year under section 163(j) or similar provisions).

Worksheet A
Interest Paid or Accrued by the Partnership
(a)
Total Interest Paid or Accrued in
the Current Year

(b)
Interest Paid or Accrued to Foreign
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)
(3) Interest Paid on all Other Liabilities
of the Partnership
Totals. Combine line (1) through line (3)

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

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.

reinsurance that reduces life insurance gross income) or section
832(b)(4)(A) (relating to amounts deducted from gross
premiums written on insurance contracts for return premiums
and premiums paid for reinsurance).
Column (c). Enter the amount of the partners’ base erosion
tax benefits attributable to premiums or other consideration as
described in section 59A(c)(2)(A)(iii) paid or accrued to any
foreign person that is a related party of any of the partners for
reinsurance.

DRAFT AS OF
December 2, 2022

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 related parties 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 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.

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.
Line 15. Payments reducing gross receipts made to surrogate foreign corporation.
Column (a). Enter the amount paid or accrued by the
partnership for the tax year to certain expatriated entities
described in section 59A(d)(4)(C)(i).
Column (b). Enter the amount paid or accrued to certain
expatriated entities that results in a reduction of the gross
receipts of the partnership. This amount includes payments to a
surrogate foreign corporation that is a related party to the
partner, but only if the entity first became a surrogate foreign
corporation after November 9, 2017. The amount also includes
payments to a foreign person that is a member of the same
expanded affiliated group, as defined in section 7874(c)(1), as
the surrogate foreign corporation. A surrogate foreign
corporation is defined in section 7874(a)(2)(B) but does not
include a foreign corporation that is treated as a domestic
corporation under section 7874(b).
Column (c). Enter the base erosion tax benefits attributable
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross receipts
of the partnership.

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)
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.
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.
Exception. A domestic partnership that is required to file a
partnership return is not required to complete Schedule K-3, Part
X, if it does not have any ECI and the partnership (or another
withholding agent) has met its withholding and reporting
obligations under chapters 3 and 4 with respect to its income.
A foreign partnership that is required to file a partnership
return is not required to complete Schedule K-3, Part X, if it
qualifies for the modified filing obligations under Regulations
section 1.6031(a)-1(b)(3)(iii) (foreign partnerships with U.S.
source income and U.S. partners), unless it has a domestic
pass-through partner that has a direct or indirect foreign owner,

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

-37-

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

DRAFT AS OF
December 2, 2022
%
%
%
%
%

Add the amounts in column E and enter the total on line 18, column (c)

beneficiary, or partner. An indirect owner, beneficiary, or partner
is one that owns an interest in the domestic pass-through partner
through a pass-through entity. The foreign partnership should
presume that a domestic pass-through partner has a foreign
owner, partner, or beneficiary if it does not have sufficient
information or notice to make this determination.

Note. Part X of Schedule K-3 need not be completed and
provided to partners who are United States persons (as defined
in section 7701(a)(30)) and not pass-through partners. A
pass-through partner is a partnership, estate, trust, S
corporation, nominee, or other similar person through whom
other persons hold an interest in the partnership. See former
section 6231(a)(9). Therefore, a partnership with one partner
that is a nonresident alien (as defined in section 7701(b)(1)(B))
and another partner that is a U.S. citizen need only provide the
Schedule K-3 to the nonresident alien partner. However, a
partnership must complete Schedule K-2 with all of the
partnership’s information and not just the total of the information
reported to the foreign partners on the Schedule K-3.

Note. A foreign partner does not include an individual who is
treated as a U.S. resident under section 7701(b)(3).
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.

Section 1. Gross Income

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.

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.

Example 17. 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 income 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 income. 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 source partnership
effectively connected items, any U.S. source FDAP income, 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.

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

Do not include gross rental real estate income in column
(c) on the Schedule K-2, Part X, that is not ECI to the
CAUTION 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.

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.

!

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-8ECI including U.S. source gross rental
real estate income that the foreign partner elected to treat as
ECI.

DRAFT AS OF
December 2, 2022

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 (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 are 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 income 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 income 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 income 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.

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.

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

-39-

• Interest (other than 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.

OID instrument or gain on the sale or exchange of the OID
instrument that are taxable on a gross basis to foreign partners
under section 881(a(3)(8) or section 871(a)(1)(C)(ii) (as
applicable), these amounts should be reported in column (e)
(U.S. source (FDAP)) as interest income or gain, as appropriate.
These amounts should also be entered as a negative adjustment
in column (f) to ensure that the total OID reported on Part X
reconciles with OID reported on Schedule K (Form 1065). Attach
a statement explaining that the negative adjustment in column (f)
is for reconciliation purposes only and is not relevant to the
foreign partner’s tax liability and therefore need not be reported
on the foreign partner’s tax return. The partnership should take a
similar approach for reporting distributive share amounts to a
foreign partner on Schedule K-3.

DRAFT AS OF
December 2, 2022

Example 18. In addition to other income and expense items,
a partnership accrues $100 OID in Year 1 reported on
Schedule K (Form 1065). On Part X of Schedule K-2 for Year 1,
the partnership should report this amount as interest in column
(f) (such amount is also included in column (a) for the total). In
Year 2, the partnership receives a payment of $50 on the same
instrument taxable to its foreign partners under section 881(a)(3)
(B) or section 871(a)(1)(C)(ii) (as applicable). On Part X of its
Schedule K-2 for Year 2, the partnership should report $50 as
interest in column (e) and ($50) as a reconciliation adjustment in
column (f). The partnership should take the same approach for
reporting a foreign partner’s distributive share of OID amounts
on Schedule K-3 in both Years 1 and 2.

If the partnership had U.S. source rental real estate
income that was not ECI to the partnership, include such
CAUTION 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.

!

Column (g). Foreign source non-ECI. For each line, enter
amounts of gross income which are neither U.S. source nor ECI.
Line 11. Net long-term capital gain. Do not include gains
reported on lines 12, 13, and 14 on line 11.
Line 12. Collectibles (28%) gain. Report collectibles gain on
line 12 and not line 11.

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-8ECI or rental real estate income which a foreign partner has
elected to treat as ECI. That income should instead be reported
in column (c).

Line 13. Unrecaptured section 1250 gain. Report
unrecaptured section 1250 gain on line 13 and not on line 11. If
gain is both unrecaptured section 1250 gain and net section
1231 gain, report the gain on line 13 and not on line 14, but
include an attachment indicating the amount of unrecaptured
section 1250 gain that is also net section 1231 gain.
Line 14. Net section 1231 gain. Report net section 1231 gain
on line 14 and not on line 11 unless such amount is also
unrecaptured section 1250 gain. See the instructions for line 13.

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 described in the
instructions for Form 1040-NR, line 23c. If you owe this tax, you
must attach a statement to your return that includes the
information described in chapter 4 of Pub. 519.

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 allocated and
apportioned 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 (Form 1120-F). See also
Schedule I (Form 1120-F). For additional guidance for
nonresident aliens, see the Instructions for Form 1040-NR.

Accrued OID reported on Form 1065. The amount of
accrued OID reported on Schedule K (Form 1065) which is not
taxable to foreign partners should be reported as interest income
in column (f) (U.S. source (other)) of Schedule K-2, Part X.
Attach a statement to Form 1065 with respect to Part X clarifying
that these amounts are not taxable to foreign partners and need
not be reported on the foreign partner’s tax return. The
partnership should take a similar approach for reporting a foreign
partner’s distributive share of OID amounts on Schedule K-3.

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.

OID payments or gains taxable on a gross basis to a foreign partner. When the partnership receives payments on the
-40-

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

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.

Line 1a. Gross ECI. Enter the partnership’s gross ECI from
Section 1, line 21, sum of columns (c) and (d).

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.

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 its average U.S. assets for purposes of
applying the asset method as defined in Regulations section
1.884-1(d)(3)(ii) to calculate interest expense under Regulations
section 1.882-5(b).

DRAFT AS OF
December 2, 2022

Do not include deductions attributable to gross rental
real estate income in column (c) on the Schedule K-2,
CAUTION 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.

!

Line 2b. Worldwide assets. Report the partnership’s basis in
its average worldwide assets for purposes of Regulations
section 1.882-5(b) and the asset method as defined in
Regulations section 1.884-1(d)(3)(ii). If the partnership does not
report an amount on line 2a because there are no U.S. assets,
then the partnership need not report an amount on line 2b.

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.

Line 3a. U.S.-booked liabilities of the partnership. Enter
the partnership's average U.S.-booked liabilities as defined in
Regulations section 1.882-5(d)(2) using the average defined in
Regulations section 1.882-5(d)(3).

Line 2. R&E expense. In general, R&E expenses are allocated
and apportioned by the partner and reported in column (b).

Line 3b. Directly allocated partnership indebtedness.
Enter the portion of the principal amount of the partnership’s
indebtedness outstanding at year end that meets the
requirements of Regulations section 1.861-10T(b) or (c), as
limited by Regulations section 1.861-10T(d)(1), as described in
Regulations section 1.882-5(a)(1)(ii)(B). See Regulations
section 1.861-10T(d)(2).

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 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 12. Net long-term capital loss. Do not include losses
reported on line 13.
Line 13. Collectibles loss. Report collectibles loss on line 12
and not on line 13.
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 5. A partnership is not required to complete this line 5
unless either (1) the partnership incurs R&E expense; or (2) the
partner is expected to license, sell, or transfer its intangible
property to the partnership (as provided in Regulations section
1.861-17(f)(3)). 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. 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.

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 Schedule H (Form 1120-F), Part III.

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

Lines 7 and 8. Report other apportionment keys than those
identified on lines 1 through 5, as applicable. See, for example,
-41-

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 0.12344, the reported amount should be 0.1235.

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. As another example, a partnership might enter average
ECI assets in column (i), line a, and the average total assets in
column (i), line b. The average ECI assets are the partnership’s
basis in its assets that generate ECI for purposes of Regulations
section 1.861-9T(e)(7) using the average tax book value as
defined in Regulations section 1.861-9(g). The average total
assets are the partnership’s basis in all of its assets for purposes
of Regulations section 1.861-9T(e) using the average tax book
value as defined in Regulations section 1.861-9(g). If the
partnership does not have assets that generate ECI, then a
partnership need not report an amount on line 7b, unless the
partner has requested this amount. 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.

DRAFT AS OF
December 2, 2022
Schedule K-3, Part XIII (Foreign Partner's
Distributive Share of Deemed Sale Items on
Transfer of Partnership Interest)

Section 4. Reserved

Note. Certain partners will use the following information to
complete Form 4797, Form 6252, and Form 8949.

Schedule K-2, Part XI (Section 871(m) Covered
Partnerships), and Schedule K-3, Part XI
(Section 871(m) Covered Partnerships)

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.

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.

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.

Schedules K-2 and K-3, Part XI, must be completed if you are
a PTP that (1) is a covered partnership as defined in Regulations
section 1.871-15(m)(1) (a "covered partnership"); or (2) directly
or indirectly holds an interest in a lower-tier partnership that is a
covered partnership, in each case regardless of whether your
partners are domestic or foreign.
Line 1. If the partnership is a PTP and (1) a covered
partnership or (2) directly or indirectly holds 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.

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 a U.S. trade or business, then
the upper-tier partnership must include in the foreign transferor’s
aggregate deemed sale ECI 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

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, the dividend equivalents, and the total of
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2022)

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 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.

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 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.

DRAFT AS OF
December 2, 2022

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.

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.

Item B. Identify the number of units or the percentage interest in the partnership transferred. Enter either 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. Complete a
separate schedule for each type of partnership interest (such as
capital or preferred) transferred, and complete each schedule
based on the portion of the type of interest transferred. If there
are multiple classes of the same type of partnership interest,
complete a separate schedule for each class of interest
transferred. If the categories in Item C are not narrow enough to
distinguish between different classes, then check other and
explain.

Line 5. Check this box if the amount provided on line 2 or 3
is determined (in whole or in part) under Regulations 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.

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

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

-43-

Index

A

Example 18 40
Exception for Form 8621 9
Excluded foreign source income 31

Base erosion and anti-abuse tax
(Section 59A) 34
Base erosion payments and base
erosion tax benefits 35
BEAT example 3

C

P

DRAFT AS OF
December 2, 2022

Allocation and apportionment
methods for deductions 41

B

Other tax information 19

Capital gains and losses 14
Category of income codes 31
Charitable contributions 15, 41
Codes for categories of income 26
Codes for classes of PFIC shares 27
Codes for types of tax 18
COGS 22
Compensation/consideration paid for
services excepted by section
59A(d)(5) 36
Compensation/consideration paid for
services NOT excepted by section
59A(d)(5) 36
Computer-generated Schedules
K-2 4
Country codes 7, 13
Currency 5

D
Deductions 14
Deductions, other 15
DEI and QBAI on Form 8993 21
Distributions from foreign corps. to
partnership 23
Dividends, ordinary and qualified 13
Domestic filing exception 3
Downstream loans 9
Dual consolidated loss 10

E
EIN 5
Example 01
Example 02
Example 03
Example 04
Example 05
Example 06
Example 07
Example 08
Example 09
Example 10
Example 11
Example 12
Example 13
Example 14
Example 15
Example 16
Example 17

3
4
4
4
7
10
11
11
13
14
16
18
20
22
32
34
38

F

FDII deduction apportionment
factors 17
Foreign branch category income 12
Foreign oil and gas taxes 6
Foreign partner’s distributive share of
deemed sale items 42
Foreign partners’ character and
source of income and
deductions 37
Foreign tax translation 7
Foreign taxes 15
Foreign taxes deductible but not
creditable 18
Foreign taxes paid or accrued to
sanctioned countries 18
Foreign taxes related to PTEP
resourced by treaty 18
Foreign-derived DEI on Form 8993 22
Foreign-derived gross receipts 22
Form 1116 exemption exception 10
Form 5471 information 9
Form 8621, information for 27
Form 8858 information 9
Form 8990 9

G
Gains on sales personal property 6
General filing instructions 12
General property 22
Gross income 13
Gross receipts 22

H
High-taxed income 7
How to complete Sch. K-2 and K-3 5

I
Identifying info., partners 6
Identifying info., partnership 5
Income resourced by treaty 12
Interest expense apportionment
factors 16
Interest expense on U.S. booked
liabilities 41
Interest expense specifically
allocable under Reg. 1.861–10
and -10T 15

N
Name of partnership 5
Net income (or loss) 40

O
Other forms 9
Other income 14
Other information for preparation of
Form 8993 22
Other international transactions 6, 10
-44-

Part applicability 6
Partner determination 13
Partner loan transactions 9
Partners eligible to claim credit 10
Partnership determination 12
Partnership election codes 28
Partnership QBAI 21
Partnership’s interest in foreign
corporation 30
Partnerships with no foreign partners
and limited or no foreign
activity 10
Parts of Sch. K-2 and Sch. K-3, in
general 5
Passive group codes 32
PFIC, QEF general information 27
Purchase or creation of property
rights for intangibles 35

Q
Qualified derivatives dealer 5

R
R&E expense apportionment
factors 15
R&E expenses 15
Rental income 13
Rents, royalties, and license fees 36

S
Section 1291 and other
Information 29
Section 250 deduction re FDII 20
Section 267A disallowed deduction 7
Section 59(e)(2) expenditures 41
Section 871(m) covered
partnerships 42
Section 901(j) income 12
Section 951(a) inclusions 14
Section 951(a)(1) and section 951A
inclusions 25
Section 951A category income 12
Section 986(c) gain and loss 14
Section 987 gain and loss 14
Section 988 gain and loss 14
Splitter arrangements 6
Stewardship expenses 16

T
Table 1. Information on Personal
Property Sold 6
Table 4. Additional Information for
Section 1, Part VII 28
Table 5. Additional Information for
Section 2, Part VII 30
Taxes assigned to section 951A
category 18
Tiered partnerships 42
Total deductions 34
Total gross income 14

U
Upstream loans 9

W
When to file 4

Where to file 4
Withholding foreign partnership 5
Worksheet A, Interest Paid or
Accrued by the Partnership 36
Worksheet B, Part IX, Sec. 2, line 18,
col. (c) 38

Worksheets 1 and 2 for Sch. K-2 8
Worksheets 3 and 4 for Sch. K-2 and
Sch. K-3 24

DRAFT AS OF
December 2, 2022

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