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

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2023

Department of the Treasury
Internal Revenue Service

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

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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.

indirect) needs to complete Form 8858 with respect to a foreign
branch or foreign disregarded entity owned by the partnership.

Contents

Part 1, box 11. Certain partnerships are now required to report
information concerning dual consolidated losses with Schedules
K-2 and K-3.

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

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Future Developments

Part I, box 13. The new qualified intermediary agreement in
Rev. Proc. 2022-43 (the QIA), 2022-52 I.R.B. 570, applies
beginning January 1, 2023, including to qualified intermediaries
that are qualified derivatives dealers (QDDs) as defined under
the QIA. For more information, see the note, later.
Part II. Amounts may now be entered in lines 41 through 43,
columns (a) through (e), with respect to interest expense.

Part VIII. Part VIII includes two new columns: (i) the foreign
corporation's total net income, and (ii) the foreign corporation's
current year foreign taxes for which credit is allowed. Part VIII
also requests the functional currency of the foreign corporation.
These additions will allow the preparer to include all information
necessary for the section 960 computation on Part VIII without
attaching Schedule Q (Form 5471).
Part XIII. New lines have been added to Part XIII to provide
additional information a nonresident alien, foreign trust, or
foreign estate needs to complete Schedule P (Form 1040-NR)
to report information and calculate gain or loss on the transfer
of an interest in a partnership that directly or indirectly is
engaged in the conduct of a trade or business within the United
States.
Domestic filing exception. A domestic filing exception that
allows an exception for filing and furnishing Schedules K-2 and
K-3 applies for 2023. See Domestic Filing Exception, later.

General Instructions
The Instructions for Form 1065 and Instructions for
Schedule K-1 (Form 1065) generally apply to Schedules K-2
and K-3. These instructions provide additional information
needed to complete Schedules K-2 and K-3 for tax years
beginning in 2023.

Purpose of Schedules K-2 and K-3

What’s New

Schedule K-2 is an extension of Form 1065, Schedule K, 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 shares 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.

Part I, box 7, reserved. Box 7 requiring attachment of Form
8858 has been reserved. Instead, box 13 now requires, in
certain instances, information that a partner (whether direct or

Any partnership required to file Form 1065 that has items
relevant to the determination of the U.S. tax or certain

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.

Nov 28, 2023

Who Must File

Cat. No. 74375Q

remaining 50% interest in USP. DC’s investment in USP doesn't
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 aren't 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, Tax on Base Erosion
Payments of Taxpayers With Substantial Gross Receipts, to
compute its base erosion minimum tax amount (if any);
therefore, USP must complete the relevant portions of
Schedules K-2 and K-3, Part IX.

withholding tax or reporting obligations of its partners under the
international provisions of the Internal Revenue Code (the
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.

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Except as otherwise required by statute, regulations, or other
IRS guidance, a partnership isn't required to obtain information
from its direct or indirect partners to determine if it needs to file
each of these parts.
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 doesn't 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 isn't required to
complete Schedules K-2 and K-3, Parts V, VI, VII, and VIII.

Domestic Filing Exception (Exception to Filing
Schedules K-2 and K-3)

Schedules K-2 and K-3 consist of the most common
international tax provisions of the Code. However, not all
provisions are specifically identified on these schedules. To the
extent that an international provision is impacted and isn't
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).

A domestic partnership (as defined under sections 7701(a)(2)
and (4)) doesn't need to (a) complete and file Schedules K-2
and K-3, or (b) furnish to a partner 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 2023.

1. No or limited foreign activity. During the domestic
partnership’s tax year 2023, 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)); or (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).

Note. A partnership that is, or has a branch that is, a QDD (a
QDD partnership) must file Form 1065 even if it wouldn’t be
required to file if it wasn’t a QDD partnership and must attach a
statement to its Form 1065 with certain required information as
provided in section 7.01(C) of the QIA. If the QDD partnership is
filing Form 1065 solely because it’s a QDD partnership and
wouldn’t otherwise be required to file Form 1065, then the QDD
partnership isn’t required to complete Schedules K-2 and K-3.
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, Foreign Tax Credit; or
Form 1118, Foreign Tax Credit—Corporations. 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
(PTP) as defined in section 7704(b) with no foreign activity or
foreign partners may need to complete Part XI. See each part
for applicability.

2. U.S. citizen/resident alien partners. During tax year 2023,
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 decedents’ estates (that is,
decedents’ estates that aren't 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 aren't
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

Example 1—Part IX required to determine base erosion
payments. 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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

1-month date, the partnership is required to provide
Schedule K-3, completed with that partner’s requested
information, on the later of the date on which the partnership
files Form 1065 or 1 month from the date on which the
partnership receives the request from the partner. See
Examples 3 and 4, later.

subject to tax under section 641 that aren't 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 limited liability
companies (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).

Example 2—domestic filing exception met; issuance of
Schedule K-3 not required. A married couple, U.S. citizens,
each own a 50% interest in USP, a domestic partnership. USP
and the married couple have a tax year end of December 31.
USP invests in a regulated investment company (RIC). With
respect to tax year 2023, USP receives Form 1099 from the
RIC reporting $100 of creditable foreign taxes paid or accrued
on passive category foreign source income. USP doesn't have
any foreign activity other than that from the RIC. The married
couple receive notification from USP on an attachment to
Schedule K-1 that they won't receive Schedule K-3 unless they
request it. The married couple don't request Schedule K-3 from
USP for tax year 2023. USP qualifies for the domestic filing
exception, and, as such, USP doesn’t need to complete
Schedules K-2 and K-3.

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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 Schedule K-1. The notification must state that
partners won't receive Schedule K-3 from the partnership
unless the partners request the schedule.

4. No 2023 Schedule K-3 requests by the 1-month date. The
partnership doesn't 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 2023 calendar year partnerships,
the latest 1-month date is August 15, 2024, if the partnership
files an extension. Any request from a partner for Schedule K-3
information for a year prior to tax year 2023 will be considered a
request for a tax year 2023 Schedule K-3 as well.

Example 3—domestic filing exception not met. The facts
are the same as in Example 2, except that each spouse owns 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 2023
and USP receives this request on February 1, 2024. After
requesting an extension, USP files Form 1065 on August 31,
2024. USP doesn't qualify for the domestic filing exception
because A requested the Schedule K-3 by the 1-month date
(July 31, 2024). As such, USP must complete and file the parts
and sections of Schedules K-2 and K-3 that are relevant to A.
With respect to Schedules K-2 and K-3, USP doesn't need to
complete, attach, or file any parts or sections relevant to the
married couple. USP must provide a copy of the filed
Schedule K-3 to A on the date that USP files its Form 1065.
USP doesn't need to furnish Schedule K-3 to the married
couple.

Note. If a partnership receives a request from a partner for
Schedule K-3 information after the 1-month date for tax year
2023 and hasn't received a request from any other partner for
Schedule K-3 information on or before the 1-month date, the
domestic filing exception is met and the partnership isn't
required to file the tax year 2023 Schedules K-2 and K-3 or
furnish the tax year 2023 Schedule K-3 to the non-requesting
partners. However, the partnership is required to provide the tax
year 2023 Schedule K-3, completed with the requested
information, to the requesting partner on the later of the date on
which the partnership files Form 1065 or 1 month from the date
on which the partnership receives the request from the partner.
See Example 4, later. The partnership must complete and file
tax year 2024 Schedules K-2 and K-3 with respect to the
requesting partner by the tax year 2024 Form 1065 filing
deadline if that partner is still a partner in tax year 2023.

Example 4—domestic filing exception met; Schedule K-3
issuance still required. The facts are the same as in
Example 3, except that USP receives the request from A on
August 20, 2024. USP qualifies for the domestic filing exception
because A requested Schedule K-3 after the 1-month date.
USP isn't required to file the tax year 2023 Schedules K-2 and
K-3 or furnish Schedule K-3 to the married couple. However,
USP is required to provide Schedule K-3, completed with the
requested information, to A on September 20, 2024, the later of
the date on which USP files Form 1065 or 1 month from August
20, 2024. Because A requested Schedule K-3 for tax year 2023,
USP must file tax year 2024 Schedules K-2 and K-3 with
respect to the information requested by A to the extent that A is
still a partner in tax year 2024.

Note for partnerships that satisfy criteria 1 through 3, but
don't 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 doesn't satisfy
criterion 4, the partnership is required to file Schedules K-2 and
K-3 and furnish Schedule K-3 to the requesting partner.
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, 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, the partnership must provide a copy of
the filed Schedule K-3 to the requesting partner. The
partnership doesn't need to complete, attach, file, or furnish any
other parts or sections of 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, later.
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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Note. If a partnership doesn't meet the domestic filing
exception, it may meet the Form 1116 exemption exception to
filing Schedules K-2 and K-3.

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 Schedule K-1. See the
Instructions for Form 1065.
Also, see the Instructions for Form 1065 for recordkeeping
requirements and amendments or adjustments to Schedules
K-2 and K-3.

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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
Form 8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund, and to
provide partners with information to determine income
inclusions with respect to the passive foreign investment
company (PFIC).
Part VIII of Schedule K-2 (and Part VIII of Schedule K-3).
Used to provide the foreign corporation's net income in the
income groups for purposes of the partner's deemed paid taxes
computation with respect to inclusions under sections 951A,
951(a)(1), and 1293(f). Partners will use the information to
figure and claim a deemed paid foreign tax credit on Form
1118.
Part IX of Schedule K-2 (and Part IX of Schedule K-3).
Used to provide information for the partner to figure its BEAT.
Partners will use the information to complete Form 8991.
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 Form
1040-NR, U.S. Nonresident Alien Income Tax Return; and Form
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 Form 1042, Annual
Withholding Tax Return for U.S. Source Income of Foreign
Persons; and Form 1042-S, Foreign Person's U.S. Source
Income Subject to Withholding.
Part XII. Reserved for future use.
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
this information as follows. A partner that:
• Is a nonresident alien individual, foreign trust, or foreign
estate completes Schedule P (Form 1040-NR), Foreign
Partner’s Interests in Certain Partnerships Transferred During
Tax Year;
• Is a foreign corporation completes Schedule P (Form
1120-F), List of Foreign Partner Interests in Partnerships, Parts
IV and V;
• Is a foreign partnership completes Form 4797, Sales of
Business Property; and Form 8949, Sales and Other
Dispositions of Capital Assets, as needed; or

Computer-Generated Schedules K-2 and K-3
If a computer-generated Schedule K-2 or Schedule K-3
conforms to and doesn't deviate from the official form and
schedules, it may be filed with 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 doesn't need to go through the approval process, and an
attachment isn't necessary.

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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/pub/irs–pdf/p1167. For purposes of
Schedules K-2 and K-3, the procedures relevant to Form 1065
and Schedule K-1 (Form 1065) should be conformed with, to
the extent possible.

How To Complete Schedules K-2 and K-3

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

References to other forms. References in these instructions
to Form 1040, U.S. Individual Income Tax Return, are intended,
if applicable, to include Form 1040-SR, U.S. Tax Return for
Seniors, as well as other tax returns for noncorporate partners
such as Form 1041, U.S. Income Tax Return for Estates and
Trusts. Similarly, references to Form 1120, U.S. Corporation
Income Tax Return, are intended, if applicable, to apply to other
forms in the 1120 series. References to forms which have been
replaced are intended, if applicable, to include the replacement
forms.

Uses of the parts of Schedules K-2 and K-3, in general.
Part I of Schedule K-2 (and Part I of Schedule K-3). Used
to report international tax items not reported elsewhere on
Schedule K-2 or K-3.
Part II of Schedule K-2 (and Part II of Schedule K-3). Used
to figure the partnership’s income or loss by source and
separate category of income; and to report the partner’s
distributive share of such income or loss. Partners will use the
information to figure and claim a foreign tax credit on Form
1116 or 1118.
Part III of Schedule K-2 (and Part III of Schedule K-3).
Used to report information necessary for the partner to
determine the allocation and apportionment of research and
experimental (R&E) expense, interest expense, and the 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. Additionally,
it’s 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’s
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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

• Had an installment sale, see Form 6252, Installment Sale
Income.

• 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 aren’t 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 8 and 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 box 11 to determine any dual
consolidated losses which may not be deducted on Form 1120.
This part is used to report information for international tax
items not reported elsewhere on 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 Schedule K-2. If applicable, the
partnership must also complete Schedule K-3, Part I, and
include with Schedule K-3 the attachment(s) as described
below with the partner's distributive share of the amounts.

Specific Instructions
If the information required in a given section exceeds
the space provided within that section, don't enter “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 portions of Schedules K-2 and K-3. The additional
sheets must conform to the IRS version of that section.

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Schedule K-2, Identifying Information

At the top of each new page, enter the name of the partnership
and the employer identification number (EIN) of the partnership
as they appear on 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.

Box 1. Gain on personal property sale. In general, income
from the sale of personal property is sourced according to the
residence of the seller; see section 865. For sourcing purposes,
personal property sold by the partnership is treated as sold by
the partners; see section 865(i)(5). A U.S. citizen or resident
alien individual with a tax home (as defined in section 911(d)(3))
in a foreign country is treated as a nonresident with respect to
the sale of personal property only if an income tax of at least
10% of the gain derived from the sale is actually paid to a
foreign country with respect to that gain; see section 865(g). In
addition, if a U.S. resident maintains an office or other fixed
place of business in a foreign country, income from the sale of
personal property attributable to such office or other fixed place
of business is foreign source only if an income tax of at least
10% of the income from the sale is actually paid to a foreign
country with respect to such income; 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 Schedules K-2 and
K-3 (for distributive share) reflecting all the information shown in
Table 1. Each item of property sold must be listed separately
with the information shown in Table 1. The partnership may
combine sales of stock property by country. Otherwise, don't
combine sales of property. If the gain is capital, enter
“long-term” or “short-term” in column (b). Enter the two-letter
code from the list at IRS.gov/CountryCodes in column (f). Don't
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.

Item B—Qualified derivatives dealer (QDD). If the
partnership (including the home office or any branch) is a QDD,
check the “Yes” box. Otherwise, check the “No” box.
If the “Yes” box is checked, provide the partnership's
qualified intermediary employer identification number (QI-EIN).

Item C—Part applicability. Check the “Yes” box to indicate the
applicable parts of Schedules K-2 and K-3. Complete each
applicable part.
Check the “No” box to indicate the inapplicable parts of
Schedules K-2 and K-3. Don't complete, file, or attach to Form
1065 or Schedule K-3 the inapplicable parts.

Schedule K-3, Identifying Information
Items A and B. Items A and B should be the same as reported
on Schedule K-1, Part I, items A and B.
Items C and D. Items C and D should be the same as reported
on Schedule K-1, Part II, items E and F.
Item E. Item E should correspond to Schedule K-2, 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.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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Table 1. Information on Personal Property Sold (For use with Schedules K-2 and 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

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

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

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• Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement.
• Amount of related income on which such taxes were paid or
accrued.
• The two-letter code for the country to which the taxes were
paid or accrued from the list at IRS.gov/CountryCodes. Don't
enter “various” or “OC” for the country code.
• The separate category and source of income to which the
taxes are assigned if determinable by the partnership.
Section 2 of attached statement—potentially
unsuspended taxes.
• Origin year of the splitter arrangement.
• Explanation of the splitter arrangement (for example, reverse
hybrid owned by the partnership).
• Amount of taxes paid or accrued by the partnership in
connection with the splitter arrangement in the origin year of the
splitter arrangement.
• Amount of related income on which such taxes were paid or
accrued in the origin year of the splitter arrangement.
• The two-letter code for the country to which the taxes were
paid or accrued from the list at IRS.gov/CountryCodes. Don't
enter “various” or “OC” for the country code.
• The separate category and source of income to which the
taxes are assigned if determinable by the partnership.
• Amount of related income taken into account in the current
tax year and the amount of taxes originally paid that relate to
that portion of the related income if determinable by the
partnership.

Box 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),
Reduction of Foreign Oil and Gas Taxes, to Schedules K-2 and
K-3 (with the partner’s distributive share). The partnership
doesn’t need to complete Schedule I (Form 1118), 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.
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 isn't 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
can't claim a foreign tax credit.

Box 3. Splitter arrangements. Foreign taxes with respect to a
foreign tax credit splitting event are suspended until the related
income is taken into account by the taxpayer; see section 909.
There is a foreign tax credit splitting event with respect to
foreign taxes of a payor if in connection with a splitter
arrangement, as defined in Regulations section 1.909-2(b), the
related income was, 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.
Check box 3 and attach a statement to Schedules K-2 and
K-3 that includes the following for each splitter arrangement in
which the partnership participates that would qualify as a
splitter arrangement under section 909 if one or more partners
are covered persons with respect to an entity that took into
account related income from the arrangement.
Section 1 of attached statement—potentially suspended
taxes.
• Explanation of the splitter arrangement (for example, reverse
hybrid owned by the partnership).

Box 4. Foreign tax translation. Check box 4 if the partnership
reports any foreign taxes on Schedules K-2 and K-3, Part III,
Section 4. Attach the statement described in the instructions for
those sections to Schedules K-2 and K-3.
Box 5. High-taxed income. Check box 5 if the partnership
has passive income and attach a statement to Schedules K-2
and K-3 with Worksheet 1 or Worksheet 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 isn't 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 QBU (as defined in section 989(a)), other
than a 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 isn't 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).

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Worksheet 1 for Schedule K-2, Part 1, Box 5
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

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Reference: Regulations section 1.904-4(c)(3).

Worksheet 2 for Schedule K-2, Part 1, Box 5
Name of foreign QBU:

Complete a separate Worksheet 2 for each foreign QBU.
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

I. Passive Income Net of Allocable Expenses

II. Taxes

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

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 Schedule K-2 (Form 1065),
Part I, and attaches Worksheet 1 and Worksheet 2 to
Schedule K-2.

Example 5—Part I, box 5; high-taxed income. 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 isn't subject to foreign tax. No expenses are allocable to
the dividend income. USP’s branch operation in Country X is
treated as a QBU under section 989(a), receives $100 of

Example 5. Worksheet 1
I. Passive Income Net of Allocable Expenses

II. Taxes

A

Passive income subject to withholding tax of 15% or more

$170

$60

B

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

0

0

C

Passive income not subject to any foreign tax

50

0

D

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

0

0

I. Passive Income Net of Allocable Expenses

II. Taxes

$100

$15

Reference: Regulations section 1.904-4(c)(3).

Example 5. Worksheet 2
Name of foreign QBU: Country X QBU
Complete a separate Worksheet 2 for each foreign QBU.
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

0

0

C

Passive income not subject to any foreign tax

0

0

D

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

280

40

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

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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This includes, but isn't limited to, the following forms.

USP completes the same worksheets with the distributive
shares and attaches those worksheets to each Schedule K-3
provided to the partners.

• Form 5713, International Boycott Report.
• Form 8833, Treaty-Based Return Position Disclosure Under

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 aren't allowed a deduction under section 267A.
See the instructions for Form 1065, Schedule B, line 22, and
FAQs for section 267A at IRS.gov/businesses/partnerships/
faqs-for-Form-1065-Schedule-B-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 check box 6 in Part I of the
specific partner’s Schedule K-3 and attach to Schedule K-3 a
statement titled “Section 267A Disallowed Deduction” that
separately lists the following information.
• The amount of interest paid or accrued by the partnership for
which the partner isn't allowed a deduction under section 267A.
• The amount of royalty paid or accrued by the partnership for
which the partner isn't allowed a deduction under section 267A.
• The extent to which information reported on other parts of
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
isn't allowed a deduction under section 267A.

Section 6114 or 7701(b).
• Form 8621.
Exception for Form 8621. With respect to Schedule K-3,
the partnership should check box 9 if the partnership checked
box 9 on Schedule K-2. The partnership should indicate in an
attachment to Schedule K-3 that Form(s) 8621 is attached to
Schedule K-2. The partnership doesn’t need to attach Form
8621 to Schedule K-1 or K-3.
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.
Withholding tax returns. Don’t include any withholding tax
returns required to be filed under chapters 3 and 4 (sections
1441 through 1474).
See Other Forms, Returns, and Statements That May Be
Required in the Instructions for Form 1065.

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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.

If the partnership attached any of the forms identified in

!

TIP box 8 or box 9 to Form 1065, the partnership doesn’t
need to attach them again to Schedule K-2.

Box 10. Partner loan transactions. Check box 10 and attach
a statement with the information in the applicable Table 2 or
Table 3 if 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 on separate
lines for each separate loan. The reporting should be as follows
in Table 2.

Note for boxes 8 and 9. If the filer meets an exception, such
as the multiple filer exception, to filing Form 5471, Information
Return of U.S. Persons With Respect to Certain Foreign
Corporations; or Form 8865, Return of U.S. Persons With
Respect to Certain Foreign Partnerships, the filer isn't required
to complete and attach those forms. However, the filer must still
attach to Form 1065 any required statements to qualify for the
exception to filing Form 5471 or Form 8865.

Box 8. Form 5471 information. Check box 8 and attach
Form(s) 5471 to Form 1065 and Schedule K-1 (Form 1065) if
either of the following apply.
• The partnership filed one or more Forms 5471.
• The partnership received Form(s) 5471 as an attachment to
a Schedule K-3 issued to the partnership,
Form 5471 doesn't need to be attached to Schedule K-1 or
K-3 if the partnership knows or has reason to know that its
direct partner (and any indirect partners) doesn't need the
information on Form 5471 to prepare its tax return. For
example, the partnership wouldn't need to attach Form 5471 to
Schedules K-3 for certain tax-exempt partners. A pass-through
entity partner that receives Form 5471 with Schedule K-1 or
Schedule 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)
doesn't need the information on the Form 5471 to prepare its
tax return.
If a partner only needs certain information from Form 5471,
such as Schedule Q, the partnership needs only to attach that
portion to Schedule K-3 and not the complete Form 5471.

Table 2. Downstream Loans
Name of

Lender’s

Date

Amount

Interest

Lender

TIN

of

of

Expense

Loan

Loan

for the
Year

If there are any partners in the same affiliated group as the
lender, attach to each of the Schedules K-2 and K-3 a
statement to expand the columns in the table to include the
information requested in the first two columns for each such
partner.
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 on separate lines for each
separate loan. The reporting should be as follows in Table 3.

Box 9. Other forms. Check box 9 and attach any applicable
forms to Form 1065 and Schedule K-1 if any of the following
apply.
• The partnership filed any other international tax forms.
• Another person filed these forms on behalf of the
partnership.
• The partnership received these forms as an attachment to
Schedule K-1 or Schedule K-3 issued to the partnership.
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Regulations section 1.6038B-2(a)(2) but didn't file Schedule O
(Form 8865), Transfer of Property to a Foreign Partnership,
containing all the information required under Regulations
section 1.6038B-2, with respect to the transfer, then 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 shouldn’t be checked on
Schedule K-2.

Table 3. Upstream Loans
Name of

Borrower’s

Borrower

TIN

Date

Amount

Interest

of

of

Income

Loan

Loan

for the
Year

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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
Code and such events aren't 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.
Don't report with respect to box 13 any withholding tax
returns required to be filed under chapters 3 and 4 (sections
1441 through 1474). These forms are separately filed with the
IRS.
Do report with respect to box 13 the following.
• 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 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.
• Information that a partner (whether direct or indirect) needs
to complete Form 8858 with respect to a foreign branch or
foreign disregarded entity owned by the partnership, if section
987 is applied to the activities of the foreign branch or foreign
disregarded entity using a method that requires the partner,
rather than the partnership, to recognize section 987 gain or
loss.

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

Box 11. Dual consolidated loss. Check box 11 if either the
reporting partnership (a) 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) is a hybrid entity (as defined in Regulations section
1.1503(d)-1(b)(3)). However, box 11 should only be checked if
the reporting partnership knows that one or more of its direct or
indirect partners are domestic corporations (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 sections
1.1503(d)-1 through 1.1503(d)-8.
If box 11 is checked, a reporting partnership should include
in attachments to the Schedule K-2 and the Schedules K-3 of a
partner that is either a domestic corporation or a partnership
the following.
• The foreign country in which each foreign branch is located.
• The foreign country in which each hybrid entity is subject to
an income tax either on their worldwide income or on a
residence basis.
• For each foreign branch and hybrid entity, including if the
reporting partnership owns an interest in a partnership that
owns a foreign branch or hybrid entity:
1. On Schedules K-2, separately state the net income or
loss attributable to each direct and indirect foreign branch or
hybrid entity of the partnership, as determined under
Regulations section 1.1503(d)-5(c); and
2. On Schedule K-3, for each partner that is a domestic
corporation or a partnership, separately state the partner's
distributive share of the net income or loss of each direct and
indirect foreign branch or hybrid entity of the partnership.
• Whether a foreign use (as described in Regulations section
1.1503(d)-3 and determined as if a net loss attributable to a
partnership separate unit were a dual consolidated loss)
occurred during the tax year with respect to a net loss of a
partnership separate unit.
• Whether a transfer of assets (as described in Regulations
section 1.1503(d)-6(e)(1)(iv)) or a transfer of an interest in a
separate unit (as described in Regulations section
1.1503(d)-6(e)(1)(v)) occurred during the tax year with respect
to a foreign branch or hybrid entity.
• The organizational chart described in item 5 of Form 8858.
• If a foreign disregarded entity made its election to be treated
as disregarded from its owner during the tax year, whether the
tax owner claimed a loss with respect to stock or debt of the
foreign disregarded entity as a result of the election.

Schedule K-2, Parts II and III, and Schedule K-3,
Parts II and III
Certain partners will use the following information to claim and
figure a foreign tax credit on Form 1116 or 1118. If the
partnership doesn't qualify for the domestic filing exception,
Schedules K-2 and K-3, Parts II and III, must be completed
unless (a) the partnership doesn't 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 Form 1116 or 1118
to claim the foreign tax credit.
Partners eligible to claim credit. A partner that’s 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, an 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 aren't required to file Form 1116 (Form 1116
exemption). See Foreign Tax Credit—How to Figure the Credit.
A domestic partnership isn't 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 earlier). If a partnership receives notification from only
some of the partners that they're eligible for the Form 1116

Box 12. Schedule K-2 (Reserved for future use). Sched­
ule K-3, Form 8865 information. 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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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 Standard Industrial
Classification (SIC) code. R&E expense by SIC code isn't
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 these instructions take this
into account by excepting the partnership from completing
certain portions of Schedules K-2 and K-3 with respect to these
partners. Schedules K and K-1 contain net amounts but don't
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 the instructions for Part II, lines 39 through 43, and Part III,
Section 2, for further guidance.

exemption, the partnership doesn’t need to complete
Schedule K-3 for those exempt partners but must complete
Schedules K-2 and K-3 with respect to the other partners to the
extent that the partnership doesn't qualify for the domestic filing
exception.
A partnership that doesn't 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 Form 1116 to claim a credit. As
such, the partnership must complete Schedules K-2 and K-3,
including Parts II and III, accordingly.

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Example 6—Form 1116 exemption. A married couple,
both U.S. citizens, each own a 50% interest in USP, a domestic
partnership. The couple and USP each have a calendar tax
year. USP invests in a RIC. USP receives 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 from the RIC. The married couple don't pay or accrue
any foreign taxes other than their distributive share of USP’s
foreign taxes. They also don't have any other foreign source
income. They qualify for the Form 1116 exemption and notify
USP by the 1-month date that they don't need Schedule K-3.
Even though USP doesn't qualify for the domestic filing
exception because the creditable foreign taxes paid or accrued
by USP are greater than $300, because the married couple
notify USP by the 1-month date that they don't need
Schedule K-3 under the Form 1116 exemption, USP doesn’t
need to complete Schedules K-2 and K-3.

Partnerships with no foreign partners and limited or no for­
eign 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
Schedules 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 Domestic Filing Exception, earlier.
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 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 isn't
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
aren't 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
isn't required to separately state gain from the sale of personal

Example 7—Parts II and III required for partnership with
no foreign activity. 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
doesn't have interest expense. None of A’s interest expense is
directly allocable. A doesn't have an overall domestic loss in tax
year 2023.
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 doesn't 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.

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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, COGS, certain
deductions, and taxes by source and separate category. The
partner adds its share of the partnership’s foreign source gross
income, gross receipts, COGS, certain deductions, and taxes by
separate category to its other foreign source gross income,
gross receipts, COGS, 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.

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% (0.25) 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% (0.25) 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 doesn't request a
Schedule K-3 from USP for tax year 2023. Under the domestic
filing exception, USP doesn't need to complete Schedule K-3 for
B.

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Partnership determination. The source and separate
category of certain gross receipts, gross income, and COGS 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 in equivalent columns in
Schedule K-3, Parts II and III.
Certain gross income, gross receipts, assets, COGS,
deductions, and taxes aren't 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 don't hold their interest in the
ordinary course of the partner's active trade or business, when
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; see Regulations
section 1.904-4(n)(1)(ii)(A). See Schedule K-3:
• 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, don't complete Schedule K-3, Part III,
Section 2, for these partners. See Regulations section
1.861-9(e)(4)(i).

Example 8—Part II, not Part III, required for partnership
with no foreign activity. The facts are the same as in
Example 7, except that A has $5,000 of deductions that aren't
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 doesn't 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%
(0.25) x $4,500) of the $2,000 of foreign taxes. See section 904.
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% (0.25) 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 don't have R&E expense or interest
expense, and because USP didn't pay or accrue any foreign
taxes, USP doesn't need to complete Schedules K-2 and K-3,
Part III.
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).

General filing instructions. On Schedule K-2, Parts II and III,
the partnership reports its gross income, gross receipts, cost of
goods sold (COGS), 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Foreign branch category income. A domestic partnership
itself doesn't 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:
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• Part II, column (b);
• Part III, Sections 1 and 2, column (b); and
• Part III, Sections 4 and 5, column (c).

Partner determination. Enter the gross income, income
adjustments, and gross receipts of the partnership that are
required to be sourced by the partner on 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).
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).
Include deductions that are allocated and apportioned by the
partner on Schedule K-2:
• Part II, Section 2, column (f); and
• Part III, Section 3, lines 3 and 4, column (e).
This includes most interest expense and R&E expense. See
Regulations sections 1.861-9(e) and 1.861-17(f).
Enter the assets that are assigned to a source and separate
category by the partner on Schedule K-2, Part III, Section 2,
column (f).
Enter the foreign taxes that are assigned to a source of
income by the partner on Schedule K-2, Part III, Section 4, in
the Partner column. This includes taxes imposed on certain
sales income.
The partner's distributive share of the amounts determined
by the partnership are reported in equivalent columns on
Schedule K-3, Parts II and III.

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.

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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 in equivalent columns in
Schedule K-3, Parts II and III. See the Instructions for Form
1118 for the potential countries to be listed with the section
901(j) category of income.

Note. As of the date of these instructions, section 901(j) is the
only category reported on Part II, Sections 1 and 2, column (e);
Part III, Sections 1 and 2, column (e); 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). 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 isn't utilized in other portions of Parts II
and III.

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

Form 1118, Schedule A, 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 Form 1118, 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
Schedule K-3, Section 1, 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.

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 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.
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.

For each line in Section 1, report the total for each country in
column (g).
Country code. Forms 1116 and 1118 require the taxpayer to
report the foreign country or U.S. territory 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.
territory 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.
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

If income is U.S. source, enter “US.” Don't enter “various” or
“OC” for the country code.

Note. The amount of distributions which are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn't determined by the partnership and therefore isn't 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. For Part II, column (f), enter the code XX if the
partnership can't determine the country or U.S. territory with
respect to which the gross income and gross receipts are
sourced because the source is determined by the partner.
However, don't 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
lines 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.
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. territory with
respect to RICs and section 863(b). See the instructions for
Forms 1116 and 1118 for the exceptions that apply in
completing Schedules K-2 and K-3, Parts II and III. Don't enter
a foreign country or U.S. territory (to report on a
country-by-country basis) for lines 16 through 18.
Schedules K-2 and K-3 request that gross income and gross
receipts be reported by country or U.S. territory because such
information is requested on Forms 1116 and 1118. Income and
taxes are reported by country on Forms 1116 and 1118 so that,
for example, the IRS may initially evaluate whether taxpayers
are claiming credits for compulsory payments to foreign
governments.

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.

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Example 10—Parts II and III: capital gains and losses.
Partnership has the following amounts for tax year 2023.

Sources of Income for Example 10

Short-term capital gains/losses

$15,000

Passive category (Haiti)

($200)

A US

(a) U.S. source

(c) Passive category
income

$1,000

B FR

$400

C CA

($300)

D HA

($200)

Line 12. Net long-term capital gain. On line 12, report net
long-term capital gain, excluding amounts reported on lines 13,
14, and 15.
Line 13. Collectibles (28%) gain. Report collectibles gain on
line 13 and not on 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. Include
an attachment indicating the amount of unrecaptured section
1250 gain that is also net section 1231 gain.

Lines 3 and 4. Rental income. These lines are reported
separately because they're reported separately on Form 1065,
Schedule K. The sourcing rule may be the same for both types
of rental income.

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.

Lines 7 and 8. Ordinary dividends and qualified dividends.
Enter only ordinary dividends on line 7 and only qualified
dividends on line 8. Don't include as ordinary dividends or
qualified dividends the amount of any distributions received to
the extent that they're attributable to PTEP in annual PTEP
accounts of the partnership. See the instructions for line 19 for
when a partnership might have an income inclusion with
respect to a foreign corporation.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

($300)

11 Net short-term capital
gains

Gross income from performance of services
$10,000

$400

Passive category (Canada)

Description

Foreign Source

B YY

Passive category (France)

Foreign Source

(d) General category
income

A AA

$1,000

Example 10. Schedule K-2, Part II, Section 1, Line
11

Example 9 Table

2

$900

U.S. source

Partnership reports these amounts on Schedule K-2, Part II,
Section 1, line 11, as follows.

Example 9—Part II: multiple country sources: gross
income. 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,
line 2.

Description

Total

Line 28. Net long-term capital loss. Report net long-term
capital loss on line 28, excluding collectibles loss which is
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
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section 1.861-8(e)(15). Generally, Section 2 follows the
separately reported types of deductions and losses on Form
1118, Schedule A. Individuals must generally follow the same
expense allocation and apportionment rules, but Form 1116
only requires separate reporting of certain deductions by
separate category; see Form 1116, Part I, lines 2 through 5.
Section 2 also generally corresponds to the deductions
separately reported on Form 1065, Schedule K.

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 isn't reported as a net amount
but rather separate items. 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.
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 isn't 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.

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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/sicmanual.

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 isn't reported as a net amount
but rather separate items. Total section 987 gains for the year
are reported on line 17. Total section 987 losses for the year are
reported on line 47.

Line 38. Charitable contributions. Charitable contribution
deductions are apportioned solely to U.S. source gross income;
see Regulations section 1.861-8(e)(12). Therefore, this
deduction should be reported in column (a).

Lines 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).

Lines 39 and 40. Interest expense specifically allocable un­
der 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).

Line 19. Section 951(a) inclusions. Report section 951(a)
inclusions if the domestic partnership takes into account such
income. A domestic partnership doesn't 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
sections 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.

Lines 41 through 43. Other interest expense. A partner’s
distributive share of a partnership’s interest expense that isn't
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 doesn’t need to 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 aren't owned in the ordinary
course of the partner’s active trade or business, the partnership
reports the partners’ distributive shares of interest expense as
reducing passive category foreign source income in column (c).
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 in
columns (a) through (e) as applicable. See Regulations sections
1.861-9(e)(4)(i) and 1.904-4(n)(1)(ii) for more information.

Line 20. Other income. Attach a statement to both Schedules
K-2 and K-3 describing the amount and type of other income.
The statement must conform to the format of Part II.
Line 24. Total gross income. Enter the total gross income
received from all sources on line 24. Then, add the gross
income on lines 1 through 23 by country or territory 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., doesn't need to equal the amount on line 24, given
that not every gross income amount is required to be reported
by country.

Section 2—Deductions (Lines 25 Through 54)
Form 1118, Schedule A, requires a corporation to separately
report certain types of deductions and losses by source and
separate category. Separate reporting is required because each
type of deduction may be allocated and apportioned according
to a different methodology; see, 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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Exception. See Regulations sections 1.861-9(e)(8) and (9)
for a special rule for partnership loans. See also Box 10.
Partner loan transactions, earlier.
Interest expense is always included on lines 39 through 43
and not on other lines.

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.

Line 45. Foreign taxes not creditable but deductible. See
the instructions for Forms 1116 and 1118 for examples of
foreign taxes that are not creditable but deductible. Foreign
taxes that are creditable (even if a partner chooses to deduct
such taxes) aren't reported as expenses on Part II. Creditable
taxes are reported on Part III, Section 4.

Note. Line 2 isn't reported according to source or separate
category.

Lines 49 and 50. Other deductions. Attach to 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.

Section 2—Interest Expense Apportionment
Factors

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Note. The SIC code for line 2B(i) doesn't need to be the same
SIC code for line 2A(i).

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.

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

Complete this Section 2 only if the partnership or the
partners have interest or stewardship expenses.

A partnership isn't required to complete Section 1 of Part III
unless either (a) the partnership incurs R&E expense; or (b) 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)).

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.

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 report
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).

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
sections 1.861-9(e)(2) and -9(e)(3). When reporting the basis in
an asset which is stock in nonaffiliated 10%-owned
corporations, adjust such amount for earnings and profits
(E&P). See Regulations section 1.861-12(c)(2)(i)(A).

Column (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.

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.

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.

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. 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 sections 1.861-17(d)(3) and (4). Sales of parties
controlled by the partnership should be included on line 1 if
such controlled parties can reasonably be expected to benefit
from the R&E expense connected with the product categories.
This includes sales that benefit from the partner’s R&E
expenses if licensed through the partnership. Sales of
uncontrolled parties are also taken into account if such sales
involve intangible property that was licensed or sold to the
uncontrolled party if the uncontrolled party can reasonably be
expected to benefit from the R&E expense.

Line 1. On Schedule K-2, report the average of the
beginning-of-year and end-of-year inside bases 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).
Line 2. On Schedule K-2, report the partnership’s average of
the beginning-of-year and end-of-year inside bases 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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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 aren't 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, don't complete lines 6b through 6d.
Include the total distributive share on line 6a.

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.

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
doesn't 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 isn't 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 can't
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 isn't 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
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. Don't 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 a 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 Regulations section 1.861-13(a)(5), the partner must apply
those rules to characterize the stock.

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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).

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 doesn’t need to 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).

Example 11—Parts II and III: asset method
apportionment of interest expense. 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 business assets and investment
assets are its distributive share of those owned by USP. 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, line 6b, column
(a). A’s $2,000 share of the interest expense is reported on
Schedule K-3, Part II, line 41, column (f). 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,
line 42, column (f). 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 respect to the interest expense on the loan for USP’s
investments, $800 (($8,000/$20,000) x $2,000) is apportioned

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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 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. Don't enter “FOREIGNUS” or
“APPLIED FOR.”
• Percentage of voting and value of stock owned by the
partnership in such foreign corporation.
• Value of the stock in such corporation.

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).

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

Codes for Types of Tax

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

Don't 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.

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 territories 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

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.

Example of Multiple Types of Income for the Same
Country

Lines 1 and 2. Report the partnership’s foreign-derived gross
receipts and COGS, respectively, by source and separate
category.

Description

(a) Type of tax

1 Direct (section 901 or 903) foreign taxes:

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).

Paid

Accrued

A AA

WHTD

B AA

OTH

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.

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.

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).

Section 4—Foreign Taxes
Don't complete this Section 4 if the partnership doesn't 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. territories.
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Code

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• Taxes attributable to boycott operations (section 908).
• Reduction in taxes for failure to timely file (or furnish all of the

On the line after category code, enter one of the following
codes.
• Code RBT PAS. If an applicable income tax treaty treats any
U.S. source passive category income as foreign source passive
category income, and there is an election to apply the treaty,
enter code RBT PAS.
• Code RBT GEN. If an applicable income tax treaty treats any
U.S. source general category income as foreign source general
category income, and there is an election to apply the treaty,
enter code RBT GEN.
• Code RBT 951A. If an applicable income tax treaty treats any
U.S. source section 951A category income as foreign source
section 951A category income, and there is an election to apply
the treaty, enter code RBT 951A.

information required on) Forms 5471 and 8865 (section
6038(c)).
• Foreign income taxes paid or accrued during the current tax
year with respect to splitter arrangements under section 909.
• Foreign taxes on foreign corporate distributions. For example,
report taxes on dividends eligible for a deduction under section
245A and ineligible for credit under section 245A(d). Also,
include taxes on a distribution of PTEP assigned to the following
PTEP groups: reclassified section 965(a) PTEP, reclassified
section 965(b) PTEP, section 965(a), section 965(b) PTEP, a
portion of which isn’t 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.
• Other. Attach a statement to Schedules K-2 and K-3
indicating the reason for the reduction.
There isn’t a need to report the amounts on line 2 by country.

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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). Don't reduce the amount that you report on line 1 by the
reductions reported on line 2. Don't report redetermined taxes
on line 1. Report such taxes on line 3.

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),
don't report the foreign tax redetermination on line 3.

Note. Don't include on line 1 any foreign taxes not creditable
but deductible as reported on Part II, Section 2, line 45.
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.
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, indicated by the letters A through F,
taxes paid or accrued to each country. Enter the two-letter code
from the list at IRS.gov/CountryCodes. Don't 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. territory with
respect to RICs and section 863(b). These exceptions apply as
well to reporting of taxes in this section.

Note. Payment of additional foreign taxes that relate to an
earlier tax year by a partnership that uses the cash method of
accounting doesn't 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.
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. territory with
respect to RICs and section 863(b). Don't 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

Example 12—Part III, Section 4: multiple country
sources: foreign taxes. The facts are the same as in
Example 9, 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

Description

(a) Type of tax

(e) General
category
income
Foreign

1 Direct (section 901 or 903) foreign
taxes:

⻫

Paid

Accrued

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.
• Taxes on foreign mineral income (section 901(e)).
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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 on other parts of
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.

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.
Contested taxes. In general, a contested foreign income tax
liability doesn't accrue until the contest is resolved and the
amount of the liability has been finally determined. In addition, a
contested foreign income tax liability isn't a reasonable
approximation of the final foreign income tax liability and,
therefore, isn't considered an amount of tax paid for purposes of
section 901 until the contest is resolved. Thus, a partnership
generally doesn't 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).
Partnerships must also file a statement each year for which
there are one or more contested liabilities outstanding or in
which a contested tax is resolved that includes information
necessary for partners to complete both Schedule L (Form
1118), Part V, and Schedule C (Form 1116), Part V.

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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 partner that decrease the partner’s
taxable income over all section 743(b) adjustments that
increase 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) negative income adjustments
should be included as relevant in other parts of Schedule K-2.
For example, the section 743(b) income adjustments should be
reflected as part of the total depreciation reported on Part II,
Section 2.

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

Note. Certain partners will use the following information to
claim and figure a section 250 deduction with respect to FDII on
Form 8993.

Section 5—Other Tax Information
This section provides other tax information that a partner needs
to figure its foreign tax credit limitation.

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 doesn't 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 Schedules K-2 and
K-3, Part IV, accordingly. Any partnership with direct or indirect
domestic corporate partners must complete this part, even if the
partnership doesn't 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 (QBAI) (see the instructions for line 8 of this part) in
such a case to determine its deemed tangible income return
and deemed intangible income (DII); see section 250(b)(2).

Column (b). Don't 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 Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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
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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 Form 8993, Part
I, line 2e.
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 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 Form 8993, Part I, line 7b. The services, however, don't give
rise to DEI, so USP shouldn’t include the partnership’s adjusted
basis in Asset D ($1,200) on Schedule K-2, Part IV, Section 1,
line 8.
USP has no sales or services provided to foreign persons
and therefore no FDDEI to report on Part IV, Section 2. 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.

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.

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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.

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

For special substantiation requirements under the
regulations, see Regulations 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 isn't subject to the specific substantiation requirements
contained in the regulations; see section 6001 and Regulations
section 1.6001-1(a). Therefore, the partner must be able to
satisfy the general or special substantiation requirements to be
eligible for the deduction. To the extent the partner doesn't have
the necessary information in its possession to substantiate the
deduction, the partnership must maintain the information.

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

Line 2b. DEI COGS. Enter the amount of COGS attributable to
the amount on line 2a.
Line 2c. DEI properly allocated and apportioned deduc­
tions. 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
Section 3, 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.

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.
Example 13—partner’s reporting of DEI and QBAI. 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 U.S. 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 COGS, 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 through 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 DII and in turn increases its section 250
deduction for FDII. DC uses these amounts to calculate its
gross DEI on Form 8993, Part I, line 4.
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
doesn't 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

Line 3. Section 951(a) inclusions. Enter any amounts
included in the partnership’s 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 doesn't 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 sections 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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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
wouldn't 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 Regulations section 1.250(b)-2(g)(8), Example 2,
for guidance on how to figure the partner adjusted basis. If
specified tangible property is only partially depreciable, then
only the depreciable portion is QBAI.

the partner and therefore isn't reported on Schedules K-2 and
K-3, Part IV, Section 1.
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). Don't 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).

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Note. The amount by which distributions are attributable to
PTEP in annual PTEP accounts of a direct or indirect partner
isn't 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.

Line 6. Domestic oil and gas extraction income. Enter the
amount of net DOGEI 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.”

Example 14—domestic corporate partner; specified
tangible property. 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 7. Foreign branch income. Enter the amount of net
foreign branch income before interest and R&E deductions (as
defined in section 904(d)(2)(J)). A partnership should report all
income that would be foreign branch income of its partners as if
all partners were U.S. persons.

Line 8. Partnership QBAI. Enter the amount, if any, of the
partnership QBAI. A domestic corporation’s QBAI is its share of
the average of the aggregate adjusted bases, determined as of
the close of each quarter of the tax year, in certain specified
tangible property. See Regulations section 1.250(b)-2(b).
The adjusted basis is determined by using the alternative
depreciation system under section 168(g) and allocating
depreciation deductions with respect to such property ratably to
each day during the period in the tax year to which such
depreciation relates. See Regulations section 1.250(b)-2(e).
The specified tangible property is that which is used in the
trade or business of the corporation in the production of gross
income included in the domestic corporation’s gross DEI and is
of a type with respect to which a deduction is allowable under
section 167. See Regulations section 1.250(b)-2(b).
If a domestic corporation holds an interest in one or more
partnerships during a tax year (including indirectly through one
or more partnerships that are partners in a lower-tier
partnership), the QBAI of the domestic corporation for the tax
year is increased by the sum of the domestic corporation’s
partnership QBAI with respect to each partnership for the tax
year. See Regulations section 1.250(b)-2(g)(1).
Partnership QBAI is the sum of the domestic corporation’s
proportionate share of the partnership’s adjusted basis in the
property and the domestic corporation’s partner specific QBAI
basis in the property for the partnership tax year that ends with
or within the tax year. See Regulations section 1.250(b)-2(g)(2).
Partnership specified tangible property means, with respect
to a domestic corporation, tangible property that is used in the
trade or business of the partnership, of a type with respect to
which a deduction is allowable under section 167, and used in
the production of gross income included in the domestic
corporation’s gross DEI. See Regulations section 1.250(b)-2(g)
(5).
If a partnership can't determine the portion of partnership
specified tangible property (for example, if the partnership
doesn't 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
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Section 2—Information To Determine
Foreign-Derived Deduction Eligible Income
(FDDEI) 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 the amount of
gross FDDEI as defined in Regulations section 1.250(b)-1.
Each place where general property is listed refers to
amounts connected to the sale, lease, exchange, or other
disposition of general property to a foreign person, and 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 isn't a
physical commodity or a commodity described in section 475(e)
(2)(B) through (D).

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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, 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

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.

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
Regulations section 1.861-9(b)(1) 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 section 163(j)(4) on this line. Under
Regulations section 1.250(b)-1(d)(2)(ii), deductions are
determined without regard to section 163(j).

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

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

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

Line 9. Gross receipts. Enter the amount, if any, of the
partnership's foreign-derived gross receipts separately for
aggregate sales of general property, aggregate sales of
intangible property, and aggregate services. Foreign-derived
gross receipts means gross receipts that are used to figure
gross FDDEI as defined in Regulations section 1.250(b)-1(c)
(16).

Line 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
ordinarily based 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 whose interest in the partnership is 10%
or more 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 basis in an asset which is 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 expense 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 10. COGS. Enter the amount of COGS attributable to the
amount(s) on line 9.
For purposes of this form, when figuring FDDEI, COGS
includes the COGS to customers, and adjusted basis of
non-inventory property sold or otherwise disposed of in a 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).
COGS must be attributed to gross receipts with respect to
gross DEI or gross FDDEI regardless of whether certain costs
included in COGS 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 Section 3, lines 13 and 16, respectively.
Deductions are determined without regard to sections
163(j),170(b)(2), 172, 246(b), and 250.
Column (a). General property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of general property.

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

Column (b). Intangible property. Enter the amount of the
deductions that are allocated and apportioned to gross FDDEI
from all sales of intangible property.

Line 14A. Enter the amount of the average of the
beginning-of-year and end-of-year inside bases in the
partnership's total assets. See Regulations section 1.861-9(g)
(2)(i)(A).

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 aren't
otherwise included on lines 11, 13, and 16. If a deduction
doesn't 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

Line 14B. Enter the amount of the average of the
beginning-of-year and end-of-year inside bases adjustments
under sections 734(b) and 743(b).

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

foreign corporation are attributable to PTEP in annual PTEP
accounts of any direct or indirect partner, and (b) 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 Schedule K-2 (discussed
below).
Exception. Schedule K-3, Part V, for a partner doesn't need
to be completed with respect to distributions by a foreign
corporation if the partnership knows that (a) 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 (b) the
partner and relevant indirect partners aren't 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 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 Schedules K-3, Part V, with respect to the foreign
corporation may not equal the amounts reported on
Schedule K-2, Part V, with respect to the foreign corporation.

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).

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Lines 15 and 16. R&E expenses apportionment factors.
These lines require the partnership to report information that a
partner will use to allocate and apportion its R&E expense for
FDII purposes. A partnership isn't required to complete lines 15
and 16 unless either (a) the partnership incurs R&E expense; or
(b) 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)). R&E expenses deducted,
or amortized and deducted, under section 174 are definitely
related to all gross intangible income reasonably connected with
relevant broad product categories of the taxpayer and are
allocable to all items of gross intangible income as a class
related to such product categories. The product categories are
generally determined by reference to the three-digit SIC code.
R&E expenses are apportioned between the statutory and
residual groupings based on an analysis of the taxpayer’s gross
receipts from certain sales, leases, licenses, and services; see
Regulations section 1.861-17. The exclusive apportionment rule
in Regulations section 1.861-17(c) doesn't 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.

Rows A through O. Use rows A through 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 Schedules K-2 and K-3 (Form
1065), Part V. If the partnership owns stock of a foreign
corporation through another partnership (lower-tier partnership)
from which it receives Schedule K-3 (Form 1065 or 8865), Part
V, the partnership must replicate each line of Schedule K-3
(Form 1065 or 8865), Part V, on its Schedules K-2 and K-3
(Form 1065), Part V. 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). Don't report distributions to the
extent that they're 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

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
isn't a sum of DEI and FDDEI but rather refers to all the
partnership’s gross receipts. Such gross receipts include both
the partnership's sales and certain other parties' sales; see
Regulations section 1.861-17(d). Gross receipts from certain
transactions of parties both controlled or uncontrolled by the
partnership may be included on line 15; see generally
Regulations section 1.861-17(d).
Line 16. Enter the amount of R&E expense by SIC code.

Schedule K-2, Part V, and Schedule K-3, Part V
(Distributions From Foreign Corporations to
Partnership)
Note. 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're attributable to
PTEP in their annual PTEP accounts and report foreign
currency gain or loss with respect to the PTEP on Forms 1040
and 1120. If eligible, partners will also use this information to
figure and claim a dividends received deduction under section
245A on Form 1120.
Use Schedule K-2, Part V, to report the distributions made by
foreign corporations to the partnership.
Use Schedule K-3, Part V, to report the partner's share of the
amounts reported on Schedule K-2, Part V.
Exception. Schedule K-2, Part V, isn't required to be
completed with respect to distributions by a foreign corporation
if the partnership knows that (a) none of the distributions by the
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

-23-

foreign corporation, or attributable to E&P that are excludable
from the partnership’s gross income under section 1293(c), that
corresponds to a tax year of the foreign corporation that ended
with or within a tax year of the partnership (a) that began after
December 31, 2012; and (b) for which an election under
Regulations section 1.1411-10(g) wasn't 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 (NII) and net investment income tax
(NIIT) relating to CFCs and qualified electing funds (QEFs), see
Regulations section 1.1411-10.
Note. If additional rows are required, attach statements to
Schedules K-2 and K-3 that look like the current versions of
Schedule K-2, Part V, and Schedule K-3, Part V, respectively.

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Worksheet 3

Worksheet 3 (Schedule K-2)

(a) Name of distributing foreign
corporation

(b) EIN or reference ID
number

(c) Date of
distribution

(b) EIN or reference ID
number

(c) Date of
distribution

(d) Functional
currency of
distributing foreign
corporation

(e) Amount of NII
PTEP in
functional
currency

(f) Spot rate
(functional
currency to U.S.
dollars)

(g) Amount of NII
PTEP in U.S.
dollars

(e) 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

Worksheet 4

Worksheet 4 (Schedule K-3)

(a) Name of distributing foreign
corporation

(d) Functional
currency of
distributing foreign
corporation

specified under Reporting exchange rates on Form 5471 in the
Instructions for Form 5471.

Column (b). Enter the EIN or reference ID number of the
distributing foreign corporation. Don't 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 (h). Enter the amount of the distribution in U.S. dollars.
Translate column (e) using the spot rate reported in column (g).

Column (c). Enter the year, month, and day in which the
distribution was made using the format YYYYMMDD.

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 (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.

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

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

Note. 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.
If a Schedule J (Form 5471) with code TOTAL entered on
line a isn’t filed with respect to the distributing foreign
corporation, then the total of the amounts reported in column (f)
with respect to a distributing foreign corporation should equal
the partnership's share of the amount reported in Schedule J
(Form 5471), line 9, column (f), filed with respect to the
distributing foreign corporation.

Note. Certain partners will use the following information to
complete Form 8992 and Forms 1040 and 1120 with respect to
income inclusions under section 951(a) (subpart F income
inclusions), section 951(a)(1)(B) inclusions, and section 951A
inclusions.
Schedules K-2 and K-3, Part VI, must be completed with
respect to a CFC if the partnership owns (within the meaning of
section 958) stock of the CFC, unless the partnership owns
stock of the CFC solely by reason of applying section 318(a)(3)
(providing for downward attribution) as provided in section
958(b).
Generally, a foreign corporation is a CFC if more than 50%
of either the total combined voting power of all classes of stock
entitled to vote or the total value of the stock of the corporation
is owned (within the meaning of section 958(a)) or is considered
as owned by applying the rules of section 958(b) by U.S.
shareholders. For this purpose, a U.S. shareholder is a U.S.

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"
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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
Schedule K-2.

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.

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 is a domestic partnership, then the
domestic partnership doesn't 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
sections 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 isn't a U.S. shareholder of the foreign corporation
during such tax year. If the partnership doesn't 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), aren't 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.

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If the partnership must complete Schedules K-2 and K-3,
Part VI, with respect to a CFC, then the partnership must
complete Schedules K-2 and K-3, Part VI, 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 on 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 Schedules K-2 and K-3, Part VI, 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.

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 doesn't
apply Regulations sections 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. Schedule K-2, Part VI, doesn't need to be
completed with respect to a CFC if the partnership knows that it
doesn't 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.
Exception. Schedule K-3, Part VI, for a partner doesn't need
to be completed with respect to a CFC if the partnership knows
that (a) the partner isn't 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 (b) 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 doesn't complete Schedule K-3, Part VI, 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

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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 isn't 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.
Line a. Complete a separate Part VI for each applicable
separate category of income. However, all GILTI items must be
reported on only one Part VI. If GILTI items include passive
category income, report all GILTI items on the Part VI
completed for passive category income; otherwise, report all
GILTI items on the Part VI completed for general category
income. Enter the appropriate code on line a.
Note. The other reporting requirements of a partnership with
respect to reporting income by separate category don't change
by reason of the partnership reporting GILTI items that include
general category income on a Part VI completed for passive
category income.

-25-

• 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.
Don't 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’ shares of a CFC’s earnings invested in U.S.
property, see Worksheet B in the Instructions for Form 5471.

Codes for Categories of Income
Code

Category of Income

PAS

Passive Category Income

901j

Section 901(j) Income

GEN

General Category Income

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

Line 1. Use lines A through K to report information with
respect to CFCs owned (within the meaning of section 958) by
the partnership, and for which Schedules K-2 and K-3, Part VI,
must be completed. If the partnership owns a CFC through
another partnership (lower-tier partnership) from which it
receives a Schedule K-3 (Form 1065 or 8865), Part VI, the
partnership must replicate each line of Schedule K-3 (Form
1065 or 8865), Part VI, that is related to the CFC on its
Schedule K-2 (Form 1065), Part VI. For example, if a
partnership directly owns 50% of the CFC's stock and owns
50% of the CFC's stock through a lower-tier partnership, the
CFC should be listed on two lines with one line related to the
partnership's direct ownership and the other line related to the
partnership's ownership through the lower-tier partnership.
Lines related to a partnership's direct ownership of CFCs
should be listed before lines related to a partnership's
non-direct ownership of CFCs. If additional lines are required,
attach 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
Schedule I-1 (Form 5471), line 8.

Column (l). If the CFC has tested income in column (g), enter
zero. If the CFC has a tested loss in column (h), enter 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 Schedule I-1
(Form 5471), line 9c, 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
Schedule I-1 (Form 5471), line 10c.

Column (b). Enter the EIN or reference ID number of the CFC.
Don't 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 Schedule I-1 (Form 5471), line 9d.

Column (c). Enter the end of the CFC’s tax year using the
format YYYYMMDD.

Schedule K-2, Part VII, and Schedule K-3, Part
VII (Information Regarding Passive Foreign
Investment Companies (PFICs))

Column (d). Enter the partners' shares 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' shares.

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.

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 doesn't,
pursuant to Regulations section 1.958-1(d)(4)(i), apply
Regulations sections 1.958-1(d)(1) through (3) to such tax year,
and is a U.S. shareholder of the CFC listed in column (a),
doesn't report amounts with respect to that CFC for that tax
year in column (e) or (f).

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, isn't required to complete Schedules K-2 and K-3, Part
VII.
• A domestic partnership that has elected to treat a PFIC as a
pedigreed QEF or made a market-to-market (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 isn't the
first year of the partnership’s holding period in the stock
(non-initial section 1296 MTM election)) isn't required to
complete Schedules K-2 and K-3, Part VII, with information
regarding that 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).

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) isn't considered subpart F
income. For guidance on computing a CFC's subpart F income
and the partners' shares of a CFC's subpart F income, see
Worksheet A in the Instructions for Form 5471.
Column (f). Enter the amount determined under section 956
with respect to the partners that relate to the partners’
ownership in the partnership, 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’
shares through their ownership in the partnership of:

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

• A partnership that owns stock of a foreign corporation that is
treated as a qualifying insurance corporation (QIC) (as defined
in section 1297(f)(1)) and which isn't 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 isn't treated as a PFIC
by reason of section 1298(b)(1)), isn't required to complete
Schedules K-2 and K-3, Part VII, with respect to that foreign
corporation.
• A partnership that knows that all of its direct and indirect
partners that are U.S. persons are either (a) not subject to the
PFIC rules with respect to the corporation under section
1297(d) because they're subject to the subpart F rules with
respect to the corporation, (b) tax-exempt entities that aren't
subject to the PFIC rules with respect to the corporation under
Regulations section 1.1291-1(e), or (c) pass-through entities
with no direct or indirect U.S. taxable owners isn't 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) doesn't 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
Form 1065, Schedule K, and report the partners’ shares of
those amounts on Schedule K-1 (Form 1065), Part III. 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 section 1291
rules apply because the stock wasn't 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.

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 those entries for a PFIC and attach a
statement including the remaining entries for that 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.

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If the partnership has additional PFICs for which to report
information that don't 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

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. Don't 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.

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 isn't filing a Form 8621.

Column (f). Enter each class of shares in the PFIC owned by
the partnership using the following codes.

Codes for Classes of PFIC Shares

Domestic partnerships must also use Schedule K-2, Part VII,
to report information for any PFIC with respect to which the
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 that 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.

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 those
shares using the format YYYYMMDD. If the partnership
acquired no shares in a particular PFIC during its tax year,
leave this column blank with respect to that PFIC.

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.

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 those
dates.

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

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Code

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Table 4
Additional Information for Part VII, Section 1
General Information
(a) Name of PFIC

Annual Information
(b) EIN or reference ID number

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

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PFIC rules with respect to a PFIC/CFC under section 1297(d)
because they're subject to the subpart F rules with respect to
the PFIC/CFC isn't required to complete Schedules K-2 and
K-3, Part VII, with respect to the PFIC/CFC.

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
aren't 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 don't reflect a reasonable estimate of the PFIC’s
value and the information provides a more reasonable estimate
of the PFIC’s value.

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.

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.

Completing Part VII, Section 1, Column (n)

IF...

• this is the first year of the
check the box.
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)

Column (j). If the partnership is a domestic partnership and
has made either of the following elections with respect to the
PFIC, indicate which election was made using the following
codes. If the partnership hasn't made an election with respect to
the PFIC, leave this column blank with respect to that PFIC.

• the foreign corporation was a PFIC check the box.
in a prior tax year of the partnership's
holding period, and
• the partnership hasn't determined
(directly or otherwise) the foreign
corporation is a former PFIC within
the meaning of Regulations section
1.1291-9(j)(2)(iv)

Partnership Election Codes
Code

Partnership Election Type

QEF

Qualified Electing Fund Election

MTM

Section 1296 Mark-to-Market Election

THEN...

• the foreign corporation was a PFIC don't check the box.
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)

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 isn't 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 isn't required to report information
regarding that PFIC on Schedule K-2 or K-3, Part VII.
Column (k). Check the box if the foreign corporation has
indicated that it has documented eligibility to be treated as a
QIC. See section 1297(f) and Regulations section 1.1297-4 for
additional information on QICs.

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.

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).
Reminder. A partnership that knows that all of its direct and
indirect partners that are U.S. persons aren't subject to the
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

respect to which it has made an MTM election under section
1296 but for which it doesn't 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.

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. Don't enter "FOREIGNUS"
or "APPLIED FOR."

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QEF Information

Reminder. If the partnership is a domestic partnership and has
made an MTM election under section 1296 with respect to a
PFIC (other than a non-initial section 1296 MTM election), and
if the partnership files Form 8621 for that PFIC, the partnership
isn't 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 those 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 isn't 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 didn't mark
the stock to market in the first year of its holding period.

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 doesn't 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.

Note. If the partnership is a domestic partnership that has
made an MTM election under section 1296 with respect to a
PFIC but doesn't 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
isn't 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 those amounts on Schedules 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 those 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
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 QEF election
(pedigreed or unpedigreed), 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 doesn't 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 this information from the QEF,
though the QEF isn't required to provide it. 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 that column with the first of those 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.

Section 1296 MTM Information
Columns (e) and (f). Enter the fair market value (FMV) 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 FMV in column (e) should reflect the
FMV of those shares as of the date of acquisition. A domestic
partnership must provide this information for any PFIC with

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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

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Table 5
Additional Information for Part VII, Section 2
General Information
(a) Name of PFIC

(b) EIN or
reference ID
number

Section 1291 and Other Information
(g) Dates PFIC (h) Amount of
shares were
cash and FMV
acquired
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

(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

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Column (n). If the partnership disposed of any block of stock in
the PFIC during the partnership's tax year, enter the
partnership's tax basis in the shares of the PFIC on the date of
disposition.
Schedule K-3. Enter the partner's share, through its
ownership in the partnership, of the partnership's tax basis in
the PFIC shares. The partner's share of the basis in the PFIC
shares should include any applicable adjustments specific to
the partner, such as section 743(b) adjustments or adjustments
made under the PFIC regime. See sections 1293(d) and
1296(b), and Regulations sections 1.1291-9, 1.1291-10,
1.1297-3, and 1.1298-3 for adjustments made under the PFIC
regime.

Column (h). Enter the amount of each distribution of cash
and/or the FMV of any other property distributed to the
partnership by the PFIC during the tax year, if any.

Note. Deemed distributions by QEFs don't 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.

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

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

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.

Schedule K-2, Part VIII (Partnership’s Interest in
Foreign Corporation Income (Section 960)), and
Schedule K-3, Part VIII (Partner’s Interest in
Foreign Corporation Income (Section 960))
Note. Certain partners will use the following information to
figure a deemed paid foreign tax credit on Form 1118.

Note. Creditable foreign taxes entered in column (j) don't
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).

Reporting currency. Report all amounts on Part VIII in
functional currency.
The partnership must complete a separate Schedule K-2,
Part VIII, for each CFC with respect to which it has a direct or
indirect interest, unless the partnership doesn't 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 (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, don't 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
doesn't file Form 8621.

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 (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.
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.

A partnership that doesn't have or receive sufficient
information or notice regarding a direct or indirect partner must
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

report by unit with respect to the recaptured subpart F income
group.
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. In column (iii), the partnership reports the CFC’s
total net income by income groups and units as reported in
Schedule Q (Form 5471), column (xvi). In column (iv), the
partnership reports the CFC’s current year foreign taxes for
which credit is allowed by income groups and units as reported
in Schedule Q (Form 5471), column (xii). 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. territory within which income is
sourced and/or to which taxes were paid or accrued. Enter "US"
for income sourced in the United States. Don't enter “various” or
“OC” for the country code. Don't enter a country in column (i) of
line 5, later. 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.

presume the partner is eligible to claim the indirect credit and
must complete Schedules K-2 and K-3 accordingly.
Exception. Part VIII isn't required to be completed with
respect to dormant foreign corporations (as defined in section 3
of Rev. Proc. 92-70).
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 sections 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.

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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;
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).

Line A. On line A, enter the EIN or reference ID number of the
CFC as listed on Form 5471. Don't enter "FOREIGNUS" or
"APPLIED FOR."

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.

Line 1f allows 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 1f for income in each of sections 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, passive
grouping, etc. See the instructions for Schedule Q (Form 5471).

Category of Income Codes

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 aren't
reported on this Part VIII.

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.

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 are figured on Schedule Q (Form 5471), and then
included in columns (iii) and (iv), respectively. See the
instructions for Schedule Q (Form 5471) for the meaning of unit.
However, don't include on line 1 (including lines 1a through
1j and any subset 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).
Also, don't 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 (including any subset lines (1), (2), etc.,
under line 4).
The PTEP groups aren't reported on this Part VIII. Don't
report by unit with respect to the following subpart F income
groups: (a) international boycott income; (b) bribes, kickbacks,
and other payments; and (c) section 901(j) income. Also don't
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Code

Passive Group Codes
Code

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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).

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 the tables for Example 15.

Example 15—Part VIII: subpart F income group reporting
by unit. In Year 1, USP, a domestic partnership, wholly owns
foreign corporation CFC, with reference ID number 1234, and

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

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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

CFC General Category Tested Income

Example 15. Partnership USP’s First Schedule K-2, Part VIII

USP completes Schedule K-2, Part VIII, as shown below.
A
B
C

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions

Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).

1

. . . . . . .

. . . . . . .

. . . . . . .

1234
PAS
i

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

AA

100u

100u

$20

Subpart F income groups

a Dividends, interest, rents, royalties, and
annuities (total) . . . . . . . . . . . . .
(1)

Unit:

Country X FDE

Example 15. Partnership USP’s Second Schedule K-2, Part VIII
USP completes another Schedule K-2, Part VIII, as shown below.
A
B
C

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
If PAS was entered on line B, enter the applicable grouping under Regulations section 1.904-4(c). See instructions
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).

1

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

1234
PAS
ii

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

YY

50u

50u

$5

Subpart F income groups
a Dividends, interest, rents, royalties, and
annuities (total) . . . . . . . . . . . . .
(1)

Unit:

CFC

Example 15. Partnership USP’s Third Schedule K-2, Part VIII
USP completes another Schedule K-2, Part VIII, as shown below.
A
B

Enter EIN or reference ID number of CFC: . . .
Separate category (enter code—see instructions)
Enter amounts in functional currency of the
foreign corporation (unless otherwise noted).

3

Tested income group (total)
(1)

Unit:

CFC

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

1234
GEN

(i) Country code

(ii) Partnership’s share of
foreign corporation’s net
income (functional
currency)

(iii) Foreign corporation’s
total net income
(functional currency)

(iv) Foreign corporation’s
current year foreign taxes
for which credit allowed
(U.S. dollars)

ZZ

300u

300u

$0

. . . . . .

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

total net income and the CFC's current year foreign taxes for
which credit is allowed in each income group.
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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

statement to indicate that you have expanded Part VIII to report
these additional countries on both Schedules K-2 and K-3.
Example 16—Part VIII: more than two source countries.
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
the tables for Example 16.
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.

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Example 16. Schedule K-2, Part VIII

USP completes Schedule K-2, Part VIII, as shown below.
A
B
D

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . .
Check the box and attach a statement if there is more than one source country for a line

Enter amounts in functional currency of the foreign
corporation (unless otherwise noted).

(i) Country code

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

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

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

1234
GEN

⻫

(ii) Partnership’s share of foreign corporation’s net
income (functional currency)

Subpart F income groups

1

g

Foreign base company sales income (total)

180u

. . .

(1)

Unit:

CFC

AA

100u

(2)

Unit:

CFC

BB

50u

Example 16. Attachment (Expansion)

USP attaches to Schedule K-2 the following schedule to expand line 1g to include another line.
A
B
D

Enter EIN or reference ID number of CFC: . . . . . . . . . . . . . . . . . . . . . . . . . .
Separate category (enter code—see instructions) . . . . . . . . . . . . . . . . . . . . . .
Check the box and attach a statement if there is more than one source country for a line

Enter amounts in functional currency of the foreign
corporation (unless otherwise noted).

(i) Country code

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

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

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

1234
GEN

⻫

(ii) Partnership’s share of foreign corporation’s net
income (functional currency)

Subpart F income groups

1
g

Foreign base company sales income (total)
(3)

Unit:

180u

. . .

CFC

CC

erosion payments made through the partnership, and the
partner's base erosion tax benefits.

Line E. The partnership should check the box and complete a
separate Part VIII for U.S. source income in each separate
category.

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 aren't 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.

Line F. If the foreign corporation has 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.
Line G. Enter the functional currency of the foreign corporation
as reported on Form 5471, line 1h.

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))
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're subject to the 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

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

30u

For the partnership to complete Schedules K-2 and K-3, Part
IX, the foreign related parties of each partner must be identified,
subject to the exception for small partners. It is expected that
the partnership will collaborate with its partners to identify the
foreign related parties of each partner. A foreign related party
with respect to the partner is a foreign person that is:
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• 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 isn't
required to be prepared by the partnership for small partners
meeting the following three requirements.
• 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.
• The partner is allocated less than 10% of each partnership
item of income, gain, loss, deduction, and credit for the tax year.
• The partner's interest in the partnership has an FMV of less
than $25 million on the last day of the partner's tax year,
determined using a reasonable method.
See Regulations section 1.59A-7(d)(2) for further information
regarding the application of the exception for small partners
Exception for certain other partners. The partnership
doesn't need to complete Schedule K-3, Part IX, for a partner
that is an individual.
The partnership doesn't need to complete Schedule K-3,
Part IX, for a corporate partner that is an S corporation.
The partnership should complete Schedule K-3, Part IX,
Section 1, lines 1 through 4, for partners that are RICs and
REITs but doesn't need to complete Section 2 for these
partners.

Section 2—Base Erosion Payments and Base
Erosion Tax Benefits
Column (b). Total 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.

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Column (c). Total 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 aren't netted with other items. A partner's base
erosion tax benefit may be more than the partner's base erosion
payment (for example, in the case of special allocations made
by the partnership). See the Instructions for Form 8991 and
Regulations section 1.59A-7(d) for further information
concerning a partner's base erosion tax benefits.

General. Don’t include amounts that a partner doesn't take into
account pursuant to the exception for certain small partners for:
• Line 8, columns (b) and (c);
• Line 9, columns (b) and (c);
• Line 10a, columns (b) and (c);
• Line 11, columns (b) and (c);
• Line 12, columns (b) and (c);
• Line 13, columns (b) and (c);
• Line 14a, columns (b) and (c);
• Line 15, columns (b) and (c); and
• Line 16, columns (b) and (c).
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.
Don't 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
hasn't 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 1 through 4, column (a). 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 1 through 4, column (b). Complete lines 1 through 4,
column (b), 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 1 through 4, column (c). Complete lines 1 through 4,
column (c), 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 intangi­
bles (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

Line 5, column (a). Amounts included in the denominator of
the base erosion percentage as described in Regulations
section 1.59A-2(e)(3). Enter the amount of deductions and
other items allocated to the partners from the partnership that
will be included in the denominator of the partners' base erosion
percentage. For a description of deductions that aren't included
in the denominator, see Regulations section 1.59-2(e)(3)(ii).
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

for the tax year for depreciation (or amortization in lieu of
depreciation) with respect to intangible property rights acquired
in the current year or prior years from all foreign persons that
are related parties of any of the partners.

Line 10b. Compensation/consideration paid for services ex­
cepted 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 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 related parties of any of the partners
for the use or right to use tangible or intangible property that
results in rents, royalties, and/or license fees.

Line 11. Interest expense.
Column (a). Enter the amount of interest paid or accrued by
the partnership for the tax year (excluding interest paid or
accrued in a prior year treated as paid or accrued in the current
year under section 163(j) or similar provisions).
Column (b). Enter the amount of interest expense paid or
accrued to all foreign persons that are related parties 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 Schedule K-3, line 11, if
the partner is a foreign person, enter the total from Worksheet
A, column (a), on the partner’s Schedule K-3, line 11, column
(a); enter the total from Worksheet A, column (b), on
Schedule K-3, line 11, column (b); and enter the total from
Worksheet A, column (c), on Schedule K-3, line 11, column (c).
The partnership is required to complete Worksheet A for all
partnership-related items and complete 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.

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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).

Worksheet A
Interest Paid or Accrued by the Partnership
(a)

(b)

Total Interest Paid or Accrued in
the Current Year

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

(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)
(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)

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.

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Line 13. Premiums and/or other considerations paid or ac­
crued 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
reinsurance that reduces life insurance gross income) or section
832(b)(4)(A) (relating to amounts deducted from gross

-35-

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.

Column (c). Enter the base erosion tax benefits attributable
to amounts paid or accrued to certain expatriated entities
described in column (b) resulting in a reduction of gross
receipts of the partnership.
Line 16. Other payments—specify.
Column (a). Enter the amount paid or accrued for the tax
year by the partnership that hasn't been included on lines 8
through 15.
Column (b). Enter the amount paid or accrued to any
foreign person that is a related party of any of the partners that
is a base erosion payment that hasn't otherwise been included
on lines 8 through 15.
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.
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 and Total base erosion tax benefits. For each
type of payment, the attachment must identify the relationship of
a partner to the foreign related party consistent with the
categories and instructions for columns (b) and (c) of this
schedule.

Line 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 aren't eligible for the
qualified derivative payment exception under section 59A(h)
and Regulations section 1.59A-6. Don't 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.

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Line 14b. Qualified derivative payments excepted by sec­
tion 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 FMV 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 isn't
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 isn't a qualified derivative payment if it
is properly allocable to the nonderivative component.

Line 17, column (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, column (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 with­
held under section 1441 or 1442 at a reduced withholding
rate pursuant to an income tax treaty. Multiply ratio of per­
centage 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
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 15. Payments reducing gross receipts made to surro­
gate 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 doesn't
include a foreign corporation that is treated as a domestic
corporation under section 7874(b).

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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

%

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%
%
%
%

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

pass-through partner regarding whether or not the pass-through
partner has any partners or owners that are foreign persons
and doesn't otherwise have the information necessary to make
this determination. Because the partnership can't 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 isn't 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.

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)

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, 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 isn't required to complete Schedule K-3, Part
X, if it doesn't 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 doesn't have ECI and files a
partnership return under the modified filing obligations under
Regulations section 1.6031(a)-1(b)(3)(iii) is only required to
complete Schedule K-3, Part X, if (a) it has a domestic
pass-through partner that has a direct or indirect foreign owner,
beneficiary, or partner; or (b) it knows or has reason to know
that another withholding agent failed to meet its withholding and
reporting obligations under chapters 3 and 4 with respect to the
income. 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 doesn't have sufficient information or
notice to make this determination.

Note. Schedule K-3, Part X, doesn’t need to be completed and
provided to partners who are U.S. persons (as defined in
section 7701(a)(30)) and not pass-through partners. A
pass-through partner is a partnership required to file a return
under section 6031(a), an S corporation, a trust (other than a
wholly owned trust disregarded as separate from its owner for
federal income tax purposes), and a decedent’s estate. See
Regulations section 301.6241-1(a)(5). 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 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
Schedule K-3.

Note. A foreign partner doesn't include an individual who is
treated as a U.S. resident under section 7701(b)(3).
A partnership may rely on Form W-8, Certificate of Foreign
Status, and Form W-9, Request for Taxpayer Identification
Number and Certificate, 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 doesn't 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 Schedules K-2 and K-3, Part X, accordingly.

The partnership uses Schedule K-2, Part X, Section 1, to report
each item of the partnership's gross income as one of the
following.
• ECI derived from U.S. sources.
• Foreign source ECI.

Example 17—pass-through partner; need to complete
Part X. A partnership doesn't receive notice from a
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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• Income from U.S. sources that is FDAP and isn't income
effectively connected with the partnership’s conduct of a U.S.
trade or business (non-ECI).
• Other U.S. source non-ECI.
• Foreign source non-ECI.
The partnership must generally report items of gross income as
either:
• U.S. source ECI in column (c),
• Foreign source ECI in column (d),
• U.S. source non-ECI (FDAP) in column (e),
• U.S. source (Other) in column (f), or
• Foreign source non-ECI in column (g).
Each line in this section of the schedule corresponds to a line
on 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.

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 a 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.

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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.
Other income treated as U.S. source ECI. If a partnership
isn't 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).

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
Form 1065, Schedule K, line 11, enter $100 in line 20, column
(a).

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.
The source of income is important in determining how to
report income on Part X of Schedules K-2 and K-3. Each type
of income has its own sourcing rules. For more information on
sourcing rules for particular items of income, see Pub. 514 and
section 865.
Schedule K-3. For each line in Section 1, enter in column (b)
the partner's distributive share of the applicable gross income
the source of which needs to be determined by the partner. For
each item of income in column (b), attach a statement
identifying the column [(c), (e), or (f)] in which the income would
be reported by the partnership if it were U.S. source and the
column [(d) or (g)] in which the income would be reported by the
partnership if it were foreign source. For example, if you have
income from the sale of personal property the source of which
is based on the tax home of the partner under section 865, the
statement should indicate both how the income should be
characterized (as ECI, FDAP, or other) if it were U.S. source,
and how it should be characterized (as ECI or non-ECI) if it
were foreign source.

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, Annual Return for Partnership Withholding Tax, for
any Form 8804, filing obligations.

Don't include gross rental real estate income in
Schedule K-2, Part X, column (c), that isn't ECI to the
CAUTION partnership. Even if a foreign partner elects to treat the
income as ECI, report these amounts in Schedule K-2, Part X,
column (e). However, the partnership should report the income
as ECI in Schedule K-3, Part X, column (c).

!

Schedule K-3. In addition to the partner’s distributive share
of the amounts reported in Schedule K-2, Part X, column (c),
report in Schedule K-3, Part X, column (c), any U.S. source
income that is subject to withholding under section 1446 based
on a partner’s Form W-8ECI, Certificate of Foreign Person's
Claim That Income Is Effectively Connected With the Conduct
of a Trade or Business in the United States, including U.S.
source gross rental real estate income that the foreign partner
elected to treat as ECI.

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).

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.

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 tests.

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

• 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.

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. Don't 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).

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Column (f). U.S. source non-ECI (other). Include in this
column U.S. source gross income amounts that aren't ECI and
wouldn't 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 Schedule K-2, Part X, column (f). 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.

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) wouldn't 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 isn't exempt (by the Code) from
taxation. For example, interest on deposits that are exempted
by section 881(d) wouldn't be included as income by a foreign
partner. In addition, certain portfolio interest isn't taxable for
obligations issued after July 18, 1984. See section 881(c) for
more details.
Amounts that are FDAP include the following.
• Interest (other than 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
wasn't previously taken into account and if the tax imposed on
the OID doesn't 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 isn't 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.

Accrued OID reported on Form 1065. The amount of
accrued OID reported on Form 1065, Schedule K, that isn't
taxable to foreign partners should be reported as interest
income in Schedule K-2, Part X, column (f). Attach a statement
to Form 1065 with respect to Part X clarifying that these
amounts aren't taxable to foreign partners and doesn’t need to
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.

OID payments or gains taxable on a gross basis to a for­
eign partner. When the partnership receives payments on the
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 Schedule K-2,
Part X, column (e), 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 Form 1065,
Schedule K. Attach a statement explaining that the negative
adjustment in column (f) is for reconciliation purposes only and
isn't relevant to the foreign partner’s tax liability and therefore
doesn’t need to 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.
Example 18—Part X; OID. In addition to other income and
expense items, a partnership accrues $100 OID in Year 1
reported on Form 1065, Schedule K. On Schedule K-2, Part X,
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 its Schedule K-2, Part X, 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 wasn't ECI to the partnership, include such
CAUTION amounts in Schedule K-2, Part X, column (e). 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
Schedule K-3, Part X, column (c), for such partners.

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Column (g). Foreign source non-ECI. For each line, enter
amounts of gross income which are neither U.S. source nor
ECI.

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Don't include deductions attributable to gross rental real
estate income in Schedule K-2, Part X, column (c), that
CAUTION isn't ECI to the partnership. Even if a foreign partner
elects to treat the income as ECI, report these deductions in
Schedule K-2, Part X, column (e). However, the partnership
should report the deductions in Schedule K-3, Part X, column
(c).

Line 8. Dividend equivalents. Except as provided in the next
sentence, the partnership must report its dividend equivalents in
columns (a) and (e). The partnership shouldn’t report dividend
equivalents with respect to any partnership interest that the
partnership knows is held directly and indirectly (including
through one or more pass-through entities) by a partner that
isn’t subject to section 871(m). In such a case, the partnership
should report dividend equivalents in columns (a) and (e) only
with respect to its other partnership interests.
Schedule K-3. Except as provided in the next sentence, the
partnership must report its dividend equivalents in
Schedule K-3, Part X, Section 1, line 8, columns (a) and (e),
with respect to its partnership interests. To the extent the
partnership knows a partnership interest is held directly and
indirectly (including through one or more pass-through entities)
by a partner that isn’t subject to section 871(m), it doesn’t have
to report allocations with respect to that partnership interest in
columns (a) and (e).

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Columns (e) through (g). Partnership determina­
tion—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 2. R&E expenses. In general, R&E expenses are
allocated and apportioned by the partner and reported in
column (b).

Line 7. Interest expense on U.S.-booked liabilities. The
partnership reports its interest expense on U.S.-booked
liabilities as described in Regulations section 1.882-5(d)(2)(vii).
This is relevant for determining the foreign corporation’s interest
expense allocable to ECI.

Line 11. Net long-term capital gain. Don't 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.

Line 10. Section 59(e)(2) expenditures. Don't include R&E
expenses on this line. Instead, include R&E expenses that are
also section 59(e)(2) expenditures on line 2.

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 12. Net long-term capital loss. Don't include losses
reported on line 13.

Line 13. Collectibles loss. Report collectibles loss on line 13
and not on line 12.

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.

Line 15. Other losses. Each loss must be separately reported
and shouldn’t be combined on line 15. Instead, 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.

Line 20. Other income (loss) not included on lines 1
through 19. Determine other income (loss) without regard to
any amount reported on line 8.

Line 16. Charitable contributions. Charitable contributions
may be deducted whether or not they're 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).

Section 2—Deductions, Losses, and Net Income
In computing a foreign corporation's or nonresident alien's ECI,
deductions are allowed only if they're 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) and Schedule I (Form 1120-F). For
additional guidance for nonresident aliens, see the Instructions
for Form 1040-NR.

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
schedules to include information on Section 2 identifying the
amount and type of deduction.

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.

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 Regulations sections
1.861-8 through 1.861-20 and Temporary Regulations sections
1.861-8T through -9T for more detailed information. The ratios
listed below generally correspond to the ratios on Schedule H
(Form 1120-F), Part III.

Column (b). Partner determination. Certain deductions and
losses must be allocated and apportioned by the partner, for
example, R&E expenses and interest expense.
Columns (c) and (d). Partnership determination—ECI.
Enter deductions definitely related and allocated to ECI under,
for example, Regulations sections 1.861-8 through 1.861-20
and Temporary Regulations sections 1.861-8T and -9T.

On Schedule K-3, Part X, report the partner’s share of the
amounts reported by the partnership on Schedule K-2, Part X.
Line 1a. Gross ECI. Enter the partnership’s gross ECI from
Section 1, line 21, sum of columns (c) and (d).

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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

$100, the partnership would enter $100 in line a, column (ii),
and if COGS is $200, the partnership would enter $200 in line
b, column (ii). As another example, a partnership might enter
average ECI assets in line a, column (i), and the average total
assets in line b, column (i). 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 doesn't have assets that generate
ECI, then a partnership doesn’t need to 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 schedules to
include all of the information for those apportionment keys.

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).

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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 doesn't
report an amount on line 2a because there aren’t any U.S.
assets, then the partnership doesn’t need to report an amount
on line 2b.

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).

Section 4—Reserved for Future Use

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).

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

Note. Certain partners that enter into section 871(m)
transactions referencing units in the partnership will use the
information in this part to determine their U.S. withholding tax
and reporting obligations with respect to those transactions
under section 871(m) and related rules.

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.

Schedules K-2 and K-3, Part XI, must be completed if you're
a PTP that (a) is a covered partnership as defined in
Regulations section 1.871-15(m)(1); or (b) 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 (a) a covered
partnership, or (b) 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.

Line 5. A partnership isn't required to complete this line 5
unless either (a) the partnership incurs R&E expense; or (b) 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 sections
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 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.

Lines 7 and 8. Report other apportionment keys than those
identified on lines 1 through 5, as applicable. See Regulations
section 1.861-8 through -20 and Temporary Regulations section
1.861-8T and -9T for more detailed information.
For example, a partnership might enter ECI COGS on line a,
column (i), and total COGS on line b, column (i). If ECI COGS is
Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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
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
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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.

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 FMV, 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.

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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.

Schedule K-3, Part XIII (Foreign Partner's
Distributive Share of Deemed Sale Items on
Transfer of Partnership Interest)

Item B. Identify the number of units or the percentage inter­
est 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.

Note. There isn't 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.
Partners will use this information as follows. A partner that:
• Is a nonresident alien individual, foreign trust, or foreign
estate completes Schedule P (Form 1040-NR);
• Is a foreign corporation completes Schedule P (Form
1120-F), Parts IV and V; or
• Had an installment sale, see Form 6252.

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 aren't narrow enough to
distinguish between different classes, then check “Other” and
explain.

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:
• 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
• The partnership directly or indirectly transferred an interest in
a partnership that engaged in a U.S. trade or business.
The partnership must complete lines 1 through line 3 of this part
if it is notified or otherwise knows that a transfer subject to
section 864(c)(8) has occurred. A partnership that makes a
distribution is treated as having actual knowledge of the
transfer. See Regulations section 1.864(c)(8)-2(a)(1) and Pub.
541 for the rules regarding foreign transferor notifications.

Line 1. Total ordinary gain or (loss) that would be recog­
nized 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 FMV 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 connec­
ted 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
outlined below. For more information, see Regulations section
1.864(c)(8)-1.
Step 1. 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
FMV immediately before the partner’s transfer of its partnership
interest.
Step 2. 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).
Step 3. Determine the partner’s distributive share of these
deemed sale gain or loss amounts.

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 didn't 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
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Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

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.

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 6 if the material change in circumstances rule
is used to determine the amount provided on line 2 or line 3.

Lines 4 and 5. Aggregate effectively connected gain (loss)
that would be recognized on the deemed sale of section
1(h)(5) collectible assets, and Aggregate effectively con­
nected gain that would be recognized on the deemed sale
of section 1(h)(6) unrecaptured section 1250 gain assets.
Lines 4 and 5 don’t apply to a foreign transferor that is a
corporation. These amounts are subsets of the amount of the
aggregate effectively connected capital gain (loss) that would be
recognized on the deemed sale of non-section 751 property
reported on line 3.
Enter on line 4 the foreign transferor's distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(5) collectible assets.
Enter on line 5 the foreign transferor's distributive share of
deemed sale effectively connected gain recognized on the
transfer of section 1(h)(6) unrecaptured section 1250 gain
assets.

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Line 7. Gain or (loss) that would be recognized under sec­
tion 897(g) on the deemed sale of U.S. real property inter­
ests. 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 FMV 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 7 if it holds
U.S. real property interests and the transfer of an interest in the
partnership isn't subject to section 864(c)(8). Under these
circumstances, the partnership must enter on line 7 for
purposes of section 897(g) the foreign transferor’s distributive
share of the partnership’s gain or loss on the deemed sale of
the U.S. real property interests.

Line 6. Check this box if the amount provided on line 2 or 3
is determined (in whole or in part) under Regulations sec­
tion 1.864(c)(8)-1(c)(2)(ii)(E) (material change in circumstan­
ces 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

Partnership Inst. for Sch. K-2 and K-3 (Form 1065) (2023)

Line 8. Gain that would be recognized under section 897(g)
on the deemed sale of section 1(h)(6) unrecaptured section
1250 gain assets. A partnership that has this type of gain will
be engaged in a U.S. trade or business and should report this
amount on line 5. Therefore, there isn’t a need to complete this
line.

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Index

A

F

Allocation and apportionment
methods for deductions 40

FDII deduction apportionment
factors 17
Foreign branch category income 11
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 6
Foreign taxes 15
Foreign taxes deductible but not
creditable 18
Foreign taxes paid or accrued to
sanctioned countries 17
Foreign taxes related to PTEP
resourced by treaty 17
Foreign-derived DEI on Form 8993 21
Foreign-derived gross receipts 21
Form 1116 exemption exception 9
Form 5471 information 8
Form 8621, information for 26

Partner loan transactions 8
Partners eligible to claim credit 9
Partnership determination 11
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 4
Passive group codes 31
PFIC, QEF general information 27
Purchase or creation of property
rights for intangibles 34

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B

Base erosion and anti-abuse tax
(Section 59A) 33
Base erosion payments and base
erosion tax benefits 34
BEAT example 2

C

Capital gains and losses 13
Category of income codes 31
Charitable contributions 14, 40
Codes for categories of income 26
Codes for classes of PFIC shares 27
Codes for types of tax 17
COGS 22
Compensation/consideration paid for
services excepted by section
59A(d)(5) 35
Compensation/consideration paid for
services NOT excepted by section
59A(d)(5) 35
Computer-generated Schedules K-2 4
Country codes 6, 12
Currency 4

D
Deductions 14
Deductions, other 15
DEI and QBAI on Form 8993 20
Distributions from foreign corps. to
partnership 23
Dividends, ordinary and qualified 13
Downstream loans 8
Dual consolidated loss 9

E
EIN 5
Example 01 2
Example 02 3
Example 03 3
Example 04 3
Example 05 7
Example 06 10
Example 07 10
Example 08 11
Example 09 13
Example 10 13
Example 11 16
Example 12 18
Example 13 20
Example 14 21
Example 15 32
Example 16 33
Example 17 37
Example 18 39
Exception for Form 8621 8
Excluded foreign source income 31

G

Gains on sales personal property 5
General filing instructions 11
General property 22
Gross income 12
Gross receipts 22

H
High-taxed income 6
How to complete Sch. K-2 and K-3 4

I
Identifying info., partners 5
Identifying info., partnership 5
Income resourced by treaty 12
Interest expense apportionment
factors 15
Interest expense on U.S. booked
liabilities 40
Interest expense specifically allocable
under Reg. 1.861–10 and -10T 14

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

O
Other forms 8
Other income 14
Other information for preparation of
Form 8993 22
Other international transactions 5, 9
Other tax information 19

P
Part applicability 5
Partner determination 12
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Q

Qualified derivatives dealer 5

R

R&E expense apportionment
factors 15
R&E expenses 14
Rental income 13
Rents, royalties, and license fees 35

S

Section 1291 and other
Information 29
Section 250 deduction re FDII 19
Section 267A disallowed deduction 8
Section 59(e)(2) expenditures 40
Section 871(m) covered
partnerships 41
Section 901(j) income 12
Section 951(a) inclusions 14
Section 951(a)(1) and section 951A
inclusions 24
Section 951A category income 12
Section 986(c) gain and loss 13
Section 987 gain and loss 14
Section 988 gain and loss 14
Splitter arrangements 6
Stewardship expenses 15

T
Table 1. Information on Personal
Property Sold 6
Taxes assigned to section 951A
category 17
Tiered partnerships 42
Total deductions 33
Total gross income 14

U
Upstream loans 8

W
When to file 3
Where to file 3
Withholding foreign partnership 5