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U.S. resident maintains an office or other fixed place of business in a foreign country, income from the sale of personal property attributable to such office or other fixed place of business is foreign source only if an income tax of at least 10% of the income from the sale is actually paid to a foreign country with respect to such income.

If the partnership has income from the sale of personal property (other than inventory, depreciable personal property, and certain intangible property excepted from the general rule of section 865(a)) and the partnership pays income tax to a foreign country with respect to income from the sale or the income is eligible for resourcing under an applicable treaty, it must check box 1 and attach a statement to Schedule K-2 and Schedule K-3 (for distributive share) reflecting all the information shown in Table 1, Information on Personal Property Sold.

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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. See each part for applicability.

The instructions for the section entitled “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),” with respect to the heading “Box 1. Gain on personal property sale,” on page 3 (column 3) are amended as follows:

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.


Do not combine sales of property. Each item of property sold must be listed separately with the information shown in Table 1. For column (g), enter the two-letter code from the list at IRS.gov/countrycodes. Do not enter “various” or “OC” for the country code.
If the property sale is taxed by more than one country, complete a separate line for that country, but indicate in some manner (for example, a footnote) that the property entered on both lines is the same property.

The instructions for the section “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),” with respect to the heading “Box 7. Form 8858 information,” on page 5 (column 3) are amended as follows:

Box 7.

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U.S. citizen A and U.S. citizen B, domestic partnership need not complete Schedules K-2 and K-3, Part I, box 1, box 2, box 3, box 4, box 5, and box 10, Parts II or III.

The instructions for the section entitled “Schedule K-2, Parts II and III, and Schedule K-3, Parts II and III,” with respect to the heading “Exception,” and, the first “Schedule K-3” heading in that section, on page 7 (columns 2 and 3) are amended as follows:

Exception. If the partnership knows that its only partners are less-than-10% limited partners that do not hold their interest in the ordinary course of the partner’s active trade or business, the partnership’s foreign source gross income and gross receipts should be reported as passive category income and its deductions allocated and apportioned to foreign source income should be reported as reducing passive category income.

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Schedule O (Form 8865), Transfer of Property to a Foreign Partnership (Under Section 6038B), containing all the information required under Regulations section 1.6038B-2, with respect to a transfer to a foreign partnership, the partnership must provide the necessary information for each partner to fulfill its reporting requirements under Regulations section 1.6038B-2.

See Other Forms, Returns, and Statements That May Be Required in the Instructions for Form 1065.

If the partnership has filed Form 8990, check box 9 and provide on Schedule K-1 the information needed to complete Form 8990, Schedule A for foreign partners which are required to report their distributive share of excess business interest expense, excess taxable income, and excess business interest income, if any, that is attributable to income effectively connected with a U.S.

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If this exception is applicable with respect to a foreign corporation, the sum of the amounts reported on Part V of the Schedules K-3 with respect to the foreign corporation may not equal the amounts reported on Part V of the Schedule K-2 with respect to the foreign corporation.

The instructions for the section entitled “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),” with respect to the heading “Exception,” on page 17 (column 3) are amended as follows:

Exception. Part VI of Schedule K-2 does not need to be completed with respect to a CFC if the partnership knows that it does not have a direct or indirect partner (through pass-through entities only) that is a U.S.

To reconcile Schedules K-2 and K-3 reporting of OID with Schedules K and K-1 reporting of OID and to provide foreign partners with the information necessary to complete their returns, the IRS recommends the following approach for reporting OID on Part X.

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

If the partnership wholly owns a reverse hybrid (as defined in Regulations section 1.909-2(b)(1)(iv)) and you own 10% or more (determined by vote or value) of the interest in the partnership, the reverse hybrid is a covered person with respect to you. You cannot credit the foreign taxes paid or accrued by the partnership with respect to the reverse hybrid until you or the partnership takes into account the related income of the reverse hybrid. Until then, the taxes are suspended. The partnership reported your share of the potentially suspended taxes as a result of the application of section 909 on Part III, section 4, line 2E.
If you are a corporation, complete Form 1118, Schedule G, line E for taxes suspended under section 909. If you are an individual, estate, or trust, include on Form 1116, Part III, line 12, taxes suspended under section 909.

Schedules K-2 and K-3 are new for the 2021 tax year. If you have items of international tax relevance, you’re required to report them on Schedules K-2 and K-3 if you file:

  • Form 1065, U.S. Return of Partnership Income
  • Form 1120-S, U.S.

    Income Tax Return for an S Corporation

  • Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships

To find out if you’re required to submit Schedules K-2 and K-3, check the schedule instructions.

How to Submit Schedules K-2 and K-3 with an Electronic Return During the Interim Period

Modernized e-File (MeF)/Extensible Markup Language (XML) electronic filing capability for the schedules K-2 and K-3 for TY 2021 will not be available as of the beginning of the 2022 filing season (January 2022). Schedules K-2 and K-3 will be available for MeF/XML filing in the following timeframes.

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