Purpose of Schedule K-3

Schedule K-3 (Form 1065) reports items of international tax relevance from the operation of a partnership. You must include this information on your tax or information returns, if applicable. See separate parts for specific instructions. You only need to use the schedules that are applicable to you. For example, in general, if the partner receiving Schedule K-3 is a domestic corporation, the partnership wouldn’t have completed and filed Part X, Foreign Partner’s Character and Source of Income and Deductions, because that part is inapplicable to domestic corporation partners. If the partner receiving Schedule K-3 is itself a partnership, it’ll use information from Schedule K-3 to complete Schedules K-3 to report to its partners.

The proper treatment of certain items by the partner is dependent on information that the partnership may not have; thus, the partnership may have reported certain information on Schedule K-3 based on assumptions that are incorrect. In such cases, the partner must treat the items according to the partner’s actual facts, and if appropriate file a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), to identify and explain the inconsistency.

Domestic partnerships with no or limited foreign activity. A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may be reporting information to partners on Schedules K-3. For example, if you claim a credit for foreign taxes paid and/or accrued separately from your partnership interest, you may need certain information from the partnership to complete Form 1116, Foreign Tax Credit; or Form 1118, Foreign Tax Credit—Corporations. Also, if you’re a domestic corporation, a domestic partnership may be required to complete Part IX when the partnership makes certain deductible payments to foreign parties related to you. The information reported in Part IX will assist you as a domestic corporation in determining the amount of base erosion payments made through the partnership, and in determining if you’re subject to the base erosion and anti-abuse tax (BEAT). See also Part IV concerning foreign-derived intangible income (FDII) for when a domestic partnership with solely domestic activity may be reporting information to you, Part XI for when a domestic or foreign publicly traded partnership (PTP) as defined in section 7704(b) with no foreign activity may be reporting information to you, and Part XII if you’re a partner in a qualified derivatives dealer (QDD) partnership (as defined in the Part XII instructions).

Example 1—Part IX required to determine base erosion payments. Foreign corporation wholly owns DC, a domestic corporation, and FC, a foreign corporation. DC satisfies the gross receipts test; see Regulations section 1.59A-2(d). In Year 1, DC owns a 50% interest in domestic partnership USP. An unrelated domestic corporation owns the remaining 50% interest in USP. DC’s investment in USP doesn’t qualify for the small partner exception defined in Regulations section 1.59A-7(d)(2). In Year 1, USP pays FC $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 FC 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 FC. 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, DC receives Part IX of Schedule K-3 (Form 1065) from USP.