Part VIII. Partner’s Interest in Foreign Corporation Income (Section 960)

Note: Amounts on this part are reported in foreign currency.

In general, for purposes of the foreign tax credit, 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 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. However, they must make an election under section 962.

To calculate the foreign taxes deemed paid by a partner that’s a corporate U.S. shareholder of a CFC held by a partnership, the income, deductions, and taxes of the CFC must be assigned to separate categories of income and then to income groups in those separate categories; see Regulations section 1.960-1(c) (1). This is completed on Schedule Q (Form 5471), CFC Income by CFC Income Groups. The income groups include the subpart F income group, the tested income group, and the residual income group. Each single item of foreign base company income as defined in Regulations section 1.954-1(c)(1)(iii) is a separate subpart F income group; see Regulations section 1.960-1(d)(2) (ii)(B). The tested income group consists of tested income within a section 904 category; see Regulations section 1.960-1(d)(2)(ii) (C). The residual income group consists of any income not in the

Example 7—USP’s Schedule K-3, Part VIII, for Partners

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) (3) with respect to the PTEP groups. The PTEP groups aren’t reported in this Schedule K-3, Part VIII.

A partner claiming a deemed paid credit with respect to an inclusion under section 951 will use Schedule K-3, Part VIII, to complete Form 1118, Schedule C; see section 960(a).

Where To Report Information From Schedule K-3 (Form 1065), Part VIII

The partner must also complete column 5 of Form 1118, Schedule C, with information from Schedule K-3, Part VIII.

Note: The amount entered in column 8(a) of Form 1118, Schedule C, won’t equal the share of the net income in the subpart F income group if there’s a qualified deficit. See Regulations section 1.960-2(b)(3)(ii).

Similarly, a partner claiming a deemed paid credit with respect to an inclusion under section 951A will use the information reported on Schedule K-3, Part VIII, line 2, to complete Form 1118, Schedule D; see section 960(d).

Where To Report Information From Schedule K-3 (Form 1065), Part VIII, Line 2

Example 7—use Schedule K-3 to claim deemed paid credit. In Year 1, USP, a domestic partnership, has two domestic corporate partners with equal interests in the partnership. USP wholly owns CFC. CFC’s reference ID number is 1234. CFC earns passive category interest income of 100u sourced from Country X and pays a withholding tax of $20 to Country X. The code for Country X is X. USP reports the following to each of its partners in Schedule K-3, Part VIII.

A EIN or reference ID number of CFC . . . . . . . 1234 B Separate category . . . . . . . . . . PAS
C If PAS was entered on line B, applicable grouping under Regulations section 1.904-4(c) . . . . . . . . . . . . . . . . . . . . . . . . (i)
(i) Country code (ii) Partner’s share of (iii) Foreign (iv) Foreign
foreign corporation’s net corporation’s total net corporation’s current
income (functional income (functional year foreign taxes for
currency) currency) which credit allowed
(U.S. dollars)

16 Partner's Instructions for Schedule K-3 (Form 1065) (2025)

On Form 1118, Schedule C, for the passive category income, each domestic corporate partner reports the information

received on Schedule K-3 as shown in Example—Domestic Corporate Partner’s Form 1118, Schedule C .

Example—Domestic Corporate Partner’s Form 1118, Schedule C