Schedules M-1 and M-3

In completing Schedules M-1 and M-3, the following apply.

• The foreign corporation must report on line 1 of Schedule M-2 the balance of unappropriated retained earnings per the set(s) of books taken into account on Schedule L.

• A corporation with total assets of $10 million or more on the last day of the tax year that are reportable on Schedule L must file Schedule M-3 (Form 1120-F) instead of Schedule M-1.

• A corporation filing Form 1120-F that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1. See the Instructions for Schedule M-3 (Form 1120-F) for more information.

• Corporations that (a) are required to file Schedule M-3 (Form 1120-F) and have less than $50 million total assets at the end of the tax year, or (b) are not required to file Schedule M-3 (Form 1120-F) and voluntarily file Schedule M-3 (Form 1120-F), must either (i) complete Schedule M-3 (Form 1120-F) entirely, or (ii) complete Schedule M-3 (Form 1120-F) through Part I, and complete Schedule M-1 instead of completing Parts II and III of Schedule M-3 (Form 1120-F). If the corporation chooses to complete Schedule M-1 instead of completing Parts II and III of Schedule M-3, the amount on Schedule M-1, line 1, must equal the amount on Schedule M-3, Part I, line 11. See the Instructions for Schedule M-3 (Form 1120-F) for more information.

• If Schedule M-3 is not required, the foreign corporation must report on line 1 of Schedule M-1 the net income (loss) per the set of books taken into account on Schedule L.

Line 29. Adjustments to shareholders’ equity. Some examples of adjustments to report on this line include the following.

• Unrealized gains and losses on securities held “available for sale.”

• Foreign currency translation adjustments.

• The excess of additional pension liability over unrecognized prior service cost.

• Guarantees of employee stock (ESOP) debt.

• Compensation related to employee stock award plans. If the total adjustment to be entered on line 29 is a negative amount, enter the amount in parentheses.

Adaptation of Schedule L for treaty-based reporting. The set(s) of books reported on Schedule L for treaty-based reporting purposes will generally be the same set(s) of books reported on Schedule L, as described below. However, certain books that give rise to ECI might not necessarily give rise to treaty-based reporting. For example, the assets on a set of books could still be attributed to a U.S. office for ECI reporting purposes even when transferred away from the U.S. permanent establishment for treaty reporting purposes (see, for example, Regulations section 1.864-4(c)(5)(iii)) if, under the facts and circumstances, such assets also constitute a set of books that give rise to U.S. booked liabilities under Regulations section 1.882-5(d)(2). Under such circumstances, the set of books would remain reportable on Schedule L for Code-based reporting purposes, but for treaty-based reporting purposes, such transfer may effect attribution to another part of the corporate enterprise under a functional and factual analysis and no longer be reportable on Schedule L as part of the U.S. permanent establishment after the transfer is made. Additionally, a set of books having no ECI or U.S. booked liabilities under Regulations section 1.882-5(d)(2) might still constitute a set of books of the U.S. permanent establishment because the items recorded thereon are primarily attributable to the U.S. permanent

Note: If Schedule M-3 is filed in lieu of Schedule M-1, the corporation is still required to file Schedule M-2.

Do not file Schedules M-1 and M-2 (Form 1120-F) if total assets at the end of the tax year (line 17, column (d), of Schedule L) are less than $25,000.