Part VII. Shareholder’s Share of S Corporation’s Interest in Foreign Corporation Income…

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

Individuals, estates, and trusts may claim a foreign tax credit for foreign income taxes deemed paid with respect to a CFC if they make an election under section 962.

To figure the foreign taxes deemed paid by a shareholder that is a U.S. shareholder of a CFC owned by an S

corporation, 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 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 are not reported in this Schedule K-3, Part VII.

A shareholder electing under section 962 to claim a deemed paid credit with respect to an inclusion under section 951 will use Schedule K-3, Part VII, to complete Form 1118, Schedule C; see section 960(a). The shareholder will use column (ii) (the share of net income in each subpart F income group of the CFC) to report in Form 1118, Schedule C, column 8(a). The shareholder will use column (iii) (the total net income in the subpart F income groups of the CFC) to report in Form 1118, Schedule C, column 6. The shareholder will use column (iv) (the total current-year taxes by the subpart F income groups of the CFC) to report in Form 1118, Schedule C, column 7. The shareholder must also complete Form 1118, Schedule C, column 5, with information from Schedule K-3, Part VII.

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

Similarly, a shareholder electing under section 962 to claim a deemed paid credit with respect to an inclusion under section 951A will use Schedule K-3, Part VII, to report on Form 1118, Schedule D; see section 960(d). The shareholder will use column (ii) (the shareholder’s share of the foreign corporation’s net income by tested income group) to report in Form 1118, Schedule D, column 5. The shareholder will use column (iii) (the foreign corporation’s total net income by tested income group) to report in Form 1118, Schedule D, column 6. The shareholder will use column (iv) (the foreign corporation’s current-year tested foreign taxes for which credit is allowed by tested income groups) to report in Form 1118, Schedule D, column 8.

Example 5. Use Schedule K-3 to claim deemed paid credit. In Year 1, USC, an S corporation, has two U.S. citizen shareholders with equal interests in the S corporation. Both shareholders make elections under section 962. USC wholly owns CFC. CFC earns passive category interest income sourced from Country X of 100u and pays a withholding tax of $20 to a foreign country. The code for Country X is “X.”

12 Instructions for Schedule K-3 (Form 1120-S) (2025)

Example 5. USC’s Schedule K-3, Part VII, for Shareholders

Example 5. Shareholder’s Form 1118, Schedule C

On Form 1118, Schedule C, with respect to the passive category each shareholder reports with respect to the information received on Schedule K-3 as follows.

Instructions for Schedule K-3 (Form 1120-S) (2025) 13