What counts as a foreign partnership
A foreign partnership is any partnership not created or organised in the US or under US or state law. "Partnership" is read broadly: limited partnerships, joint ventures, syndicates and similar unincorporated arrangements all count, as do foreign entities with two or more owners that are taxed as partnerships, whether by default or through a check-the-box election on Form 8832. A Cayman fund vehicle or a Luxembourg SCSp taxed as a partnership is a typical example.
One unusual case: a domestic partnership formed on or after January 18, 2017 that holds built-in-gain property contributed by a US person under the §721(c) gain deferral method is treated as foreign for Form 8865 purposes.
The two measures: a 10% interest and a 50% interest
Every category is built on percentage interests, and an interest is measured three ways. You hold a 10% interest if you have 10% of the partnership's capital, or 10% of its profits, or 10% of its deductions or losses. A 50% interest works the same way, and control means owning more than a 50% interest.
Constructive ownership counts, using the §267(c) rules. Interests held by a corporation, partnership, estate or trust are treated as owned proportionately by its owners. An individual is treated as owning interests held by their spouse, siblings, ancestors and lineal descendants. An interest held by a nonresident alien relative is attributed only if the person it would be attributed to already has a direct or indirect interest in the partnership.
Category 1: control
A US person who controlled the foreign partnership at any time during the partnership's tax year, meaning they held more than a 50% interest, is a Category 1 filer. Because interests are measured three ways, a partnership can have more than one Category 1 filer: one US partner might hold more than half of the capital while another is allocated more than half of the losses.
Category 1 also covers a US transferor that must report on a §721(c) partnership under the gain deferral rules. Category 1 is the full return: the partnership's income statement, balance sheet, capital accounts, Schedule K and the K-1, K-2 and K-3 schedules, as if it were filing a US partnership return.
Category 2: a 10% partner in a US-controlled partnership
A US person is a Category 2 filer if, at any time during the partnership's tax year, they held a 10% or greater interest while the partnership was controlled by US persons who each held at least 10%. Put simply, the US 10% partners between them hold more than half.
There is a cut-off: if the partnership had a Category 1 filer at any time during that tax year, nobody is a Category 2 filer for it.
Category 3: contributions of property
A US person who contributes property to a foreign partnership in exchange for an interest during their tax year is a Category 3 filer if either:
- they hold a 10% or greater interest, directly or constructively, immediately after the contribution; or
- the property contributed, added to anything they or a related person contributed in the 12 months ending on the transfer date, is worth more than $100,000.
Cash counts as property here, so a single capital call above $100,000 can make a small investor in a foreign fund a Category 3 filer for that year. If a US partnership makes the contribution, its partners are treated as contributing their share, but they are let off if the US partnership files Form 8865 and reports the contribution properly.
Category 3 also picks up a US person that previously had to report a contribution of appreciated property, if the partnership sells that property while the US person is still a direct or indirect partner.
Category 4: crossing the 10% line
Category 4 is the event category under §6046A, and it looks only at direct interests. A US person is a Category 4 filer for a tax year in which they have one of three reportable events:
- Acquisition: going from below 10% to 10% or more (for example 9% to 10%), or increasing by at least 10 percentage points since the last reportable event (for example 11% to 21%).
- Disposition: going from 10% or more to below 10% (for example 10% to 8%), or decreasing by at least 10 points since the last reportable event (for example 21% to 11%).
- Change in proportional interest: an increase or decrease of at least the equivalent of a 10% interest since the last reportable event, even if the partner did nothing. Another partner withdrawing, or a profit share that steps up under the partnership agreement, can trigger it.
If you contribute property in exchange for a 10% or greater interest, you are both Category 3 and Category 4. Reporting the contribution properly under Category 3 is enough, although it still counts as a reportable event when testing later changes.
Which schedules each category completes
Every category completes the identifying information on page 1 and Schedule A. Beyond that, from the chart in the 2025 instructions:
| Category | Schedules required |
|---|---|
| 1 | A-1, A-3, B, D, G, H, K, K-1, K-2, K-3, L, M-1, M-2, N |
| 2 | A-3, K-1, K-3, N |
| 3 | A-1, A-3, G, H, O |
| 4 | A-3, G, H, P |
*Schedules G and H report on the §721(c) gain deferral method, so they matter only where that method is used. Schedule A-2 is likewise needed only for a §721(c) partnership.
| Schedule | What it reports |
|---|---|
| A | Constructive ownership of the filer's interest |
| A-1 | Certain partners of the foreign partnership |
| A-3 | Affiliation: other partnerships the foreign partnership holds interests in |
| B, D, K, L, M-1, M-2 | The partnership's income statement, capital gains, distributive share totals, balance sheet, book-tax reconciliation and capital accounts |
| K-1, K-2, K-3 | The partner's share of income, plus international items such as foreign taxes |
| N | Transactions between the partnership and its partners or other related parties |
| O | Transfers of property to the partnership |
| P | Acquisitions, dispositions and changes in interests |
If you qualify under more than one category, you complete everything each category requires. And if the foreign partnership files a US Form 1065 anyway, Category 1 and 2 filers can attach those 1065 schedules in place of the matching 8865 schedules.
Filing once for several people
- Several Category 1 filers. Only one needs to file, with a separate Schedule N, K-1 and K-3 for each of the others. A partner who controls only losses or deductions cannot be the one to file if another US person controls capital or profits. The others attach a "Controlled Foreign Partnership Reporting" statement to their own returns.
- Constructive owners. A Category 1 or 2 filer with no direct interest, who is a filer only because of interests attributed from another US person, does not file if that person files. They attach the same statement.
- Consolidated groups. The parent of a consolidated group can file one form for all members that are Category 1 or 2 filers.
DREs and Form 8858
A DRE (disregarded entity) is an entity ignored for US tax, so its owner is treated as owning its assets directly. Two things follow for Form 8865.
First, a foreign entity with one owner cannot be a partnership. If a US person is its only owner and it has elected to be disregarded, the right form is usually Form 8858 for a foreign disregarded entity (FDE), not 8865.
Second, if the foreign partnership itself owns an FDE or runs a foreign branch, its US filers also file Form 8858 for it. A Category 1 filer completes the whole 8858 and its Schedule M. A Category 2 filer completes page 1 and Schedules G, H, J and M, unless a Category 1 filer has already filed the full form.
Worked examples
- Two unrelated US corporations each hold 30% of a UK LLP taxed as a partnership; foreign partners hold the rest. Neither controls it, so there is no Category 1 filer. But US partners who each hold at least 10% together hold 60%, so both corporations are Category 2 filers every year.
- A US pension plan commits to a Cayman fund taxed as a partnership and pays a $5 million first capital call for a 2% interest. The contribution is over $100,000, so the plan is a Category 3 filer for that year even though it holds well under 10%.
- A US individual holds 8% of a foreign partnership, and another partner withdraws, lifting their share to 11%. They bought nothing, but their direct interest crossed 10%, so they are a Category 4 filer for the year and report the change on Schedule P.
Penalties and the open statute
- Categories 1 and 2 (§6038). $10,000 for each partnership for each year. If the form is still missing 90 days after the IRS mails a notice, another $10,000 accrues for each 30 days, up to $50,000 more. The filer can also lose 10% of foreign taxes available for credit, plus 5% for each further three months.
- Category 3 (§6038B). 10% of the value of the property contributed, capped at $100,000 unless the failure was intentional. The contributor must also recognise gain as if the property had been sold at its value.
- Category 4 (§6046A). $10,000, plus $10,000 for each 30 days the failure continues more than 90 days after an IRS notice, up to a further $50,000.
Reasonable cause can excuse these penalties. As with Form 5471, §6501(c)(8) keeps the IRS's time to assess tax on the whole return open until three years after a missing Form 8865 is filed, limited to the related items if the failure had reasonable cause.
Sources
- Instructions for Form 8865 (2025), IRS
- Instructions for Form 8858, IRS
- 26 U.S. Code § 6501, Cornell LII
Related reading
- Form 5471 Filer Categories Explained
- Form 8621 and PFIC Reporting Explained
- Glossary: Schedule K-1 (and K-3)
This explainer is analysis and general information, not tax, legal or investment advice.