Schedules K-2 and K-3, Explained

Short answer: Schedules K-2 and K-3 are the international add-ons to a partnership's Form 1065. Schedule K-2 reports the partnership's items of international tax relevance in total, as an extension of Schedule K. Schedule K-3 gives each partner their share of those items, as an extension of their Schedule K-1. They exist so partners can claim foreign tax credits, compute inclusions from foreign companies, and, for foreign partners, work out what is taxable in the US. For 2025, Schedule K-2 has 12 parts and Schedule K-3 has 13. Most funds with any foreign investors or investments will complete at least some of them; small and purely domestic partnerships can often use an exception.

Why they exist

Before the 2021 tax year, partnerships reported international information to partners in whatever format they chose, usually as footnotes and attachments to the K-1. The IRS replaced that with standard schedules. Partners use the K-3 to fill in their own forms, for example Form 1116 or 1118 for the foreign tax credit, Form 8992 for GILTI (renamed NCTI from 2026), Form 8621 for PFICs, and, for a foreign partner, its US return.

The schedules cover the most common international provisions, not all of them. Anything relevant that has no line of its own is flagged in Part I, box 13 and explained in an attached statement.

Who must file

Any partnership that files Form 1065 and has items relevant to the US tax, withholding or reporting obligations of its partners under the international provisions must complete the relevant parts. A partnership only completes the parts that apply to it. For example, if it does not own stock in a foreign corporation, apart from ownership treated as existing only through downward attribution, it skips Parts V to VIII.

A purely domestic partnership is not automatically off the hook. If a partner claims a foreign tax credit from other sources, the partner may need the partnership's income and expense split from Parts II and III to calculate the credit limitation.

Penalties for a missing or incomplete K-2 or K-3 are the same as those for Form 1065 and Schedule K-1.

The two exceptions

1. The domestic filing exception. A domestic partnership does not need to file Schedules K-2 and K-3, or furnish K-3s, for 2025 if all four of these are true:

No or limited foreign activity. It has no foreign activity at all, or only passive foreign income with no more than $300 of creditable foreign taxes, reported to it on a payee statement such as a Form 1099. Foreign activity includes foreign taxes, foreign source income or loss, and any interest in a foreign partnership, foreign corporation, foreign branch or foreign disregarded entity.
US individual partners only. Every direct partner is a US citizen or resident individual, or a domestic estate, trust, S corporation, single-member LLC or partnership that in turn has only such owners or beneficiaries. A single corporate, tax-exempt or foreign partner fails the test.
Partner notice. Partners are told, no later than when they receive their K-1s, that they will not receive a K-3 unless they ask for one.
No request by the 1-month date. No partner asks for K-3 information on or before the date one month before the partnership files Form 1065. For a calendar-year 2025 partnership on extension, the latest 1-month date is 17 August 2026.

2. The small partnership exception (new for 2025). A partnership that answers yes to Form 1065, Schedule B, question 4, meaning total receipts under $250,000, total assets under $1 million, K-1s filed and furnished on time, and no Schedule M-3, is also excepted, again with partner notice and subject to partner requests by the 1-month date.

Under either exception, a request received after the 1-month date does not trigger a filing with the IRS, but the partnership must give the requesting partner a completed K-3 within one month of the request, covering the parts that partner needs.

The parts at a glance

Part	Title on the 2025 form	Who usually needs it
I	Partnership's Other Current Year International Information	Anyone: a checklist of extra attachments, such as Form 5471 information, partner loans and high-taxed income
II	Foreign Tax Credit Limitation	Partners claiming a foreign tax credit: income and deductions by source and basket
III	Other Information for Preparation of Form 1116 or 1118	Same partners: R&E and interest apportionment factors, asset values, foreign taxes
IV	Information on Partners' Section 250 Deduction With Respect to Foreign-Derived Intangible Income (FDII)	US corporate partners claiming the FDDEI deduction
V	Distributions From Foreign Corporations to Partnership	Partners in a partnership that owns foreign corporations
VI	Information on Partners' Section 951(a)(1) and Section 951A Inclusions	US shareholders of CFCs: subpart F and GILTI, renamed NCTI from 2026
VII	Information Regarding Passive Foreign Investment Companies (PFICs)	Partners with indirect PFIC holdings
VIII	Partnership's Interest in Foreign Corporation Income (Section 960)	US corporate partners claiming deemed-paid foreign tax credits
IX	Partners' Information for Base Erosion and Anti-Abuse Tax (Section 59A)	Large corporate partners subject to BEAT
X	Foreign Partners' Character and Source of Income and Deductions	Foreign partners: what is ECI or FDAP income
XI	Section 871(m) Covered Partnerships	Publicly traded partnerships with dividend-equivalent payments
XII	Section 871(m) Tax Liability of a Qualified Derivatives Dealer (QDD)	QDD partnerships only
XIII (K-3 only)	Foreign Partner's Distributive Share of Deemed Sale Items on Transfer of Partnership Interest	A foreign partner that sold or transferred its interest

The 2025 form still labels Part IV "FDII". The One Big Beautiful Bill Act renamed the deduction for foreign-derived deduction eligible income (FDDEI) for later years, and the 2025 instructions already reflect its change to deduction eligible income for sales after 16 June 2025.

What this means for funds

Funds with foreign investors almost always complete Part X, and Part XIII when a foreign partner sells, because those partners need to know what share of their income is effectively connected with a US business and what is subject to withholding.
Funds with foreign investments, whether foreign portfolio companies, foreign holding companies or foreign real estate, usually complete Parts II and III, and Parts V to VIII if they own foreign corporations, including Form 5471 and Form 8621 information that partners need.
Tax-exempt and corporate investors knock a fund out of the domestic filing exception, so institutional funds rarely qualify for it.
Timing. Because partners can ask for K-3 information up to the 1-month date, funds that rely on the exceptions should track requests carefully and keep the K-1 notice in their standard package.

In this series

This overview is the first page of a part-by-part guide to Schedule K-2. The following pages cover the foreign tax credit parts (II and III), the section 250 part (IV), the foreign corporation parts (V to VIII), BEAT (IX), the foreign partner parts (X and XIII), and section 871(m) (XI and XII).

This explainer is general information, not tax advice.