Fund Taxation Alert 2022-02

2021 US Tax Reporting: New Schedules K-2 and K-3

2021 US Tax Reporting: New Schedules K-2 and K-3


The US Internal Revenue Service (IRS) is increasing its efforts to ensure that US and non-US entities (including Luxembourg investment funds or partnerships) comply with US tax rules. Making US investments may lead to US tax compliance obligations. In the particular case of a partnership (e.g. Luxembourg SCS or SCSp or any other partnership for US tax purposes), you may need issue K-1 statements to your US and non-US investors. Schedule K-1 is a schedule of IRS Form 1065, U.S. Return of Partnership Income. It is provided to partners in a business partnership to report their share of a partnership’s profits, losses, deductions and credits to the IRS.

Form 1065 must be filed by any US partnership unless it neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes. Generally, a non-US partnership that has gross income effectively connected with the conduct of a trade or business within the United States (ECI) or has gross income derived from sources in the United States (U.S. source income) must file Form 1065, even if its principal place of business is outside the United States or all its members are non-US persons. Few exceptions apply.

Change for 2021

In this regard, we want to highlight a change in US tax reporting that will impact US tax reporting.

The IRS has created new Schedules K-2 and K-3 for Form 1065 U.S. Return of Partnership Income for tax year 2021. As the form instructions outline, these new schedules replace, supplement, and clarify the Schedule K-1 Lines 16 and 20. The new schedules assist partnerships in providing partners with the information necessary to complete their tax returns in accordance with the international tax provisions of the Internal Revenue Code. 

Schedules K-2 and K-3

Schedule K-2 is an extension of the current Form 1065 Schedule K and is used to report items of “international tax relevance” from the operation of a partnership.

Schedule K-3 is an extension of the Form 1065 Schedule K-1 and is generally used to report each partners share of items reported on Schedule K-2. These schedules are intended to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.  

Schedule K-2 (replacing Form 1065 Schedule K, Line 16) is 19 pages with 12 parts while Schedule K-3 (replacing Form 1065 Schedule K-1, Line 16) is 20 pages with 13 parts.  There is a great deal still unknown about them, with new revisions to the forms and FAQ’s released just recently on January 19.

For reference, the forms and draft instructions can be accessed on IRS website:

Who must file schedules K-2 and K-3?

Any partnership required to file Form 1065 (or Form 8865) that has items relevant to the determination of the U.S. tax or reporting obligation of its partners under the international provisions of the Internal Revenue Code must complete the relevant parts of the Schedules K-2 and K-3.

The partnership should not complete the schedule “if the partnership does not have items of international tax relevance (typically, international activities or non-U.S. partners).” However, this statement may be misleading because “items of international tax relevance” may be broader than commonly construed. For example, even partnerships with solely U.S. activity may be required to file the Schedules K-2 and K-3.

The post release changes to the instructions acknowledges the general misconception that Schedules K-2 and K-3 have limited relevance and indicate that the Schedules K-2 and K-3 may apply even if the partnership has no non-U.S. source income, no assets generating non-U.S. source income, and no non-U.S. taxes paid or accrued. “For example, if the partner claims a credit for non-U.S. taxes paid by the partner, the partner may need certain information from the partnership to complete Form 1116.”

Other US tax compliance obligations

U.S. tax returns

Reason for filing



Filing for reclaiming of overwithholding of FDAP Income


Filing due to U.S. investments generating Effectively Connected Income (Federal returns and state returns)

Time limitation period (3 years)

- OR -

15th day of the 6th month after the end of its tax year

Schedule K-1 Equivalent statements

Non-US fund treated as a partnership for U.S. tax purposes and has U.S. partners

Before April (US investor)/June (non-US investor) of N+1 - Extension (till September)

PFIC Statements for QEF Statements

Non-US fund treated as a corporation for U.S. tax purposes and has U.S. shareholders

Before April (No extension)

Form 8832

Entity Classification Election or "Check the box" election form

75 days after set-up

Form SS-4

Application for Employer Identification Number


1042 and 1042-S

For banks with the Qualified Intermediary (QI) status

15 March

FATCA Return

Nil Return or reporting of US Accounts



KPMG would be happy to help you navigate the unchartered waters of schedules K-2 and K-3 or any other US tax compliance obligations. Should you have any queries, please contact us.


Jean Kizito

Partner, Financial Services Tax
+352 22 51 51 5492 

Frederic Jadoul

+352 22 51 51 5596