Foreign Entity of Concern Rules: A Quick Overview for Clean Energy Stakeholders

The clean energy industry is at a crossroads. The One Big Beautiful Bill Act (OBBBA) introduced sweeping restrictions on Foreign Entities of Concern (FEOCs), fundamentally changing how developers, manufacturers, and investors approach procuring equipment, components, and licensing of intellectual property for renewable energy projects. These rules are not just a compliance hurdle—they represent a strategic pivot toward national security interests and supply chain resilience. Below, we provide a quick analysis of what these new requirements mean, why they matter, and how your organization can prepare.

The Policy Shift: From Incentives to Security

For years, U.S. clean energy policy focused on accelerating deployment through tax incentives. The Inflation Reduction Act (IRA) epitomized this approach, offering new ways to monetize tax credits to spur adoption of clean energy technologies. However, geopolitical realities—particularly concerns about reliance on “covered nations” (China, Russia, North Korea, and Iran)—have prompted lawmakers to tighten the rules.

Under OBBBA, FEOC restrictions now apply to a broad range of credits, including:

• 45X Advanced Manufacturing Production Credit
• 45Y Clean Electricity Production Credit
• 48E Clean Electricity Investment Credit
• 45Q, §45U, §45Z Carbon capture, nuclear, and clean fuel credits

This expansion signals a clear policy shift: clean energy growth must align with national security priorities and domestic supply chain growth.

Expanded Definitions: What Counts as an FEOC?

The new law introduces two critical categories:

• Specified Foreign Entities (SFE): Entities tied to foreign adversaries, including those linked to military programs or forced labor.
• Foreign-Influenced Entities (FIE): Entities with significant foreign ownership or control—even indirectly.

These definitions go beyond surface-level ownership. Compliance requires tracing multi-tiered corporate structures, identifying beneficial owners, and assessing control mechanisms. Companies must also apply material assistance tests and cost-ratio calculations to quantify foreign involvement in labor and materials. This is not a simple checkbox exercise—it’s a forensic review of your supply chain.

Ownership and Control Tests

OBBBA applies FEOC rules at the ownership and control level. An entity may be disqualified from claiming certain clean energy tax credits if a Foreign Entity of Concern holds significant ownership, voting power, or other rights that allow it to influence key decisions, whether directly or indirectly.

These rules look through multi-tier structures and capture governance rights such as board seats or veto powers—not just equity percentages. If an entity fails the ownership or control tests, it may be barred from claiming affected credits regardless of its supply chain or cost ratios, making ownership diligence and careful structuring essential.

Jurisdiction of a Covered Nation

Taxpayers should be cognizant that entities with a principal place of business located or subject to the jurisdiction of the government of a covered nation are considered FIEs. As such, these entities and any direct costs paid to them must be considered when evaluating Material Assistance requirements and whether they are exercising Effective Control over the credit-claiming taxpayer.

Effective Control in Licensing Agreements

Taxpayers can be disqualified from receiving credits if a prohibited foreign entity (PFE), a FIE, or an SFE, exerts effective control not only through ownership but by contractual means. Taxpayers should be diligent in fulfilling contractual obligations when licensing intellectual property to counterparties in a covered nation. Licensing agreements that grant a PFE the ability to control output or direct the operation of an IRA-qualified facility may lead to disqualification.

Material Assistance Test and Cost Ratio Calculations

Under the new Foreign Entity of Concern (FEOC) rules, eligibility for certain clean energy tax credits (like §§ 45Y, 45X, and 48E) is contingent not only on ownership and control but also on whether a project or component receives material assistance from a PFE. Material assistance is evaluated through a material assistance cost ratio (MACR).

The MACR measures how much of a facility’s or component’s direct costs come from non-PFE sources. It is calculated by taking total applicable direct costs (including labor and materials for facilities, or direct material costs for eligible components), subtracting the costs attributable to PFEs, and dividing the remainder by the total direct costs. If a project’s MACR falls below the statutory threshold percentage for that year and product type, the project is deemed to have received material assistance and may be ineligible for the credit.

These thresholds vary by product type (e.g., qualified facilities, energy storage technology, solar components, inverters, battery components, etc.) and tighten over time. Prior to Treasury’s issuance of safe harbor tables, taxpayers may rely on interim cost guidance and supplier certifications to substantiate non-PFE sourcing.

In practical terms, the MACR requirement adds a data and documentation burden, requiring detailed cost allocation and supplier information to demonstrate that a sufficient portion of eligible costs is not tied to PFEs. Early supply-chain engagement and robust recordkeeping are critical to pass this test and preserve credit eligibility under the OBBBA.

Compliance Challenges and Risks

The implications for developers and manufacturers are profound:

• Supply Chain Mapping: You must know where every component originates, including raw materials.
• Contractual Complexity: Procurement agreements need FEOC compliance clauses to allocate risk.
• Tax Credit Eligibility: Failure to comply could result in denial of credits or IRS clawbacks, jeopardizing project economics.

For tax equity investors and lenders, FEOC compliance will become a due diligence priority, influencing financing terms and risk allocation.

Impact on Project Economics

FEOC rules could reshape the economics of clean energy projects:

• Cost Pressures: Domestic sourcing often comes at a premium, increasing capital expenditures.
• Timeline Risks: Compliance uncertainty or long lead times for domestic made materials may delay projects, particularly in solar, wind, and storage sectors.
• Market Realignment: Expect accelerated investment in U.S.-based manufacturing and reshoring initiatives.

While these changes may strengthen long-term supply chain security, they introduce short-term volatility and complexity.

Deadlines and Transitional Relief

Timing is critical:

• Projects that began construction before December 31, 2025, avoid the stricter FEOC rules for the credits listed above.
• After 2025, compliance becomes mandatory, with thresholds tightening through 2029.
  IRS Notice No. 2025-42 and forthcoming Treasury guidance will clarify these requirements, but until then, developers operate in a gray zone, balancing urgency with incomplete information.

Strategic Action Plan

To navigate this landscape, organizations operating in the clean energy sector may find it helpful to consider several practical steps as they assess how the FEOC rules could affect their planning and compliance efforts.

• Conduct a Comprehensive Supply Chain Audit: Identify potential FEOC exposure across all tiers.
• Update Contracts: Incorporate FEOC compliance provisions in procurement and financing agreements.
• Enhance Documentation: Maintain detailed records to substantiate compliance for IRS and investors.
• Engage Advisors Early: Legal and tax guidance is essential to interpret evolving rules and mitigate risk.

The Bottom Line

The FEOC provisions represent a fundamental shift in U.S. clean energy policy—from incentivizing growth at any cost to prioritizing security and supply chain integrity. Stakeholders must act quickly to lock in current benefits and prepare for a more restrictive future. Success will depend on proactive compliance, strategic sourcing, and robust legal safeguards.