Article
Understanding foreign entity of concern (FEOC) provisions in the OBBBA of 2025
New compliance expectations and what they mean for your next energy project
Jul 30, 2025 · Authored by Robert Moczulewski, Jiyoon Choi, Matt Kaden, Beckett Woodworth
The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, would extend foreign entity of concern (FEOC) restrictions, previously limited to the section 30D clean vehicle credit in the Inflation Reduction Act (IRA), to six additional clean energy tax credits:
- 45U zero-emission nuclear production credit
- 45Y tech-neutral clean electricity production credit
- 48E tech-neutral clean electricity investment credit
- 45X advanced-manufacturing production credit
- 45Q carbon capture credit
- 45Z clean fuel production credit
Prior law: Inflation Reduction Act FEOC definition
The IRA applied FEOC restrictions to the 30D clean vehicle credit. As defined in the IRA, a FEOC was an entity that met any of the following criteria:
- A designated foreign terrorist organization;
- An entity included on the Specifically Designated Nationals (SDN) and blocked persons list;
- An entity owned by, controlled by, or subject to the jurisdiction or direction of a foreign government;
- An entity involved in criminal activity under various U.S. national security laws; or
- An entity that is engaged in conduct detrimental to U.S. national security or foreign policy.
New law: OBBBA FEOC definition
The OBBBA expands upon the IRA’s FEOC definition and creates two new FEOC categories: (1) Specified Foreign Entities, and (2) Foreign Influenced Entities. Both categories are considered Prohibited Foreign Entities (PFEs). Any PFE is a FEOC.
Specified Foreign Entity (SFE)
The OBBBA definition of a SFE adds new criteria on top of the IRA’s 30D FEOC definition. Credit restrictions are extended to any of the following:
- Chinese military companies operating in the U.S.;
- An entity that is subject to Uyghur Forced Labor Prevention Act restrictions;
- An entity that is ineligible for Department of Defense contracts, as identified by the National Defense Authorization Act for Fiscal Year 2021 (2021 NDAA), including: Contemporary Amperex Technology Company (CATL); BYD Company; Envision Energy; EVE Energy Company; Gotion High Tech Company; Hithium Energy Storage Company; or
- A foreign-controlled entity, defined as a government, individual, business, or entity (including subsidiaries) under the control of China, Russia, North Korea, or Iran, including any citizens of those countries or an entity controlled by another entity where more than 50% of the stock, 50% of the profit or capital interests, or 50% of the beneficial interest lies with a government, individual, or business of China, Russia, North Korea, or Iran.
For all tax credits, the prohibition on Specified Foreign Entities claiming these credits begins immediately.
Foreign Influenced Entity (FIE)
As defined in the OBBBA, a FIE is an entity over which a SFE exercises influence, meeting any of the following criteria:
- Can directly or indirectly appoint a senior/covered officer
- Covered officers are defined as a member of the board of directors, or an executive level officer, such as the president, CEO, COO, CFO, general counsel or senior vice president of an entity - Has 25% ownership over the entity
- Owns, in the aggregate, alongside other SFE at least 40% of the entity
- At least 15% of total debt held by Chinese lenders, only counting debt holders at original issuance
- Made a payment to a SFE that allows a SFE to exercise “effective control” over a qualified facility under 48E/45Y, energy storage technology, or eligible component under 45X; “effective control” is defined in the bill as a contract or licensing agreement that allows a foreign party to exert influence over the production of components, generation or storage
Rules about what constitutes “effective control” are unclear. The bill directs the Treasury Department to issue guidance defining effective control. The July 7, 2025, executive order signed by President Trump directs the Treasury Secretary to promulgate guidance on FEOC, and possibly terms like “effective control,” in August 2025.
For the 45U and 45Z credits, the prohibition on a FIE begins the second tax year after the date of enactment (i.e., 2027). However, for 45X, 45Y, 45Q and 48E, the prohibitions on FIEs begin in the immediate tax year after the date of enactment.
The four FEOC restrictions to remember
A project or company can lose its credit if it:
- Claims the credit while itself qualifying as a PFE (45Y, 48E, 45X, 45U, 45Q and 45Z)
- Sources key components from a PFE beyond an allowed “material assistance cost ratio” (45Y, 48E and 45X)
- Licenses critical technology from a PFE (45Y, 48E and 45X)
- Engages in significant financial arrangements (payments, loans, royalties, etc.) with a PFE (45Y, 48E and 45X)
These restrictions are further explained below.
1. PFEs cannot claim a clean energy credit (45Y, 48E, 45X, 45U, 45Q and 45Z).
OBBBA prohibits taxpayers from receiving any investment or production tax credits if the taxpayer itself is a PFE (SFE or FIE).
For example, a company majority-owned by Chinese nationals would be considered an SFE. Even though this company plans to invest in a solar facility in the U.S., none of the eligible costs from that facility could be claimed as a section 48E tax credit under the new FEOC restrictions.
| Credit | Specified Foreign Entity | Foreign Influenced Entity | Material assistance (sourcing) | Licensing from PFEs | Payments to PFEs |
| 45Y | X | X | X | X | X |
| 48E | X | X | X | X | X |
| 45X | X | X | X | X | X |
| 45U | X | X | |||
| 45Q | X | X | |||
| 45Z | X | X |
It’s important to note that, for section 45U, the OBBBA prohibits nuclear fuel sourced from North Korea, China, Russia, Iran or any entities under their jurisdiction beginning after Dec. 31, 2027.
For 45Z, the OBBBA also reduces credits under section 45Z if it includes fuel derived from foreign feedstock starting in 2026.
2. Credit claimant sources key components from a PFE beyond the material assistance cost ratio (45Y, 48E and 45X).
The OBBBA phases in material assistance restrictions. Percentage thresholds and phase-in timelines vary depending on the technology. For example:
- 45Y and 48E clean electricity credits: Qualified facilities lose eligibility if the ratio falls below 40% in 2026, rising 5 percentage points each year until 2030. Energy storage projects lose eligibility if the ratio falls below 55% in 2026, rising 5 percentage points each year until 2030.
- 45X manufacturing credit: Solar components must clear 50% in 2026 (rising to 85% by 2030); wind components must clear 85% in 2026, and then 90% in 2027; battery components start at 60% in 2026 and step up 5 points per year.
| Year | 48E/45Y (qualified facility) | 48E/45Y (energy storage) | Solar components (45X) | Wind components (45X) | Inverters (45X) | Battery components (45X) | Critical minerals (45X) |
| 2026 | 40% | 55% | 50% | 85% | 50% | 60% | 0% |
| 2027 | 45% | 60% | 60% | 90% | 55% | 65% | 0% |
| 2028 | 50% | 65% | 70% | - | 60% | 70% | 0% |
| 2029 | 55% | 70% | 80% | - | 65% | 80% | 0% |
| 2030 | 60% | 75% | 85% | - | 70% | 85% | 25% |
| 2031 | 60% | 75% | 85% | - | 70% | 85% | 30% |
| 2032 | 60% | 75% | 85% | - | 70% | 85% | 40% |
| After 2032 | 60% | 75% | 85% | - | 70% | 85% | 50% |
An entity would be ineligible to receive the relevant credits if a certain percentage of the value of the components in a project are sourced from a PFE. These percentage thresholds, known as material assistance cost ratios (MACRs), vary between tax credits and types of components being sourced. Somewhat counterintuitively, the material assistance cost ratio is a measure of the percentage of the component value that is sourced from non-PFEs, so a company would need to have a ratio that is higher than the threshold to qualify for the tax credits.
It is important to note that, for sections 48E and 45Y, the MACRs apply at the project level if construction begins on or after 2026. The years listed for section 45X refer to sale dates.
Material assistance cost ratio calculation
MACR = ((T-P)/T) X 100%
- MACR = Material assistance cost ratio
- T = Total cost of all manufactured products
- P = Total cost of all manufactured products from a PFE
The total cost of the manufactured products going into a solar project is $100. The project procures $40 worth of manufactured products from a PFE.
MACR = ((100-40)/100) X 100% = 60%
The project has a MACR of 60%. If this project seeks to claim the 45X tax credit in 2026, it would not be disqualified on the basis of its MCR, since the MACR threshold is set at 50% for solar components in 2026. If this project seeks to claim the 45X credit in 2028, however, it would be disqualified on the basis of its MACR, since the MACR threshold is set at 70% for solar components in 2028.
The material assistance provision also includes safe harbor rules, certification requirements and existing contract exceptions. The bill directs the IRS and Department of Energy to publish “safe harbor tables” by Dec. 31, 2026, that “identify the percentage of the total direct material costs of any manufactured product or eligible component which is attributable to a foreign entity.” In the time period before safe harbor tables are published, the taxpayer aiming to claim any of the applicable credits may use either the safe harbor tables updated in IRS Notice 2025-08 or issue a certification requirement that verifies the material assistance cost ratio calculation. The IRS must publish the safe harbor tables no later than Dec. 31, 2026.
Certification requirements are used to verify that components supplied to the taxpayer were not produced by a PFE. Suppliers who issue false or misleading certifications face fines from the IRS. The bill also exempts existing contracts from the material assistance restrictions. This allows taxpayers who acquire a component from a supplier based on a contract finalized before June 16, 2025, to exempt those components from their material assistance cost ratio calculations as long as the component is then placed into service (or sold) before Jan. 1, 2030.
These FEOC rules would create an environment in which there are increased IRS enforcement risks relating to energy credits. For instance, OBBBA establishes an extended FEOC audit period. In most circumstances, the IRS has three years from the date a return is due or filed (whichever comes later) to complete an audit and assess any associated tax liability. The OBBBA now allows six years where there is a deficiency (understatement) in tax due to an error in determining whether there was material assistance from a FEOC.
There is also an increased penalty risk. OBBBA allows the IRS to impose a 20% penalty for substantial understatement of tax liability when there is a disallowance of energy credits due to an overstated MACR, if the disallowance creates an understatement of tax equal to 1% of the tax that should have been shown on the return (under previous law, this penalty did not apply unless there was a misstatement of $10,000,000 or 10% of the tax that should have been shown on the return).
Further, the supplier certification regime comes with penalty risks for suppliers. Suppliers who deliver certifications regarding FEOCs that turn out to be false, and where the supplier knew or reasonably should have known that the statements as to FEOCs or MACRs were false, can now result in tax penalties to suppliers. If such a misstatement causes the disallowance of an energy credit, the supplier who made the certification can be subject to a penalty equal to up to 10% of the amount (or $100,000, whichever is larger) of any underpayment attributable to the inaccuracy or falsity of the certification. The IRS would also have six years to assess this penalty.
The penalty applies to misstatements on certificates given after Dec. 31, 2025.
3. Credit claimant cannot license critical technology from a PFE (45Y, 48E and 45X).
The licensing agreement restrictions are applied to the following credits:
- 45Y (Tech-Neutral Clean Electricity Production Credit);
- 48E (Tech-Neutral Clean Electricity Investment Credit); and
- 45X (Advanced Manufacturing Credit).
OBBBA puts a restriction on any component or applicable critical mineral produced using technology that was licensed from a PFE if the licensing agreement allows the PFE certain rights related to the facility, component, or critical mineral, including the right to:
- Specify or direct sources of components;
- Direct the operation at the facility or production unit that produces the qualified component;
- Limit the utilization of intellectual property;
- Receive royalties beyond the tenth year of the agreement; or
- Direct the taxpayer to enter into an agreement for the provision of services for longer than two years, or if the contract does not provide the licensee with all the technical data, information, and know-how necessary to enable them to produce the component without further involvement of the foreign entity.
The licensing restriction begins immediately, but there is an exception for contracts signed before July 4, 2025.
If a U.S. battery company enters into a licensing agreement with any of the battery-producing entities currently ineligible for DOD contracts and their agreement includes the rights for the FEOC to direct the operation of the facility or production unit that produces those batteries, those batteries would be ineligible for the tax credit.
4. Credit claimant cannot make significant payments to a PFE (45Y, 48E and 45X).
The restrictions on significant payments are applied to the following credits:
- 45Y (Tech-Neutral Electricity Production Credit);
- 48E (Tech-Neutral Electricity Investment Credit); and
- 45X (Advanced Manufacturing Credit).
OBBBA disqualifies a taxpayer from receiving the relevant credits if:
- In the case of 45Y and 48E, the taxpayer made a payment in the previous taxable year to a specified foreign entity in compliance with a contract, agreement, or other arrangement that allows the specified foreign entity to exercise effective control over a qualified facility or energy storage technology; or
- In the case of 45X, the taxpayer made a payment for the production of an applicable component or the extraction, processing, or recycling of any applicable critical mineral.
In the case of 48E specifically, if any of these payments are made within 10 years after the facility is placed into service, the taxpayer would be forced to pay back the entire value of the previously claimed tax credit. Any payment made by the taxpayer in the previous tax year under a contract or technology license will classify the taxpayer as a "foreign-influenced entity." However, the IRS will only deny a tax credit for the specific project related to that contract.
This recapture provision would apply to ITCs claimed in tax years starting more than two years after July 4, 2025. These new rules may make developers more willing to claim the PTC instead of the ITC, since section 45Y does not have this payment restriction.
Take action today
As the regulatory landscape around FEOC continues to evolve, vigilance is a necessity. On July 7, 2025, President Trump signed an Executive Order titled Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources, directing the Department of the Treasury to issue new guidance within 45 days (i.e. by mid-August 2025) for OBBBA provisions relating to wind and solar tax credits as well as FEOC restrictions. This guidance aims to clarify and refine the definition of the "beginning of construction" for solar and wind projects. It will also provide clarity on the new FEOC rules, including the rules regarding the beginning of construction related to material assistance for all technologies.
Is your organization engaged in clean energy and advanced manufacturing? Continue closely monitoring the Treasury’s imminent guidance because the window for qualifying projects under the accelerated phaseout of credits is tightening, and the new FEOC thresholds could reshape eligibility in 2026. Practical steps now, such as auditing suppliers, accelerating construction timelines, and consulting knowledgeable advisors, will not only mitigate risk, but also position businesses to adapt and prosper amid rapidly shifting rules.
For additional questions, contact our authors Robert Moczulewski and Matt Kaden.
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