FEOC Rules For Clean Energy Tax Credits

What Are the FEOC Rules and How Do They Impact Clean Energy Tax Credit Eligibility?

The One Big Beautiful Bill Act (OBBBA) of 2025 introduced comprehensive foreign entity of concern (FEOC) rules that prohibit taxpayers considered “prohibited foreign entities” from claiming clean energy tax credits.

The FEOC rules apply to the following clean energy tax credits:

• Section 45Q: Carbon oxide sequestration credit
• Section 45U: Zero-emission nuclear power production credit
• Section 45X: Advanced manufacturing production credit
• Section 45Y: Clean electricity production credit
• Section 45Z: Clean fuel production credit
• Section 48E: Clean electricity investment credit

The FEOC rules are designed to prevent entities subject to certain foreign ownership, control, or influence – primarily from China, Russia, Iran, or North Korea – from benefiting from these tax credits. The rules also include restrictions based on material assistance from such entities for Sections 45X, 45Y and 48E, which took effect on January 1, 2026.

What Is a Prohibited Foreign Entity?

A prohibited foreign entity is any “specified foreign entity” or “foreign-influenced entity.”

Specified Foreign Entity

Generally, a specified foreign entity is:

• any designated terrorist organization; specially designated national or blocked person identified by the Office of Foreign Assets Control (OFAC); entity alleged by the Attorney General to be involved in violations of certain federal laws relating to espionage, arms exportation, or the International Emergency Economic Powers Act (IEPPA); or entity determined by the Secretary of Treasury to be engaged in conduct detrimental to US national security or foreign policy;
• any Chinese military company, entity subject to the Uyghur Forced Labor Prevention Act or certain entities that are ineligible for Department of Defense contracts or funding;
• the government of China, Russia, Iran or North Korea (including any agency or instrumentality thereof); any entity or business incorporated, organized, or having its principal place of business therein; or any non-publicly traded entity that, taking into account certain constructive ownership rules, is more than 50 percent owned (by vote or value, capital or profits or otherwise by beneficial interest) by any such government, entity, or business; and
• any other entity identified under designated federal statutes.

Foreign Influenced Entity

Generally, a foreign influenced entity is:

• any entity with respect to which, during the taxable year:
  • a specified foreign entity has the direct authority to appoint a covered officer (e.g., board member, CEO, CFO);
  • a single specified foreign entity owns at least 25 percent, or multiple specified foreign entities own 40 percent; or
  • at least 15 percent of its debt is issued to one or more specified foreign entities; and
• an entity that, during the prior taxable year, made a payment to a specified foreign entity under a contract or arrangement that gives the specified foreign entity (or any person related to the specified foreign entity) “effective control” over any qualified facility, energy storage technology, or eligible component (including the production thereof, or the extraction, processing, or recycling of any applicable critical mineral with respect thereto) of such entity (or any person related to such entity).

What Is Effective Control and How Does It Impact Clean Energy Tax Credit Eligibility?

Effective control refers to any contractual or licensing arrangement that gives a specified foreign entity authority over key aspects of a project or component, such as the ability to:

• determine quantity or timing of component production or electricity output or storage;
• direct sales or usage of output;
• restrict access to any critical data, site of production, or part of a facility;
• maintain or operate, on an exclusive basis, any plant or essential equipment; or
• with respect to licensing agreements, direct sourcing, operations, or certain service arrangements or receive royalties beyond 10 years.

If a taxpayer makes a payment under such an arrangement, and such arrangement is not a bona fide purchase or sale of intellectual property, it may be classified as a foreign-influenced entity that is not eligible to claim tax credits under Sections 45X, 45Y and 48E. Effective control limitations do not apply under Sections 45Q, 45U or 45Z. For Section 48E, there is a 10-year recapture period for tax credits if such payments are made after the project is placed in service.

When Do FEOC Restrictions on Clean Energy Tax Credits Take Effect?

The effective dates for FEOC restrictions vary by tax credit type and taxpayer status, as outlined below:

Sections 45X, 45Y, 48E and 45Q

• The specified foreign entity and foreign-influenced entity prohibitions apply to taxable years beginning after July 4, 2025 (i.e., starting January 1, 2026, for calendar-year taxpayers).

Sections 45U and 45Z

• The specified foreign entity prohibition applies to taxable years beginning after July 4, 2025 (i.e., starting January 1, 2026, for calendar-year taxpayers).
• The foreign-influenced entity prohibition applies to taxable years beginning after July 4, 2027 (i.e., starting January 1, 2028, for calendar-year taxpayers).

What Are the Material Assistance Rules and to Which Clean Energy Tax Credits Do They Apply?

The material assistance rules are additional restrictions imposed under Sections 45X, 45Y and 48E that disqualify a project or component from tax credit eligibility if it receives “material assistance from a prohibited foreign entity.” The material assistance rules apply with respect to any project the construction of which begins in 2026 or later (for qualified facilities and energy storage technology) and any components sold in 2026 or later (for eligible components).

Material assistance is measured by the “material assistance cost ratio” (MACR), which is the percentage of total direct costs (for qualified facilities and energy storage technology) or direct cost of materials (for eligible components) that are not attributable to a prohibited foreign entity.

Sections 45Y and 48E (qualified facilities and energy storage technology):

• The MACR is calculated at the project level, with required threshold percentages that increase over time (e.g., for 2026, 40 percent for qualified facilities and 55 percent for energy storage technology).

Section 45X (eligible components):

• The MACR is calculated for each component sold in a given year, with thresholds varying by component type and year (e.g., for 2026, 50 percent for solar components, 85 percent for wind components, 60 percent for battery components and 50 percent for inverters).

If the MACR falls below the applicable threshold, the tax credit is denied for that project or component.

How Is Material Assistance Determined, and What Can Taxpayers Do to Comply?

Material assistance is determined by calculating the MACR:

MACR = ((T – P) / T) x 100%

• T = Total direct cost of all manufactured products or components
• P = Total direct cost of all manufactured products or components from a prohibited foreign entity

Taxpayers must maintain documentation and, until Treasury issues new safe harbor tables (by December 31, 2026), may rely on the tables in IRS Notice 2025-08 (relating to the domestic content requirements) and supplier certifications. Suppliers who provide false certifications may be subject to penalties.

Can Clean Energy Tax Credits Be Transferred to Specified Foreign Entities?

No. The OBBBA prohibits the transfer of any portion of the tax credits under Sections 45Q, 45U, 45X, 45Y, 45Z or 48E to specified foreign entities under Section 6418.

What Should Taxpayers and Project Developers Do Now?

The following actions may mitigate risk and ensure eligibility for clean energy tax credits:

• review ownership, debt, and contractual arrangements to ensure no specified foreign entity or foreign-influenced entity taint;
• audit supply chains and procurement to ensure compliance with MACR thresholds;
• obtain and retain supplier certifications and documentation; and
• monitor Treasury and IRS announcements regarding impending FEOC guidance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.