Understanding FEOC Rules Under The Inflation Reduction Act For Businesses

The One Big Beautiful Bill, signed on July 4, 2025, expanded the Foreign Entity of Concern (FEOC) restrictions. Previously, these restrictions applied only to the Section 30D clean vehicle credit under the Inflation Reduction Act. The new law extends FEOC limitations 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

Original IRA Guidelines on Foreign Entity of Concern (FEOC)

The Inflation Reduction Act applied the FEOC restrictions as per the 30D clean vehicle credit. Under the IRA, an entity is classified as an FEOC if it meets any of the following criteria:

●      A foreign terrorist group that has been designated;

●      An organisation that is owned, managed, or under the authority or control of a foreign government;

●      An organization listed on the Specially Designated Nationals (SDN) and Blocked Persons List;

●      An organisation that violates any of the national security statutes of the United States;

●      An organisation that engages in actions that are harmful to American foreign policy or national security.

OBBBA’s Revised Criteria for Foreign Entity of Concern (FEOC)

The OBBBA adds two more FEOC categories: Specified Foreign Entities and Foreign Influenced Entities. This builds on the IRA's definition of FEOC. Both groups are included in the list of Prohibited Foreign Entities (PFEs). Any PFE is an FEOC.

Specified Foreign Entity (SFE) – Under OBBBA

Foreign Influenced Entity (FIE) – Under OBBBA

Four Key FEOC Limitations You Should Know

A project or company may lose eligibility for credits if it:

●      Claims a credit while also being a PFE (45Y, 48E, 45X, 45U, 45Q, and 45Z)

●      Sources critical components from a PFE beyond the allowable material assistance cost ratio (45Y, 48E, and 45X)

●      Licenses essential technology from a PFE (45Y, 48E, and 45X)

●      Makes significant financial payments to a PFE (45Y, 48E, and 45X), including loans, royalties, or similar arrangements

Let’s elaborate on these restrictions a little more.

PFEs cannot access clean energy incentives provided under 45Y, 48E, 45X, 45U, 45Q, or 45Z.

The OBBBA prohibits the taxpayers from receiving any kind of investment or production tax credit if they are a PFE.

For example, if your company is majority Chinese-owned, it would be considered a PFE. Even if the company plans to invest in solar facilities in the U.S., it would not qualify for tax benefits.

A claimant loses eligibility if critical components are sourced from a PFE beyond the allowed material assistance ratio under 45Y, 48E, or 45X.

This means that there are certain material restrictions placed by the OBBBA, like material assistance restrictions. Percentage thresholds and phase-in timelines vary depending on the technology. For example,

●      45Y and 48E clean electricity credits: If the material assistance ratio falls below 40% in 2026, qualified facilities will lose eligibility. The threshold increases by 5 percentage points annually through 2030. For energy storage projects, the 2026 threshold is 55%, increasing annually through 2030.

●      45X manufacturing credit: Solar parts must pass 50% in 2026 (and 85% by 2030); wind parts must pass 85% in 2026 and 90% in 2027; battery parts must pass 60% in 2026 and then go up 5 points every year.

Claimants are prohibited from licensing essential technology from a PFE for purposes of 45Y, 48E, and 45X.

There are licensing agreement restrictions that are placed on the following credits:

●      45Y

●      48E

●      45X

The OBBBA restricts producing any component or applicable critical mineral using technology licensed from a PFE if the licensing agreement grants the PFE certain rights, such as:

●      Directing sourcing decisions or specifying where parts must be produced

●      Controlling facility operations or production processes

●      Limiting the taxpayer’s use of intellectual property

●      Requiring royalty payments beyond the tenth year of the agreement or mandating service contracts longer than two years

●      Failing to provide full technical data and know-how needed to produce the component independently

Significant payments to a PFE disqualify eligibility for the 45Y, 48E, and 45X credits.

If you’re a relevant taxpayer, you’re ineligible for any of the credits under 45Y, 48E, and 45X if you engage in activities such as:

●      A taxpayer is ineligible for credits under Sections 45Y, 48E, and 45X if significant payments are made to a PFE under arrangements that grant the foreign entity effective control.

●      For 45X, this includes payments related to manufacturing components or extracting, processing, or recycling critical minerals used in eligible production.

Conclusion

The regulatory landscape around FEOC continues to change, and you need to stay vigilant about it. Does your company work with sustainable energy and modern manufacturing? Keep a close eye on the Treasury's upcoming advice because the time frame for qualifying projects under the accelerated phaseout of credits is getting shorter, and the new FEOC standards might change who is eligible in 2026.

Taking practical steps now, like inspecting suppliers, speeding up construction schedules, and getting advice from experts, will not only lower risk but also help firms adapt and thrive when requirements change quickly.