In the One Big Beautiful Bill, signed into law earlier this month, the definition of a so-called “foreign entity of concern” spanned dozens of pages. The new restrictions on eligibility for certain tax credits will apply to a huge range of companies with both direct and indirect links to China, North Korea, and Iran.
Despite the lengthy definitions, however, the law itself doesn’t answer several key questions that could trip developers up in contracts and payment terms, explained Jason Clark, CEO of consulting firm Power Brief, in a Latitude Media webinar last week. They are going to have to be ironed out in guidance, Clark added — and that could take a while.
“There’s no feasible way to do even a bad job of writing all of the FEOC rules in the next 45 days,” he said, pointing to the president’s executive order from earlier this month, directing the Treasury Department to issue initial interpretive guidance for the FEOC restrictions on clean energy tax credits in just a month and a half.
“When you have something like this, it usually results in a thousand-page regulation that defines all this stuff to the nth degree,” Clark explained. “That doesn’t always make it easier necessarily, but at least there’s the thousand-page version to pour through…here we’ve got the 40-page version, which is just specific enough to create questions.”
The bill outlines two restrictions on “prohibited foreign entities.” First, it bars prohibited entities from claiming tax credits or receiving tax credit benefits via transferability. But it also places limits on how much procurement within a project can come from a prohibited entity. Those thresholds are different for different technologies, and shift over the lifetime of the tax credit.
So, who qualifies as a prohibited entity?
This is the question that’s giving the clean energy industry the most anxiety, Clark explained.
“The checklist of what qualifies somebody to be a prohibited foreign entity is very long and complicated,” he said. Projects now need to figure out “all kinds of details” about their suppliers that they didn’t have to before, even in the face of tariffs and other restrictions.
There are a handful of “tests” to determine whether a company is a prohibited foreign entity, that would therefore prevent their project from qualifying for tax credits.
So-called “specified foreign entities” and “controlled entities” are the most straightforward, Clark explained. Specified entities include specific entities on U.S. government lists, like Chinese military companies and those on the Uyghur Forced Labor entity list, among others. Controlled entities include those incorporated in China, Russia, Iran, or North Korea; companies that are subsidiaries or business units organizations based in those countries; and companies with 50% or more Chinese ownership.
But there’s another, more complicated group of suppliers that are considered prohibited foreign entities: “foreign influenced entities.”
For example, if a company from the specified foreign entities list — like a company based in China — has the power to appoint an officer to a third company, that third company is deemed to be “foreign influenced.” The same is true if a Chinese company had direct or indirect ownership over a certain percentage of a supplier’s equity or debt, or if a supplier makes significant payments, like royalties, to a Chinese company.
But if a supplier has a contract or licensing agreement that results in a specified foreign entity having “effective control” over critical aspects of a project — like production capacity, or component sourcing — it may also be ineligible for tax credits.
That “effective control” component is tricky, because it means that even if a supplier isn’t owned in any amount by a specified entity, a contract signed with one could result in the supplier itself being prohibited. “Even if you’re confident that you’re not a prohibited entity, you’re looking at all of your suppliers saying ‘how in the heck am I going to figure out if all of you are or not?’” Clark said.
And the reality, he added, is that there isn’t a system in place to help developers navigate requirements that are “so prescriptive.”
“There’s not a list you can just pull up and be like, here’s who’s prohibited and here’s who’s not,” he said. “And I think that’s where a lot of the anxiety is coming from.”
Which technologies are most at risk?
The FEOC restrictions are likely to be most challenging for the energy storage sector, Clark said, in part because that credit has a long runway.
“The administration is prioritizing energy storage as a part of their baseload worldview,” he explained. “However, because of that now, the restrictions are in place for a lot longer, and they get harder over time.”
Batteries is one of the industries that historically has had a huge sourcing connection back to China, he added. That’s something that can certainly evolve, but it’s “not something you can change overnight.”
Determining eligibility requires developers to calculate their “material assistance cost ratio,” which is the percentage of total direct material costs that do not come from a prohibited entity. Determining that ratio, Clark said, “is a complicated, multi-step thing that you have to do for every single facility and project that you’re bringing online in 2026, and beyond.”
Different credits have different threshold requirements for that ratio, and those thresholds increase each year, based on when a project starts construction.
Geothermal, hydro, and nuclear projects starting construction in 2026, for example, must meet a 40% threshold. By 2030 that threshold jumps to 60%. Energy storage has the highest threshold: Starting in January energy storage must meet a 55% threshold, which jumps to 60% for projects starting construction in 2027, and increases each year until it reaches 75% in 2030.
Wind and solar developers were subject to the most aggressive tax credit cuts and phaseouts under OBBB; as a result of how soon those credits phase out, they actually may not have to worry that much about complying with FEOC restrictions.
What does the recapture provision mean?
But determining who is and is not a prohibited entity isn’t a one-and-done exercise for developers, Clark warned. In fact, there’s a 10-year window where FEOC restrictions will require ongoing diligence, thanks to a “very complicated and unprecedented” provision known as the recapture provision.
Under that provision, recipients of a credit could be required to repay the value of those credits after the fact, if disqualifying events occur within a decade of the credit being awarded.
For example, if a prohibited entity gains “effective control” over a project in that window, or a company makes a payment to a prohibited entity at some point in that window, the tax credit recipient could be required to repay as much as 100% of the claimed tax credit value.
“It just adds a lot of risk into projects,” Clark explained.
