FEOC Rules and Clean Energy Compliance Under the OBBBA

The enactment of the One Big Beautiful Bill Act (OBBBA) has introduced significant legal risk for clean energy developers by expanding the scope of foreign entity of concern (FEOC) rules.

Diana DiGangi of Utility Dive reports that these rules, which previously applied only to clean vehicle tax credits, now extend to the 45X advanced manufacturing credit, the 45Y production credit, and the 48E investment credit.

The legislation has created uncertainty regarding compliance, particularly with respect to ownership structures, debt holdings, and licensing arrangements involving entities from China, Russia, North Korea, and Iran. Legal counsel is hoping for some clarity from the upcoming Treasury Department guidance.

Background on the FEOC provisions illustrates why compliance is a complex matter. Ownership thresholds, debt percentages, and indirect licensing arrangements can trigger the status of a prohibited entity. This could potentially affect eligibility for tax incentives.

Lawyers argue that the current statutory language leaves substantial ambiguity regarding which agreements or project participants may be subject to FEOC rules.

Concurrently, Treasury and IRS guidance have sought to clarify the construction commencement rules for projects qualifying for 45Y and 48E credits. Questions persist about the distinction between subjective “significant physical work” and the prior 5% safe harbor method.

The new framework is already shaping industry behavior. Developers are reassessing project strategies and favoring production tax credits over investment credits to mitigate potential recapture risks under FEOC rules.

Smaller developers face bigger challenges. Their limited resources constrain their ability to thoroughly analyze supply chains. Balancing the administrative burden of proving compliance against the likelihood of triggering FEOC violations has become a primary concern for investors and legal advisors.

For the clean energy sector, the immediate takeaway is the importance of rigorous compliance planning. The article quotes Vinson & Elkins tax partner Lauren Collins, who calls FEOC rules “extremely onerous” and full of traps for the unwary.

Early engagement with Treasury guidance, thorough diligence, and strategic project timing are essential to securing tax benefits while avoiding the operational and recapture risks introduced by the expanded FEOC regime.