Both the House-passed reconciliation bill (HR 1) and the Senate Finance Committee proposal would expand the definition of, and increase the restrictions related to, prohibited foreign entities for facilities claiming renewable energy credits under the Inflation Reduction Act (IRA).

This Tax Alert gives an overview of the terms used to determine prohibited foreign entities as well as whether taxpayers meet these definitions. For information on how various tax credits would be subject to these rules, see Tax Alert 2025-1331.

Prohibited foreign entity

A prohibited foreign entity means either a specified foreign entity or a foreign-influenced entity.

Specified foreign entity

The term "specified foreign entity" (defined in proposed IRC Section 7701(a)(51)(B)), which is the same in the Senate Finance Committee proposal and the House-passed bill, includes foreign entities related to or controlled by nations considered adversaries, as described in the William M. Thornberry National Defense Authorization Act for Fiscal Year 2021. The definition also includes foreign-controlled entities and entities under Public Laws 117-78 and 118-31.

Foreign-influenced entity

This term (defined in proposed Section IRC 7701(a)(51)(D)), refers to entities that show signs of effective control by specified foreign entities based on ownership, management or control criteria, including licensing agreements. Under the Senate Finance Committee proposal, this definition carries slightly higher ownership and payment thresholds than previous regulations, now at 25% versus 10% for a single specified foreign entity. There would also be an exemption for publicly traded entities.

Material assistance from a prohibited foreign entity

This term (defined in proposed IRC Section 7701(a)(52)) is defined in the Senate Finance Committee proposal as having a material assistance ratio that is less than the applicable threshold percentage. Different formulas would apply for (1) a qualified facility or energy storage technology; and (2) a product line that produces eligible components.

Material assistance cost ratio

IRC Sections 45Y and 48E

For facilities under IRC Sections 45Y and 48E, the Senate Finance Committee proposal would introduce a new method to calculate the "material assistance cost ratio," which would help identify the percentage of costs related to products or components made by prohibited foreign entities.

The material assistance cost ratio for facilities under IRC Sections 45Y and 48E can be represented by the following equation:

Definitions: "Total direct material costs" are defined as the total costs attributable to all the manufactured products (including components) (as defined in Notice 2023-38; domestic content bonus) that are incorporated into the qualified facility. "Direct material costs attributable to a prohibited foreign entity" are defined as the total costs attributable to all the manufactured products incorporated into a qualified facility or energy storage technology and that are mined, produced or manufactured by a prohibited foreign entity.

The threshold percentages under IRC Sections 45Y and 48E for a qualified facility or energy storage technology would be as follows:

IRC Section 45X

For IRC Section 45X, which deals with eligible components, the threshold percentage varies by component category and critical minerals.

The material assistance cost ratio is the same, but the definitions differ.

Definitions: Total direct material costs are defined as direct material costs paid or incurred (within the meaning of IRC Section 461 and regulations under IRC Section 263A) to produce the eligible component. Total direct material costs attributable to a prohibited foreign entity include the direct material costs paid or incurred to a prohibited foreign entity.

The threshold percentages for eligible components under IRC Section 45X would be as follows:

Safe harbor tables

The Senate Finance Committee proposal would require the Secretary to issue safe harbor tables by December 31, 2026, which would allow taxpayers to rely on the tables to determine the percentage of direct material costs associated with products and components from prohibited foreign entities.

Until then, and for facilities that begin construction 60 days after the tables are issued, the Senate Finance Committee bill would permit taxpayers to rely on (1) existing IRS safe harbors for the domestic content bonus credit, which list certain direct material costs; and (2) a supplier's certification for the direct material costs of the manufactured product, eligible component (including subcomponents) or constituent element that was not produced by a prohibited foreign entity.

The certification would have to include the supplier's EIN, be signed under penalties of perjury, and be retained by the supplier and taxpayer for at least six years.

An exception would apply for written binding contracts entered before June 15, 2025, and placed in service before January 1, 2030.

Implications

The Senate Finance Committee's proposals on the foreign entity-related restrictions are more flexible than the versions in the House-passed Bill. As overly rigid FEOC rules could chill investment and delay projects, evaluating the proposals as they evolve will be very important to taxpayers or projects with certain non-US investors or stakeholders.