The "One Big Beautiful Bill Act" (P.L. No. 119-21, OBBBA), which was signed into law on July 4, 2025, expands the definition of, and increases the restrictions related to, the ability of renewable energy projects to claim tax credits under the Inflation Reduction Act (IRA) if they have any relationship to prohibited foreign entities. The OBBBA is largely consistent with the earlier proposals in the House and Senate versions (see Tax Alert 2025-1332).

Following the legislation's enactment, President Trump issued an Executive Order on July 7, 2025 (the Order), in which he directed the Department of Treasury, within 45 days of the OBBBA's enactment, to issue guidance implementing the Act's enhanced foreign-entity-of-concern (FEOC) restrictions, among other things.

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 2025-1434).

Prohibited foreign entity

A prohibited foreign entity (defined in new IRC Section 7701(a)(51)(A)) means either a specified foreign entity or a foreign-influenced entity.

For the first tax year after the date of enactment (July 4, 2025), the determination of whether an entity is a specific foreign entity is made as of the first day of the tax year.

For other tax years, the determination of whether an entity is a specified foreign entity or foreign-influenced entity is made as of the last day of the tax year.

Specified foreign entity

The term "specified foreign entity" (defined in new IRC Section 7701(a)(51)(B)), 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

Foreign-influenced entity (defined in new IRC Section 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. For example, one sign of control could be that "at least 15[%] of the debt of such entity has been issued, in the aggregate, to [one] or more specified foreign entities."

This definition carries slightly higher ownership and payment thresholds than previous regulations, now at 25% versus 10% for a single specified foreign entity. There is also an exemption for publicly traded entities.

Material assistance from a prohibited foreign entity

This term (defined in new IRC Section 7701(a)(52)) means having a material assistance ratio that is less than the applicable threshold percentage (the allowable percentage of costs related to products or components made by prohibited foreign entities before the restrictions apply). Different formulas 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, a new method is used to calculate the "material assistance cost ratio," which will 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 are as follows:

The threshold percentages under IRC Sections 45Y and 48E for an energy storage facility are 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 are as follows:

Before December 31, 2027, the Secretary must issue threshold percentages for applicable critical minerals that will (1) apply in lieu of the threshold percentage for each applicable year and (2) equal or exceed the applicable threshold taking into account domestic geographic availability, supply chain constraints, domestic-processing-capacity needs and national security concerns.

Safe harbor tables

The Secretary must issue safe harbor tables by December 31, 2026, which allows taxpayers to rely on the tables to determine the percentage of direct costs or 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 taxpayers may rely on (1) existing IRS safe harbors for the domestic content bonus credit, which list certain direct costs or direct material costs; and (2) a supplier's certification for the direct costs or 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 must include the supplier's EIN, be signed under penalties of perjury, and be retained by the supplier and taxpayer for at least six years. The material assistance rule carries a six-year statute of limitations and increased tax penalties, including a penalty imposed on suppliers for a non-complying certification.

An exception applies for written binding contracts entered before June 16, 2025, and placed in service before January 1, 2030.

Implications

The FEOC and related provisions in the OBBBA are complex and will require more guidance, as noted in the July 7 Executive Order directing Treasury to revise or issue guidance on foreign entity and beginning-of-construction provisions within 45 days. Renewable developers and suppliers will be watching closely for these rules and/or guidance considering that projects whose construction begins by the end of 2025 are not subject to the material assistance provisions of the OBBBA.

Regarding the effective-control requirement, taxpayers should monitor payment arrangements with manufacturers and suppliers that may have specified foreign entity implications. Taxpayers should also consider reassessing procurement and safe harbor strategies given the material assistance rules and consider whether due diligence procedures need to be updated for manufacturer, supplier and vendor certifications. Required documentation, including certification, needs to be obtained, even if the taxpayer is comfortable with the non-specified foreign entity and non-foreign influenced entity status of the parties in the transaction.