Two months after the passage of the One Big Beautiful Bill Act, the clean energy industry is still working to interpret the impact of the new Foreign Entity of Concern (FEOC) rules in the bill, and looks forward to more certainty from the upcoming U.S. Treasury Department guidance. The bill shortens the duration of most clean energy tax credits under the Inflation Reduction Act.

"I discuss this almost every day," said Jenny Speck, tax partner at Vinson & Elkins. "Developing clear, manageable rules is the first step, because we already have a law that creates ambiguity. We've heard this is priority guidance—it should be at the top of their work list."

The FEOC provisions in OBBBA expand on the original IRA rules, which restricted foreign entities of concern associated with China, Russia, North Korea, or Iran from claiming clean vehicle tax credits. The new FEOC rules apply to the 45X Advanced Manufacturing Production Credit, the 45Y Clean Electricity Production Credit, and the 48E Clean Electricity Investment Credit.

"We believe wind, solar, and 45X will be the three areas with the most rigorous due diligence," Speck said.

Associations with foreign entities of concern "could include: a single Chinese shareholder holding 25% or more, or two or more such shareholders holding a combined 40%, or a Chinese lender holding at least 15% of original issue debt. Additionally, licensing agreements with Chinese interests could also make a supplier a prohibited foreign entity... It is currently unclear how U.S. developers can identify such arrangements," Norton Rose Fulbright wrote in a July article.

Advait Arun, senior associate for energy finance at the Center for Public Enterprise, said he believes "there is some understanding of the cost percentage of prohibited content," but as for "what kind of licensing or service agreements might violate FEOC rules, or what kind of prohibited foreign entities actually exist in these construction processes—I think we haven't gained that clarity yet."

"Developing clear, manageable rules is the first step, because we already have a law that creates ambiguity. We've heard this is priority guidance—it should be at the top of their work list."

—Jenny Speck, tax partner at Vinson & Elkins

The U.S. Treasury Department and IRS issued OBBBA guidance on August 15, clarifying how project developers can demonstrate that construction has begun before the deadline to qualify for the 45Y and 48E tax credits, and noted in a footnote that they are "currently drafting additional necessary and appropriate guidance on the FEOC rules."

The FEOC rules are "extremely burdensome," said Lauren Collins, tax partner at Vinson & Elkins. "They are extremely complex and contain multiple traps for the unwary. If you don't spend a significant amount of time understanding these rules and conducting due diligence on ownership structures and debt structures, you will inevitably encounter problems."

Collins said that as her team interprets these rules, they "discover new issues almost daily when trying to apply them to real-world situations."

"My basic conclusion is that in rare cases, taxpayers will actually trigger these rules and become prohibited foreign entities after application," she said. "The problem is that they are difficult to apply and conduct due diligence on; the administrative burden of the certification process is the real challenge. It's not a substantive issue—will we trigger it? It's how do we prove it with any certainty?"

Industry Shift

Bryen Alperin, partner and managing director at Foss & Company, also called some of the new FEOC restrictions "burdensome" and said meeting these new requirements "will be one of the industry's biggest challenges... It could add significant legal compliance costs and more."

Alperin said investors have begun to lean toward choosing the 45Y production tax credit over the 48E investment tax credit because the latter faces potential recapture risk under the FEOC rules.

"In investment tax credit transactions, you receive all the tax credits in the first year, but there is a ten-year compliance period during which they could be recaptured," Alperin said. "Suppose you build a solar plant in 2028 and claim the tax credit. Our investors receive the credit, and then eight years later—by which time the project may have new owners and we're no longer involved—someone unexpectedly hires a Chinese company for maintenance."

In that scenario, the tax credit from eight years ago could be recaptured, Alperin said.

"I think the biggest concern is—regardless of how the rules ultimately turn out, once the government issues them, you have to bear a fairly heavy compliance burden. Then, of course, there's the larger legal risk—the IRS recapture statute is now longer, holding you liable for a longer period."

—Advait Arun, senior associate for energy finance at the Center for Public Enterprise

"This makes many of our investors nervous," Alperin said. "Many investors who previously only did solar are now considering wind transactions because wind generates production tax credits. Going forward, we may see more solar projects choosing production tax credits over investment tax credits, because investment tax credits will carry a risk premium and investors will feel uneasy."

Arun said the FEOC rules are also inherently disadvantageous to smaller developers because they have fewer resources to ensure supply chain compliance.

"I think the biggest concern is—regardless of how the rules ultimately turn out, once the government issues them, you have to bear a fairly heavy compliance burden," he said. "Then, of course, there's the larger legal risk—the IRS recapture statute is now longer, holding you liable for a longer period."

Developers are also adjusting strategies based on the Treasury's August guidance, which states that construction of most wind and solar projects is considered to begin when "physical work of a significant nature" starts, rather than when 5% or more of the project's total costs have been paid. Solar facilities with a net output below 1.5 megawatts can still use the 5% test.

"[The physical work test] is indeed more subjective," Arun said. "For the 5% test, if you have contracts and proof of payment, it's easy to show and verify to the IRS. But another thing they changed is that the wording of the physical work test now distinguishes between 'physical effort' and 'construction plans,' and payments and contracts no longer count in the factual or circumstantial analysis the IRS may conduct."

Arun said the IRS now has "discretion," which adds "more ambiguity."

Alperin noted that the Trump administration is generally shifting toward more subjective discretion, putting pressure on solar and wind projects, "not only regarding the IRA, but also permits that may not be granted—these used to be routine standard permits that the government would simply grant."

Overall, Alperin said the industry is still digesting the physical work test guidance, "but from what I understand, its impact is not as great as some feared." He said the beginning-of-construction guidance "is not retroactive and doesn't change the game much," which is "a relief."

Collins said she and her colleagues believe the latest guidance is "very workable."

"We see many clients and developers starting to respond and beginning to perform various forms of physical work of a significant nature to secure safe harbor for their wind and solar projects," she said. "The physical work test has been used for over a decade. We have clear application rules that haven't changed, and it's less expensive than the 5% safe harbor approach."

Collins noted that the 5% test "is not subjective. It is—you pay that amount, you get the safe harbor, which has the certainty the industry likes. But the physical work of a significant nature method has gained favor over the years and is well-established."

Similar to the lack of clarity in the FEOC rules, Arun said abandoning the 5% test could disadvantage developers that are not large enough to enjoy the 1.5 megawatt solar exemption, but are small enough to be "small fish" rather than "sharks."

"Obviously, I think everyone says this isn't the worst-case scenario for the industry," he said. "But I think the ability to conclusively prove to the IRS that you've begun construction and are conducting construction activities depends on you already having market share and market relationships, and thus having already built a large project pipeline."

Under the safe harbor provisions, wind and solar projects that begin construction before July 4 next year can still be placed in service by December 31, 2030, while projects that begin construction after that date must be placed in service by the end of 2027 to qualify.

Additionally, OBBBA includes a provision that projects beginning construction before the end of 2025 are exempt from certain new FEOC restrictions. Therefore, developers are pushing to start projects as soon as possible, Alperin said.

"Developers have already pushed to start as many projects as possible," he said. "But I think they will now redouble their efforts to start as many projects as possible by the end of the year."