During the webinar, Partners Philip Tingle and Heather Cooper of McDermott Will & Schulte discussed the new Foreign Entity of Concern (FEOC) rules enacted under the OBBBA. They focused on how these rules will affect eligibility for federal energy tax credits, the definitions of prohibited foreign entities, and the practical steps developers, investors, and lenders must take to ensure compliance. The conversation highlighted the complexity of the rules, the lack of IRS guidance, and the need for contractual and diligence strategies as the rules take effect.

Top takeaways included:

1. Five General Buckets of FEOC Restrictions. The rules apply in five key areas: (i) taxpayer/project owner cannot be an SFE or FIE; (ii) projects/facilities cannot be effectively controlled by SFEs; (iii) projects/facilities cannot receive material assistance from PFEs; (iv) ITC recapture may apply if payments confer effective control to SFEs during a 10-year period; and (v) tax credit buyers under Section 6418 cannot be SFEs.
2. Key Definitions Matter.
   1. Specified Foreign Entity (SFE): Generally includes (i) parties specifically identified on a list of concerning actors, and (ii) companies and persons (including their subsidiaries) from or controlled by China, Russia, North Korea, and Iran.
   2. Foreign Influenced Entity (FIE): Entities generally influenced by SFEs through material legal and/or financial relationships with such SFEs (e.g., through ownership, debt, officer appointment rights, and effective control arrangements).
   3. Prohibited Foreign Entity (PFE): Umbrella term covering both SFEs and FIEs, generally relevant for the material assistance rules.
3. Effective Control Is Complex. Effective control can arise from contractual arrangements involving payments to SFEs that grant SFEs rights over key aspects of a project/facility or production of components, which includes rights over electricity production, off-takers, access to critical data, and exclusive maintenance/operation rights, and certain aspects of specified licensing agreements.
4. Taxpayer-Level Focus. The most critical diligence is at the taxpayer/project owner level. Ensuring the taxpayer credit claimant entity is not an SFE or FIE is the key compliance focus.
5. Material Assistance Rules Are Narrower. These rules don’t apply to projects that begin construction before year-end 2025.
6. ITC Recapture Risks. The 10-year recapture period could apply to projects already placed in service if payments to SFEs occur later. This creates long-term compliance risks that must be carefully monitored.
7. Due Diligence and Contractual Protections. Developers, investors, lenders, contractors, suppliers, and tax credit buyers must conduct internal diligence and counterparty diligence (e.g., implementing “know-your-client” processes). Transaction documents should include representations, warranties, and covenants to mitigate FEOC risks, and contracts should be carefully reviewed for provisions that could confer control to SFEs.
8. Emerging Practical Strategies.
   1. Focus diligence on ownership chains to eliminate PFE taint.
   2. Scrub project-level contracts for problematic provisions (e.g., officer appointment rights, debt arrangements, IP licensing).
   3. Use contractual language to confirm counterparties are not SFEs and to avoid triggering effective control rules.
9. Uncertainty Remains Without IRS Guidance. The lack of IRS guidance makes compliance challenging, but the market is already incorporating representations, warranties, and diligence processes into transactions as the market moves to 2026.
10. Commercial Implications. These rules will significantly shape clean energy project financing and structuring. Tax equity investors, lenders, and buyers must adapt their diligence and contractual practices to ensure qualification for credits are not jeopardized.