Navigating FEOC restrictions for the 45X energy manufacturing tax credit

The One Big, Beautiful Bill Act (OBBBA) includes new restrictions on technology neutral tax credits, including project-based tax credits and the 45X manufacturing tax credit. The law seeks to limit content from foreign entities of concern (FEOC), which primarily affects products shipped from China.

FEOC restrictions apply at both the product and taxpayer level and could lead to manufacturers and mineral producers to be ineligible for the 45X advanced manufacturing tax credit. The tax credit is a production-based credit that begins to phase out 25% per year starting in 2030. Find the solar and battery supply chain credit values and guidance here.

The FEOC restrictions take effect in the tax years beginning after July 4, 2025. An executive order from President Trump this week reaffirmed “prompt action” on FEOC enforcement.

“The FEOC rules are complicated, but they distill to a three-step analysis,” said Keith Martin, partner, Norton Rose Fulbright.

Martin proposed a three-step process for both project developers and manufacturers seeking to attain FEOC compliance.

Step 1

The first step recommended by Norton Rose Fulbright is to determine whether each product or mineral on which the 45X tax credits are claimed benefit from “material assistance” from “prohibited foreign entities.” If this is the case, a product or mineral is not eligible for 45X. The definition of a “prohibited foreign entity” is explained in step two.

“Material assistance” is calculated as a fraction. The denominator is the direct materials cost to produce the product or mineral, defined by the amount the manufacturer pays for raw materials and parts used in the product. The numerator is the denominator minus the share of direct materials cost that are “mined, produced or manufactured” by prohibited foreign entities.

The fraction represents the percentage of raw materials and parts not supplied by prohibited foreign entities.

For solar equipment, 50% of the cost must not be provided from prohibited foreign entities. This increases to 85% in 2029.

For batteries and battery components, it is 60% in 2026, increasing to 85% in 2029.

For wind, it is 85% for equipment sold in 2026 and 90% in 2027. Wind is ineligible for the 45X credit after 2027.

And for critical minerals, it is 0% until 2030, increasing 25% over time, and reaching 50% after 2032. The IRS is expected to issue new critical mineral percentages by late 2027, and Norton Rose Fulbright said the percentages will be higher than the current statute.

Martin said the IRS is expected to issue tables by late 2026 that will simplify the “material assistance” calculations.

“Manufacturers and mineral producers should get certificates from suppliers of raw materials and parts confirming, if true, that the suppliers are not prohibited foreign entities and do not know or have reason to know of any such entities in their supply chains and also confirming the amount paid by the manufacturer or mineral producer for raw materials or parts whose cost can be included in the numerator,” said Martin.

Step 2

For manufacturers, Martin said the second step is to determine whether the taxpayer claiming or selling tax credits is “specified foreign entity” or “foreign-influenced entity.”

Prohibited foreign entities under FEOC include companies that have direct or indirect interest of 50% or more from “Specified Foreign Entities,” which include China, Russia, Iran and North Korea.

IRS also applies FEOC restrictions to “Foreign-Influenced Entities” which are entities “influenced” by Specified Foreign Entities (SFE). Influence is determined by an entity’s right to assign a board member or executive officer, by showing at least 25% ownership from an SFE, collective ownership of at least 40% from multiple SFE, or an SFE holding at least 15% of debt in the entity.

Step 3

The final step, said Martin, is to scrub contracts and technology licenses for counterparties that may be designated as SFEs. Manufacturers should ensure that contracts do not provide SFEs “effective control” over the manufacturer or mineral producer or its products or minerals on which the 45X credits will be claimed.

An SFE has “effective control” if it has “specific authority over key aspects” of production. Martin said the IRS is expected to issue guidance on this definition. Until then, Norton Rose Fulbright recommends avoiding letting the counterparty that may be designated as SFE from doing the following:

determine the quantity of or when 45X products or minerals are produced,
determine who can buy the products or minerals,
restrict access to itself or its agents to critical data from the factory, mine or mineral processing facility, or
maintain, repair or operate any equipment at the factory, mine or mineral processing facility on an exclusive basis. This last clause makes long-term services agreements and restrictive warranty arrangements potentially a problem.

For licensing arrangements for use of intellectual property, Norton Rose Fulbright said to avoid giving the counterparty the rights to do any of the following:

“specify or otherwise direct one or more sources of components, subcomponents, or critical minerals” to be used in the product or minerals,
direct the operation of the production line, mine or processing facility,
limit the manufacturer’s or mineral producer’s use of intellectual property related to the product or mineral,
receive royalties for more than 10 years, or
require the taxpayer to hire the counterparty for more than two years of “services.

Find more details and recommendations for FEOC compliance here.

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