The Prohibited Foreign Entity (Or FEOC) Rules And Battery Storage

Over the past year, battery storage developers and equipment manufacturers have had to contend with new “Prohibited Foreign Entity” (PFE) rules—commonly called the FEOC (“foreign entity of concern”) requirements. 

Enacted on July 4, 2025, as part of the “One Big Beautiful Bill Act” (OBBBA), the PFE rules bar developers and manufacturers with specified ties to certain foreign entities—primarily entities with certain ties to China—from eligibility for key federal tax credits—including the Section 48E clean energy investment tax credit (ITC), the Section 45Y clean energy production tax credit (PTC), and the Section 45X advanced manufacturing credit. This post analyses the PFE rules specifically as they relate to the battery storage industry.

The PFE rules are complex and, in key respects, unclear, and Treasury and IRS guidance to date has been limited. Despite this uncertainty, storage developers and equipment manufacturers are pressing forward, developing compliance strategies to mitigate risk and maintain momentum for an industry that has seen major gains in recent years. 

A quick note before ping in—this publication addresses certain key PFE rules but is not exhaustive. The PFE rules are sweeping and complicated, and noncompliance can result in complete loss of credits and penalties. Consult tax counsel when assessing any PFE issue.

Background

The Inflation Reduction Act (IRA), enacted in 2022, significantly expanded federal tax credits for clean energy projects. For the first time, it extended the ITC to battery energy storage facilities and created the 45X advanced manufacturing tax credit for manufacturers of certain battery components and critical minerals.

The tide turned on July 4, 2025, with the enactment of the so-called “One Big Beautiful Bill Act.” The OBBBA, among other things, phases out the ITC and PTC for wind and solar at the end of 2027, unless “beginning of construction” (for tax purposes) on those projects occurs before July 4, 2026. 

The OBBBA did not impose similar phaseouts on storage. But it introduced the PFE rules, which apply across technologies—including battery storage—under the ITC, PTC, and 45X.

The PFE Rules

The PFE rules fall into three categories:

1. PFE Entity Requirements.

Often called the “entity” or “entity-level” requirement, this rule bars taxpayers from claiming credits if they are PFEs. The rule applies beginning in the first taxable year after the OBBBA’s enactment (July 4, 2025). However, the definitions of certain PFE categories discussed below—such as those relating to “effective control”—suggest that even certain actions taken in 2025, before the OBBBA’s enactment, could affect one’s PFE status.

The statute identifies two categories of PFEs: specified foreign entities and foreign-influenced entities. I also identify a third category: foreign-controlled entities. Though technically a type of specified foreign entity, foreign-controlled entities have their own expansive definition in the OBBBA that warrants careful attention.

Specified Foreign Entities

These are entities appearing on certain federal government lists under national security laws, including designated foreign terrorist organizations, OFAC-listed entities and inpiduals, and entities convicted or suspected of certain national security crimes. The category also includes Chinese military companies operating in the United States—a list that covers several Chinese battery and solar equipment manufacturers. As mentioned, the specified foreign entity category also includes foreign-controlled entities.

Foreign-Controlled Entities 

Foreign-controlled entities—a type of specified foreign entity—include several entities with ties to “covered nations” (China, Iran, North Korea, and Russia). Specifically, a foreign-controlled entity includes:

• The government or an agency or instrumentality of the government of a covered nation
• A citizen or national of a covered nation who is not also a U.S. citizen, national, or lawful permanent resident.
• Any entity or qualified business unit incorporated or organized under the laws of, or with its principal place of business in, a covered nation—for instance, companies incorporated in China or incorporated elsewhere but headquartered there
• Entities “controlled” by any of the above. 

“Control” means ownership of more than 50 percent of (1) stock (by vote or value) for corporations, (2) profits or capital interests for partnerships, or (3) beneficial interests for other entities. So, for instance, certain companies operating in other countries may nonetheless be considered foreign-controlled entities if they are “controlled” by the Chinese government or a company organized under Chinese laws or having its principal place of business in China.

Foreign-Influenced Entities

Foreign-influenced entities include entities whose ties to “covered nations” are more attenuated. They are entities with respect to which, during the taxable year:

• a specified foreign entity has the direct authority to appoint a “covered officer” of such entity,
• a single specified foreign entity owns at least 25 percent of such entity,
• one or more specified foreign entities own in the aggregate at least 40 percent of such entity, or
• at least 15 percent of the debt of such entity has been issued, in the aggregate, to one or more specified foreign entities.

Foreign-influenced entities also include entities under the “effective control” of specified foreign entities, defined as follows:

• An entity which, during the previous taxable year, made a payment to a specified foreign entity pursuant to a contract, agreement, or other arrangement which entitles such specified foreign entity (or an entity related to such specified foreign entity) to exercise effective control over any ITC-eligible battery energy storage facility of the taxpayer (or a person related to the taxpayer) or, with respect to 45X, the extraction, processing, or recycling of any applicable critical mineral or the production of a 45X-eligible component which is not an applicable critical mineral.

“Effective control” is currently defined by reference to 13 factors in the OBBBA arising from certain contractual arrangements, including, in particular, IP licensing arrangements. Those factors include, among others, certain “unrestricted” contractual rights held by specified foreign entities to control facility operations or to maintain or repair such facilities on an exclusive basis. Effective control also includes IP licensing agreements entered into (or modified) after July 4, 2025, when the OBBBA was enacted. Treasury has not issued guidance on “effective control,” but may do so in forthcoming proposed regulations. Until then, taxpayers must rely on the 13 statutory factors.

Importantly, foreign-influenced entity status hinges on a relationship with a specified foreign entity (including foreign-controlled entities). Specified foreign entities can provide the “influence” that creates foreign-influenced entities under the OBBBA, but foreign-influenced entities generally cannot similarly convert other entities into PFEs. This distinction is important when assessing PFE entity status.

Public Companies

Public companies receive different treatment under the PFE entity requirements. Certain public companies are exempt from parts of the foreign-influenced entity definition but are subject to additional foreign-controlled and foreign-influenced entity requirements that other entities are not subject to. These additional requirements for public companies can further complicate the PFE entity analysis.

2. FEOC Material Assistance Requirements.

The material assistance requirements address a different set of PFE connections. They bar taxpayers from using certain equipment or components (or, for 45X, certain materials) from PFEs above specified thresholds. For ITC purposes, these requirements do not apply to facilities for which construction began (for tax purposes) in 2025 or earlier. Facilities for which beginning of construction occurs in 2026 or later must comply.

Under the material assistance rules, developers and manufacturers must calculate a “material assistance cost ratio” (MACR) reflecting the percentage of non-PFE equipment or materials, based on direct costs, in a given facility or component. For battery storage developers, the MACR must exceed the following thresholds based on the year construction began:

For “qualifying battery components,” the thresholds (based on production and sale date) are:

Calculating the MACR involves identifying non-PFE direct costs, subtracting them from total direct costs, and piding by total direct costs. In February 2026, IRS issued Notice 2026-15, which elaborates on these calculations and also provides three “interim” safe harbors. For more details on Notice 2026-15, see our previous publications regarding the ITC/PTC and 45X. Notice 2026-15 did not substantially address the other PFE rules, including the PFE entity requirement or PFE recapture period, discussed below.

3. PFE Recapture Period.

The OBBBA imposed a new PFE-related recapture period. This applies to the ITC. Recapture can occur if a “specified taxpayer” makes an “applicable payment” within 10 years following a project’s placement in service. “Specified taxpayers” are those allowed an ITC for any taxable year beginning more than 2 years after the OBBBA’s July 4, 2025 enactment date. “Applicable payment” is defined by reference to the “effective control” payments in the foreign-influenced entity definition, discussed above. Making such a payment, in addition to affecting PFE status, could also result in recapture if the statute’s other conditions are met.

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Storage developers should closely track the regulatory process for the PFE rules. Notice 2026-15 promises future proposed regulations on the PFE rules beyond “material assistance,” including the PFE entity and PFE recapture rules. Those forthcoming proposed regulations, expected to be issued by the end of the year, will not be the final step—Treasury must solicit another round of comments before publishing final regulations on the PFE requirements, which will require additional time and could result in further changes.

Despite the limited guidance, the industry can take steps to mitigate risk based on the statute, Notice 2025-16, related principles, and long-standing practice. We are available to help address any PFE questions you may have.