Key Provisions of the One Big Beautiful Bill (H.R.1) Related to Foreign Ownership and Foreign Supply (FEOC)

Applicable Limitations on Tax Credits under Sections 48E, 45Y, and 45X: 

The below summary describes provisions in the One Big Beautiful Bill that were passed by the House and are currently under consideration in the Senate.  The Senate may make changes to the legislation. 

• Section 48E Limitations[1] (Project Investment Tax Credits):
  • No credit is allowed for taxable years beginning after enactment of the bill if the taxpayer is a Specified Foreign Entity.
  • No credit is allowed for a facility that commences construction after December 31, 2025, that includes any Material Assistance From a Prohibited Foreign Entity.
  • No credit is allowed for tax years that begin after the date that is two years after the date of enactment of the bill:
    • For Foreign-Influenced Entities; or 
    • if the taxpayer makes fixed, determinable, annual, or periodic (FDAP) amount payments to a Prohibited Foreign Entity that are more than five percent of total expenditures related to the credit generating activity or 15% in aggregate.
    • New recapture provisions would also apply to certain payments to Prohibited Foreign Entities after a project is placed in service.
• Section 45Y Limitations[2] (Project Production Tax Credits):
  • No credit is allowed for taxable years beginning after enactment of the bill if the taxpayer is a Specified Foreign Entity.
  • No credit is allowed for a facility that commences construction after December 31, 2025, that includes any Material Assistance From a Prohibited Foreign Entity.
  • No credit is allowed for tax years that begin after the date that is two years after the date of enactment of the bill:
    • for Foreign-Influenced Entities; or 
    • if the taxpayer makes fixed, determinable, annual, or periodic (FDAP) amount payments to a Prohibited Foreign Entity that are more than five percent of total expenditures related to the credit generating activity or 15% in aggregate.
• Section 45X Limitations[3] (Manufacturing Production Tax Credits):
  • No credit is allowed for taxable years beginning after enactment of the bill if the taxpayer is a Specified Foreign Entity.
  • No credit is allowed for tax years that begin after the date that is two years after the date of enactment of the bill:
    • for Foreign-Influenced Entities; 
    • for components that include any Material Assistance From a Prohibited Foreign Entity;
    • if the taxpayer makes fixed, determinable, annual, or periodic (FDAP) amount payments to a Prohibited Foreign Entity that are more than five percent of total expenditures related to the credit generating activity or 15% in aggregate; or
    • for components produced subject to a licensing agreement with a Prohibited Foreign Entity for which the value of such agreement is in excess of $1,000,000.

Underlying Definitions[4]:

• “Prohibited Foreign Entity” means any of:
  • Specified Foreign Entity; or
  • Foreign-Influenced Entity.
• “Specified Foreign Entity” means any of:
  • Foreign entities of concern as described in the William M. (Mac) Thornberry National Defense Authorization Act of FY 2021;
  • Chinese military companies operating in the U.S.;
  • Any entity on a list with regard to the prohibition on imported goods made through forced labor in Xinjiang;
  • An entity listed as ineligible for Department of Defense battery acquisition in the National Defense Authorization Act of FY 2024; or 
  • A Foreign-Controlled Entity.
• “Foreign-Controlled Entity” means any of:
  • The governments of the Democratic People’s Republic of North Korea; the People’s Republic of China; the Russian Federation; and the Islamic Republic of Iran (each, a “Covered Nation”);
  • A person who is a citizen, national or resident of a Covered Nation, provided the person is not a U.S. citizen or lawful permanent resident;
  • An entity or qualified business unit incorporated or organized under the laws of or having its principal place of business in a Covered Nation; or 
  • An entity controlled by any of the above.
• “Foreign-Influenced Entity” means any entity which:
  • During the applicable taxable year:
    • a Specified Foreign Entity has the direct or indirect authority to appoint a covered officer;
    • a single Specified Foreign Entity owns at least 10% of such entity;
    • one or more Specified Foreign Entities own in the aggregate at least 25% of such entity; or
    • at least 25% of the debt of such entity is held in the aggregate by one or more Specified Foreign Entities; or
  • For the previous taxable year:
    • the entity knowingly makes FDAP payments to a Specified Foreign Entity an amount equal to 10% of the annual gross receipts of the entity for the previous taxable year; or
    • makes aggregate FDAP payments to one or more Specified Foreign Entities of at least 25% of the annual FDAP payments of the entity.
• “Material Assistance From a Prohibited Foreign Entity” means, for any property or facility, that:
  • Any component, or subcomponent, or critical mineral included in such property is extracted, processed, recycled, manufactured, or assembled by a Prohibited Foreign Entity; or
  • Any design of such property was based on any copyright or patent held by a Prohibited Foreign Entity or any know-how or trade secret provided by a Prohibited Foreign Entity. 
  • Exception: Does not apply to any component, subcomponent, or critical mineral that:
    • Is not acquired directly from a Prohibited Foreign Entity; and
    • Is not uniquely designed for the use in construction of the applicable qualified facility or manufacture of the applicable eligible component; and 
    • Is not exclusively or predominantly produced by Prohibited Foreign Entities. 

Notes and Conclusion:

While all of the provisions in the bill related to energy tax credits are important, the prohibitions on tax credits provisions related to Material Assistance From a Prohibited Foreign Entity may overshadow the rest of the bill.   

Given the broad definition of Prohibited Foreign Entity, any manufacturer with a Chinese parent or intermediate company is likely a Prohibited Foreign Entity.  The definitions of component, subcomponent, and critical mineral are broad and vague, and may include nearly all parts and materials in a project (not just cells or modules). 

The provisions related to Material Assistance From a Prohibited Foreign Entity (including the exceptions) are not entirely clear, however, and there is no available guidance for the interpretation of the exceptions.  It is not unreasonable to interpret these provisions to render many projects ineligible for tax credits, although additional guidance would be necessary to determine whether that is actually the case.  Further, as noted above, that at this stage the legislation has not been enacted into law, and it’s possible that it is never enacted or enacted in revised form. 

[1] Sec. 122009

[2] Sec. 122008

[3] Sec. 122014

[4] Sec. 112008(d)