Senate Version of One Big Beautiful Bill Act Clarifies Foreign Entity Restrictions on Renewable Energy Tax Credits

The Senate Finance Committee recently released its own draft of the “One Big Beautiful Bill Act” (the Bill) previously passed by the House as H.R. 1. Both the House and Senate versions of the Bill impose restrictions on Inflation Reduction Act (IRA) tax credits based on “material assistance” from “Foreign Entities of Concern” (FEOCs). The House version lacked significant details on what “material assistance” was. The Senate Bill provides significant details on the structure and operation of the restrictions.

By way of background, these limitations restrict various IRA credits by prohibiting them from being claimed by taxpayers that are, or by facilities or projects that engage in certain activities with or otherwise have significant relationships to, Prohibited Foreign Entities (PFEs). Relevant activities for purposes of the FEOC restrictions include licensing or sourcing from, or significant payments to, a PFE. The Bill establishes two species of PFEs: Specified Foreign Entities or SFEs (those whose names appear on certain lists or registries as specified in the House Bill, such as the 2021 and 2024 National Defense Authorization Acts as well as the Uyghur Forced Labor Prevention Act List, and have relationships to China, Iran, Russia, or North Korea) and Foreign-Influenced Entities or FIEs (an entity over which an SFE has certain power, leverage, or ownership interests). The effective dates of the FEOC limitations varied somewhat by credit, but most took effect after January 1, 2026, in the House text.

The Senate Bill incorporates the House’s general requirement that taxpayers must not receive “material assistance” from FEOCs in order to be eligible for certain credits. The Senate Bill also provides objective tests for what constitutes an FIE and what constitutes “material assistance,” which the House Bill left to subjective definition.

Under the Senate Bill, an FIE is an entity:

1. Over which a SFE has the direct or indirect authority to appoint a covered officer (typically executives or board members); or
2. Which is owned at least 25% percent by an SFE; or
3. Which is owned at least 40% by one or more SFEs together; or
4. Of which at least 40% of such entity’s debt is held in the aggregate by one or more SFEs; or
5. That has made a payment to an SFE pursuant to a contract, agreement, or other arrangement which entitles such SFE to exercise effective control over any qualified facility or energy storage technology of the taxpayer (or any person related thereto), or involves the extraction, processing, or refinement of any applicable critical mineral or the production of any other eligible component with respect to any eligible component produced by the taxpayer.

These benchmarks offer objective standards for what constitutes an SFE, though the fifth test may require significant factual inquiry.

Additionally, the Senate Bill provides an objective definition of “material assistance.” The Senate Bill determines material assistance by reference to “Material Assistance Cost Ratios” created within the Bill, which are determined by the total cost of manufactured products minus the cost of products from an FEOC, divided by the total cost of manufactured products, producing a percentage that reflects non-FEOC sourcing (the lower the FEOC costs, the higher a developer’s cost ratio). Consequently, having a cost ratio lower than the specified percentage qualifies as material assistance. These ratios vary depending on the Qualified Facility, Energy Storage Technology, or Eligible Component at issue and change over time, as summarized in the following table (which also highlights important Senate departures from H.R. 1):

Senate Finance Bill FEOC Restrictions

It is important to note the effective date of the FEOC regulations for each credit in the table. This represents a departure from the House’s original effective date of January 1, 2026, for most credits. The Senate has varied the relevant timeframe within which construction must begin for projects and facilities under Sections 45Y & 48E. Additionally, supply contracts executed prior to June 16, 2025, would be exempt from the FEOC rules under this Senate draft. To ease the burden on taxpayers under these rules, the Bill provides that they may obtain and rely on certifications from their manufacturers as to the content of products from FEOCs, provided they do not know, nor have reason to know, that such certifications are incorrect. The Senate draft also promises a safe harbor approach to calculating this ratio similar to the domestic content safe harbors found in IRS Notices 2024-24 and 2025-08; taxpayers may rely on these safe harbors without manufacturer certification.

These FEOC rules would create an environment in which there are increased IRS enforcement risks relating to energy credits. The Senate Bill text institutes a more punishing IRS enforcement regime for credits disallowed due to FEOC issues than for many other tax issues.

For instance, the Senate Bill would establish an extended FEOC audit period. In most circumstances, the IRS has three years from the date a return is due or filed (whichever comes later) to complete an audit and assess any associated tax liability. The proposed legislation would allow six years where there is a deficiency (understatement) in tax due to an error in determining whether there was material assistance from a FEOC.

There is also an increased penalty risk. The proposed legislation would allow the IRS to impose a 20% penalty for substantial understatement of tax liability when there is a disallowance of energy credits due to an overstated Material Assistance Cost Ratio, if the disallowance creates an understatement of tax equal to 1% of the tax that should have been shown on the return; under present law, this penalty does not apply unless there is a misstatement of $10,000,000 or 10% of the tax that should have been shown on the return.

Further, the supplier certification regime comes with penalty risks for suppliers. Suppliers who deliver certifications regarding FEOCs that turn out to be false, and where the supplier knew or reasonably should have known that the statements as to FEOCs or Material Assistance Cost Ratios were false, can now result in tax penalties to suppliers. If such a misstatement causes the disallowance of an energy credit, the supplier who made the certification can be subject to a penalty equal to up to 10% of the amount of any underpayment attributable to the inaccuracy or falsity of the certification. The IRS would also have six years to assess this penalty.

The above provisions indicate that the Senate Finance Committee envisions significant IRS enforcement of the FEOC provisions, and that both energy companies and suppliers will need to take care to ensure they are in compliance with the law, as well as to maintain good records for at least six years after the year in which credits were claimed.

There is still a significant amount of work to be done before the Bill becomes law; the Senate expects to begin voting on the Bill on Friday, June 27, and continue voting over the weekend. The final Senate Bill text must then be reconciled with the House text and the final Bill will have to pass both the House and Senate. But given the commonalities between both Bills and the other restrictions on tax credits proposed in both chambers, industry participants should look at what projects they can begin construction on in 2025 in order to avoid these restrictions altogether, as well as look to their supply chains and the safe harbors offered by IRS regulations to see if they can meet the FEOC tests for projects that may be subject to those tests.

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