The U.S. government has been steadily tightening rules relating to who can benefit from clean energy incentives. The One Big Beautiful Bill Act (OBBBA) is the latest step, and it makes one thing crystal clear: if your company has ties to certain foreign governments, your access to federal tax credits could be at risk and you should carefully consider the source of any debt financing. Here is what you need to know.
Who Gets Blocked from Tax Credits?
The OBBBA introduced several new entity categories, all under the umbrella term “prohibited foreign entity” (PFE), which are barred from obtaining clean energy tax credits. A PFE is either a—
- Specified Foreign Entity (SFE), which includes:
- Foreign Entities of Concern (FEOCs),
- Chinese military companies,
- Entities on national security watchlists, and
- Foreign-Controlled Entities (FCEs)—entities owned or controlled by, or with sufficient ties to, a “covered nation” (i.e., North Korea, China, Russia, and Iran).
- Foreign-Influenced Entity (FIE), which refers to companies where SFEs hold significant influence, such as:
- Large ownership stakes,
- Debt holdings, and
- Contracts that effectively let the SFEs steer operations.
Notably, an entity is an FIE if at least 15% of its debt is issued, in the aggregate, to one or more SFEs (the “15% debt threshold”).
An organization can be labeled an FEOC if it is:
- on a terrorism or sanctions list,
- named on the U.S. Treasury’s Specially Designated Nationals (SDN) list,
- owned, controlled by, or subject to the jurisdiction or direction of a government of a “covered nation,”
- accused by the Attorney General of involvement in a serious crime, or
- determined to be engaged in unauthorized conduct that is detrimental to national security or foreign policy.
- Even partial ownership, voting rights, grants, debt, or board seats can be enough to trigger concern
If your business is an SFE or FIE, you will not be eligible for clean energy tax credits.
Which Tax Credits Are Affected?
Starting in 2025, restrictions kick in for a wide range of incentives, including credits for:
- Nuclear power generation (45U)
- Clean electricity (45Y, 48E)
- Manufacturing clean energy components (45X)
- Clean fuel production (45Z)
- Carbon capture and storage (45Q)
Some bans began immediately upon enactment of OBBBA, while others phase in by 2027. Additionally, credits cannot be transferred or sold to SFEs, and harsher penalties are imposed for misstatements of tax liability due to disallowed credits under the PFE rules.
Why This Matters for Financing?
As noted, it is not just about ownership—financing and supply chain ties matter too. If your company uses loans or financing from an SFE, that alone can disqualify your company from tax credits (i.e., if you become an FIE).
On the debt capital markets front, we have been receiving queries from underwriters working with issuers in the energy and utility sector concerning the 15% debt threshold and its potential impact on debt securities offerings. For instance, underwriters are exploring whether and to what extent they can avoid placing with or reselling notes to, SFEs as well as the practical implications of implementing or monitoring compliance. Issuers, on the other hand, are exploring seeking additional or stronger representations from underwriters that no distributions of securities will be made by them to SFEs or FIEs either altogether or in excess of the 15% debt threshold. In one transaction we are aware of, the terms of the securities gave the issuer the right to redeem bonds at 101% upon a “Tax Credit Event” which was defined as any time in the reasonable determination of the issuer that payment of interest under the bonds would result in the issuer being unable to utilize its tax credits. It will be interesting to see how the market develops to tackle these issues and whether any regulatory relief or clarification will be forthcoming.
Bottom Line
If clean energy tax credits are important to your business, evaluate your ownership, financing and supply chain structures. Affected borrowers and lenders may include contractual language in loan or credit agreements addressing these issues and underwriters in bond offerings may need to explore ways (e.g. contractually and/or operationally) to avoid selling (or limit sales of) securities to certain foreign lenders.
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