McDermott Will & Schulte, a global law firm

Foreign Entity of Concern (FEOC) restrictions introduced by the One Big Beautiful Bill Act (OBBBA) have upended clean energy tax credit compliance, adding a demanding layer to energy project development. And even as the industry works through the full implications, the  IRS continues to refine FEOC guidance.

In combination with US tariff policies, FEOC rules are increasing scrutiny of foreign ownership, supply chains, and sourcing – and are reshaping the energy sector.

Stakeholders face complexities that reach beyond the formalities of narrow compliance. Treating FEOC developments as strategic business considerations will better position you to adapt in the evolving market.

FEOC compliance as business strategy

Adhering to highly technical FEOC constraints is essential for energy project developers because tax credits are significant economic drivers of these business models. When tax credits can represent 50% or more of a project’s capital investment, FEOC restrictions are a core business concern – and compliance is an essential business strategy.

To deliver projects, developers need more than their own commitments to FEOC compliance. They need buy-in from investors, lenders, insurers, and other stakeholders to move any future energy project forward. And to commit to a project, stakeholders need confidence that the developer’s structures and strategies will secure the anticipated tax credits. Compliance with FEOC rules, then, is not only a legal requirement. It is a prerequisite for financing an energy project.

As you absorb tax credit challenges, you can look to clearly defined statutory language and subsequent FEOC guidance from the IRS. Some companies have already begun to successfully incorporate those directives into business activities. Gaps still exist, and further guidance to address those gaps is anticipated. In the meantime, you can take steps to position energy projects for future success.

Drafting with compliance in mind

As the energy markets move forward through fluctuating tariffs and shifting regulatory dynamics, preparation is more than a best practice. Proactive, precise contract drafting is key to navigating FEOC restrictions and positioning energy projects for long-term success.

Market participants who address technicalities now can avoid future situations where inadequately drafted contracts jeopardize tax credit eligibility – and unravel a project’s finances. This is especially true in areas where the industry is awaiting additional IRS guidance. Developers and other stakeholders who build conservative contractual frameworks that can withstand evolving regulatory demands will set themselves up to execute energy projects in what is becoming an increasingly protectionist and compliance-driven environment.

Over time, certain issues have consistently emerged as concerns that you can document and protect against – either in revising preexisting contracts or in negotiating new ones. For example:

• Intellectual property licensing provisions must be considered. What appears to be a standard licensing agreement may, under a conservative interpretation of the statute, jeopardize tax credit eligibility if it crosses the line into “effective control” by a “specified foreign entity” as defined by the statute. Reviewing and revising intellectual property provisions in every agreement that touches your projects, even those associated with projects already under development, is prudent given the current FEOC regulatory framework.
• Standard business practices could trigger potential debt obligation concerns. FEOC’s framework restricts tax credit eligibility for any company with 15% or more of its total debt issued to “prohibited foreign entities.” However, the statute does not define “debt.” In a conservative interpretation, routine corporate borrowing arrangements that are unrelated to the specific energy project in question, or even trade payables, could trigger the limit and bar an otherwise compliant project from obtaining tax credits. With additional guidance, those concerns may not materialize; in the meantime, the safer course is for companies to review debt obligations across the board, ensuring that exposure to the 15% threshold does not go undetected.
• Supply chain challenges are a critical concern. When Congress enacted FEOC restrictions, it raised questions about how far down the supply chain you must go to ensure that problematic foreign entities are not involved in equipment manufacturing. Tracing components all the way through the supply chain requires diligencing sub-suppliers and sources of raw materials. And if you go far enough in any supply chain, you will find parts originating from China, which is a FEOC jurisdiction. Developers awaiting further guidance on FEOC supply chain constraints should reexamine procurement relationships and identify suppliers that are unable or unwilling to properly meet sufficient transparency and certification requirements.

To find a competitive foothold in this environment, it’s important to manage risk with strategic contracting. Tackling FEOC-related concerns up front will allow you and other stakeholders to move forward confidently in current projects and future endeavors.

Moving forward

Despite FEOC challenges, energy deals continue to move forward. The months after the OBBBA passed were initially marked by uncertainty; market participants struggled with highly technical FEOC constraints that created a slowdown in project development through the fall and winter of 2025 and early 2026. An initial lack of regulatory guidance compounded industry hesitation to move energy projects forward.

The IRS has since offered some guidance, although more is needed (and expected). The energy industry has developed a clearer understanding of the compliance landscape and is actively working toward incorporating regulatory necessities. Those companies that treat current challenges as forward-looking strategies will be better able to adapt and thrive in the increasingly geopolitically sensitive energy market. They will find themselves operating from a position of strength, ready for the future, while others will be playing catch-up.

Currently, energy projects are moving forward with momentum. Compelling incentives and opportunities do exist, and with proper planning, offer real potential for meaningful success.