Clean-Energy Tax Credit Deals Require Extra Compliance Checks

Foreign Entity of Concern restrictions—designed to prevent clean energy tax credits from benefiting projects with prohibited foreign ownership, influence, or supply‑chain involvement—have turned renewable tax incentives into a high‑stakes compliance challenge.

Absent clear, verifiable evidence of FEOC compliance, lenders and prospective buyers may simply move to the next project.

Evaluating the full circle of stakeholders and their readiness to produce reliable data and documentation will help renewable-energy developers and component manufacturers preserve credit eligibility, secure financing, and maintain a competitive standing in the credit market.

Complexities in Practice

Compliance isn’t a straightforward ownership test. It requires a layered assessment of control, foreign influence, and transaction tracing that examines who can meaningfully direct or influence a project. This includes extensive review of ownership chains, financing arrangements, governance rights, and commercial agreements to identify ties to government‑ or military‑linked adversaries or other foreign‑influenced entities.

Under the Inflation Reduction Act, FEOC rules denied clean vehicle credits for vehicles whose batteries contained critical minerals or components that could effectively be traced to a foreign entity of concern. Last year’s massive tax package expanded these rules by conditioning clean‑energy tax credits on whether a prohibited foreign entity—an entity subject to meaningful influence by a foreign adversary—is involved in a project.

This includes ownership or governance participation as well as supply‑chain involvement through “material assistance,” meaning the provision of key components, materials, technology, or other critical inputs that are essential to building or operating the project. These material-assistance thresholds demand companies trace their supply chains down to underlying materials, proving that a sufficient share of project costs come from non-PFE sources.

Notice 2026-15, released in February, outlines how to calculate material assistance, including safe harbors that rely on existing domestic content tables. However, reliance lasts only until 60 days after proposed regulations or new safe harbor tables drop, likely sometime this year.

Several questions remain unanswered, including how the government will define control exercised through licensing or contractual leverage, rather than outright ownership, and how regulators will ultimately apply ownership testing and debt tracing.. There are also questions about how stringently the government will apply forthcoming anti‑circumvention rules.

Demonstrating compliance requires tracing project materials, representations, and records, but there are unknowns here as well. Suppliers may be reluctant to certify that their products are FEOC-compliant given the risk that certification today could be invalidated by future IRS guidance, which would trigger penalties or indemnification claims.

Lenders, tax equity investors, and tax credit buyers likely will tighten their diligence procedures before providing capital. The processes required to prove compliance will take time to develop and operationalize and may be difficult to add late in a project lifecycle.

Noncompliance Implications

Projects that fail to comply with these FEOC requirements risk losing credits entirely. The risk is compounded by supplier audits being subject to a six-year statute—rather than the customary three—and potential for statutory penalties.

Recapture can loom as long as 10 years for certain credits. Lenders, tax equity investors, and tax credit buyers may demand proof of compliance during diligence, with missing supplier data, weak certifications, or control risks potentially stalling deals.

Getting Ahead

Delaying FEOC preparation until final IRS guidance arrives is no longer a neutral choice; it’s a risk decision.

To reduce risk, companies must fully standardize and operationalize their FEOC processes. In practice, this means re-engineering the supply chain, assessing compliance exposure before contracting with suppliers, and revisiting these analyses throughout the project lifecycle.

It also requires upgrading representations, warranties, and remedies—particularly supplier representations to confirm that supply chains haven’t changed over time. Contracts should mandate disclosure of traceable and verifiable data and recalibrate liquidated damages to reflect after‑tax losses of clean energy credits rather than limiting recovery to the price of individual components.

FEOC compliance needs to be embedded into company operations. This begins with assigning executive ownership and coordinating action across tax, legal, procurement, supply chain, and commercial teams. Procurement should implement stop gates that require FEOC clearance before signing contracts or issuing purchase orders.

The supply chain team should identify suppliers that pose compliance threats and consider alternative sourcing. Legal and finance should update contracts immediately , with requirements for supplier certifications, disclosure obligations, audit rights, and remedies.

Finally, the tax team should remain focused on developing processes around audit-and-finance-ready documentation that evidences compliance procedures and support throughout project lifecycles.

Clean energy tax credits remain powerful incentives, but only for companies that can produce reliable data and documentation. Many companies are already moving to standardized FEOC frameworks to avoid last-minute disruptions or delays.

Those that act now will be better positioned to preserve credit eligibility, secure financing, and maintain a competitive standing in the credit market.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Brian Murphy is EY Americas power, utilities, and renewables tax leader.

Kerry Matthews Funderburk is EY’s US power and utility indirect tax sector leader.

The views expressed are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of the global EY organization.

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