Original Coverage & Source Attribution: us.bbrown.com
Foreign Entity of Concern (FEOC) restrictions are a significant consideration for renewable energy developers, investors, and tax credit buyers as new requirements affect eligibility for several federal tax incentives. Projects with certain foreign ownership, financing, control, or supply-chain connections could lose access to valuable tax credits, creating financial consequences for everyone involved in the transaction.
These rules limit certain tax credits when prohibited foreign entities have specified connections to a project, or the components used to build it. For projects that rely on tax credits as a source of funding, failing to meet the requirements could affect the available tax benefit and the transaction’s economics.
Often, projects need to move forward before regulators have answered every question about FEOC compliance. By reviewing ownership, financing, and supply-chain relationships early, you can identify potential problems and determine whether tax insurance could help protect against the risk that the IRS later challenges the project’s tax credits.
How FEOC rules affect renewable energy projects
The One Big Beautiful Bill Act expanded FEOC-related restrictions for several clean energy tax credits. Under the rules, certain projects may lose eligibility when a prohibited foreign entity has a disqualifying connection to them. Two parts of the FEOC rules are particularly relevant:
- Material assistance: This generally focuses on the equipment and components that go into a renewable energy project or an eligible clean energy product, and whether prohibited foreign entities supplied too much of that material.
- Controlling ownership and financing: Renewable energy projects can involve developers, tax equity investors, lenders, and other parties, all connected through multiple layers of financing and ownership. FEOC analysis may require you to trace who owns, finances, supplies, or has contractual control over the project to determine whether any prohibited foreign entity has a disqualifying connection
Identifying these factors is just the first step. You may still need to make financing and investment decisions before regulators have fully clarified how certain FEOC requirements will apply.
Why uncertainty creates challenges for transactions
The Treasury and the IRS are developing additional guidance to clarify how prohibited foreign ownership and influence affect eligibility.
However, renewable energy transactions rarely pause while regulatory questions are resolved. Developers may need financing. Investors must decide whether to commit capital. Tax credit buyers need to determine whether they’re comfortable purchasing credits. Each party must evaluate whether the project meets the applicable requirements because, if the IRS later disagrees, it could reduce or disallow the tax credit or require the parties to repay a credit they already claimed.
For projects with complex ownership or financing structures, gathering the information needed to assess FEOC exposure can be challenging. Lenders or investors may need details about entities higher in the ownership chain, and that information is not always easy to obtain.
These uncertainties can affect billions of dollars in renewable energy projects, making it important for you to address FEOC compliance before signing transaction documents or committing capital.
Even with thorough diligence, however, you may not be able to eliminate every FEOC-related uncertainty before moving forward. When a project has a well-supported tax position, but some risk remains, tax insurance can offer another way to manage the potential financial exposure and keep the project moving forward.
How tax insurance can help address FEOC risk
Tax insurance may provide another layer of protection when you have a well-supported FEOC position but still face uncertainty about how the IRS could interpret it. If the IRS later determines that a covered project failed to meet FEOC requirements and reduces, disallows, or recaptures the tax credit, the policy can reimburse you for the covered loss.
What supporting documentation insurers may request
Depending on the policy terms, coverage may also extend to related penalties, interest, and legal fees and other costs associated with defending the tax position, all subject to a gross up. That protection can help you limit the financial impact of an adverse IRS decision and move forward with a transaction you might otherwise consider too risky.
However, insurers need robust third-party analysis that provides granular explanations of the project’s details and why you and your advisors believe the project satisfies FEOC requirements.
Depending on the FEOC risk, insurers can ask for several types of supporting documentation, including:
- Legal or tax analysis: A law firm or accounting firm may need to provide a tax memorandum or opinion explaining why the project or seller complies with the applicable FEOC requirements.
- Ownership and financing information: Insurers could examine whether a prohibited foreign entity owns part of the seller, provides debt financing, has the right to appoint certain officers, or otherwise has influence over the project.
- Supply-chain analysis: For material-assistance risks, insurers expect an accounting firm or other third-party familiar with supply-chain analysis to document the sources of project components and assess whether the project remains within applicable limits for materials linked to prohibited foreign entities.
- Contract rights: Insurers may review whether a prohibited foreign entity has contractual rights to control important aspects of the project, such as how it operates, who can purchase its output, or who can access, maintain, or repair the facility.
- Intellectual property arrangements: If the project relies on technology or intellectual property associated with a prohibited foreign entity, insurers may review licensing agreements, royalty payments, sourcing arrangements, and whether another party could restrict access to the technology the project needs to operate.
- Project documents: Depending on the risk, insurers may want to review debt agreements, governance documents, equipment supply contracts, operations and maintenance agreements, service agreements, and licenses.
The stronger the underlying diligence, the more information an insurer has to determine whether it can offer coverage.
How to prepare before approaching the insurance market
Put yourself in a stronger position by beginning that work early. Engage experienced tax counsel and other advisors who can identify potential FEOC concerns and develop a clear, defensible analysis.
Involve an experienced specialized tax insurance broker early in the process. The tax insurance market comprises a relatively small group of insurers, and how you present risk can influence the market’s response. A broker with current market knowledge and deep experience can help determine what information insurers will need and approach carriers strategically.
FEOC requirements will continue to shape renewable energy tax credit transactions as regulators provide additional clarity and the tax insurance market develops its approach to these risks. Addressing exposures early will better equip you to evaluate your options and move transactions forward.
Corey Lewis is the Global Head of Tax Insurance at Brown & Brown based in New York, NY, and was previously a member of the North America Transaction Solutions Operating Committee, Co-Leader of the North American Tax Insurance Practice and Tax Credit Insurance Practice Leader at a large, global insurance broker. Corey was recognized as a multiple Power Broker and Rising Star award honoree by RISK & INSURANCE Magazine. He graduated from the University of Michigan with a B.A. and the University of Texas School of Law with a J.D.
