Foreign Entity restrictions: a practical guide for non-US energy technology companies

This piece is operator commentary, not tax or legal advice. The Prohibited Foreign Entity regime is technical, fact-specific, and still being clarified through IRS notices. Run any specific situation past qualified US tax counsel before acting. The intent here is to give an international energy tech leadership team enough structural literacy to ask the right questions of counsel, not to substitute for the answers.

The question the leadership team of a non-US energy technology company is now searching for an answer to is: can my company, or the projects my technology will go into, claim the US clean energy tax credits in 2026 and beyond? The honest answer in May 2026 is: probably, with conditions, but the conditions have teeth and the test is now running for the first time.

This guide is the structural map. The detail will sit with your counsel; the structure should sit with you.

What changed, in one paragraph

The One Big Beautiful Bill Act, signed 4 July 2025, restricted access to the principal US clean energy tax credits (sections 45Y, 48E, 45X, 45Q, 45U, 45Z) for projects and entities with prohibited foreign connections. The restrictions apply to taxable years beginning after enactment — meaning calendar year 2026 for most calendar-year taxpayers, including most international entrants. The Treasury and IRS released initial guidance in early 2026, including Notice 2026-15, with safe harbour tables for the Material Assistance Cost Ratio test required to be published by 31 December 2026.

The three categories that determine your exposure

The regime sorts entities into three buckets that drive every other question.

Specified Foreign Entity (SFE)

An entity is an SFE if it is:

• the government of, an agency of, an individual citizen or national of, or

• an entity organised under the laws of or having its principal place of business in

• China, Russia, Iran, or North Korea.

Also captured: entities on national-security designation lists, Chinese military companies (per DoD designations), and certain entities with effective control by an SFE.

Practical translation: if your company is Chinese-, Russian-, Iranian-, or North Korean-headquartered or -domiciled, you are an SFE. Projects owned by SFEs are categorically ineligible for the credits listed above starting in the 2026 tax year.

Foreign-Influenced Entity (FIE)

An entity is an FIE if an SFE has significant influence over it. The published thresholds for "significant influence" include:

• a single SFE owns ≥25% of the entity's stock,

• SFEs in aggregate own ≥40% of the entity's stock,

• the SFE holds certain debt interests, or

• the SFE has contractual control rights (board appointments, operational direction, similar).

Practical translation: if a Chinese investor sits on your cap table at 25% or above, or Chinese investors in aggregate hold 40% or above, you are an FIE. Same outcome if a Chinese parent has board-control or operational rights without crossing the equity thresholds. FIE projects are ineligible for the same credits.

Material Assistance from a PFE

Even if your entity is neither an SFE nor an FIE, projects that receive "material assistance" from PFEs (the umbrella term for SFEs and FIEs together) may be ineligible — depending on the credit and the year. The test is the Material Assistance Cost Ratio (MACR):

MACR = (Total direct costs − PFE-sourced direct costs) / Total direct costs × 100

A project with $100 of total direct costs and $20 from PFEs has an MACR of 80%. The MACR must exceed the threshold percentage for the relevant product category and year of construction or sale.

Threshold percentages vary by product — separate percentages for qualified facilities, energy storage technology, and component categories (solar, wind, inverters, batteries, critical minerals). They escalate year-over-year, becoming more stringent over time. The IRS-published safe harbour tables (due by 31 December 2026) will give the exact percentages.

Practical translation: if your bill of materials sources from Chinese suppliers for cells, modules, controllers, magnets, critical minerals, or similar, you have a MACR exposure that grows tighter each year — and at some point the threshold catches the project unless the BOM is restructured.

Which credits this matters for

The affected credits, in plain operator language:

Wind and solar §45Y/48E eligibility is separately phasing out for projects not in construction by 5 July 2026 or in service by 1 January 2028 — that is the broader OBBA change covered in [Cell 1.3]. The PFE rules sit on top of that timeline.

What this means for non-Chinese international entrants

Most European, Australian, Japanese, Korean, Canadian, UK, and DFI-territory tech companies will not be SFEs and will not be FIEs — but most will have MACR exposure through their supply chains. The question is not whether your company is foreign, but whether your component sourcing crosses the line.

A few common cases:

A European long-duration storage company with European cell sourcing. Low to zero MACR exposure. Likely safely eligible. The work is documentation — being able to show clean sourcing if challenged.

A European storage company with Chinese-sourced battery cells. Direct MACR exposure. Probably ineligible without supply-chain restructuring. Restructuring typically takes 12-18 months and material capex. Some companies will not be able to clear the threshold by the relevant year and will pivot toward markets where the credit isn't the underwriting variable.

A Japanese or Korean inverter manufacturer with mixed component sourcing. Mid-range MACR exposure. Depends on the specific component categories and the threshold percentages for the year. Usable with documentation discipline and possibly some sourcing shifts.

An Australian geothermal technology company with US-fabricated equipment. Probably clean. Geothermal sits in the firm-power category that retained §45Y/48E eligibility post-OBBA. If your contract manufacturer is US-based and your critical mineral sourcing is allied-country, you should be well inside the safe harbour.

An international company with Chinese venture or PE investors near or above the 25% threshold. FIE exposure regardless of where the company is operationally headquartered. The fix is on the cap table, not the supply chain. Typical remediation: secondary, buyback, or restructuring of the equity stake before the project is placed in service. This is a serious workstream and benefits from being started early.

The five-question PFE pre-flight for your company

Before any US-side spending and well before any project enters the eligibility window, leadership should be able to answer these:

1. SFE check: is the company organised under the laws of, or principally located in, China, Russia, Iran, or North Korea? (Yes → categorically ineligible. Re-domiciliation is possible but slow.)

2. FIE equity check: does any single SFE own ≥25% of the company, or do SFEs collectively own ≥40%? (Yes → ineligible until the cap table is remediated.)

3. FIE non-equity check: does any SFE hold board appointment rights, operational control rights, or debt interests that confer effective influence? (Yes → ineligible under "effective control" tests even if equity is below threshold.)

4. MACR baseline: what is the current PFE-sourced share of your bill of materials, by direct cost? (You need a number. Most companies don't have one yet.)

5. MACR trajectory: as the threshold percentage tightens year by year, when does your current BOM fail the test, and what's the remediation pathway and timeline?

A company that scores clean on 1, 2, 3 and has manageable answers on 4 and 5 is structurally eligible. A company that fails 1, 2, or 3 needs corporate remediation before project work. A company that fails 4 or 5 needs supply-chain remediation before the year the threshold catches them.

What remediation looks like in practice

Corporate-side remediation (SFE/FIE exposure) is a cap table and governance workstream. Buying out an SFE-classed investor takes 3-9 months in most jurisdictions if the investor is co-operative, longer if not. Restructuring board or contractual rights to eliminate "effective control" is faster — typically 30-90 days with counsel — but the documentation must survive IRS scrutiny.

Supply-chain-side remediation (MACR exposure) is a procurement workstream. Qualifying allied-country suppliers for critical components takes 6-12 months from first conversation to qualified production lots; longer for components where Chinese suppliers have dominant cost position. Some companies will not be able to fully remediate inside the relevant year and will accept partial credit exposure or geographic substitution (e.g., deploying in jurisdictions where the US credit isn't material to the project economics).

Documentation discipline runs through both. Even companies with clean structures will need to demonstrate that they are clean — through sourcing records, ownership attestations, board-rights disclosures, and certifications that survive lender and IRS review. Build the documentation discipline now, not in the year you need it.

What to do this quarter

If you are an international energy tech company considering US deployment in 2026-28:

Run the five-question PFE pre-flight now, internally first, then with US counsel. Most companies have not run it, and the gap between believing you're clean and knowing you're clean is the gap that kills the deal at lender review.

Quantify your MACR. This requires a procurement-data exercise: pulling your BOM by direct cost and tagging country-of-origin per component. Three to five days of work for most companies. The output is a single number that decides whether your projects clear the threshold this year and how many years before they don't.

Stage the corporate-side remediation if needed. If SFE/FIE remediation is required, it is the longest path on the critical chain and should be started before any US BD spending.

Pair this with the US market entry playbook. PFE is one of the five gates in the broader pre-flight covered in [Cell 1.3]. A clean PFE position is necessary but not sufficient for US market readiness; the other four gates (performance data, bankable guarantees, balance sheet, OBBA cohort) still apply.

When this changes

The IRS will publish safe harbour tables by 31 December 2026. Subsequent notices and likely regulations will refine the definitions of "material assistance," "effective control," and the MACR calculation methodology. Some of those clarifications will tighten the rules; some will create new safe harbours. Audit your position annually against current guidance, not against your 2025 reading of the law.

The regime is also vulnerable to further legislative change. Trade-policy shifts, allied-country exemptions, and component-category re-categorisations are all plausible over the next 24 months. None of these warrant deferral of remediation today — the cost of being non-compliant when the rule catches your project is higher than the cost of remediating early.