FEOC and Prohibited Foreign Entity Rules: What a Tax Credit Buyer Needs to Check

Published October 29, 2026. The One Big Beautiful Bill Act (P.L. 119-21) added "prohibited foreign entity" (PFE) rules to several credits. People also call this FEOC risk. For a buyer, the risk is simple: if the credit was not allowed to the seller, it is not allowed to you, and you can owe the tax back plus a penalty.

Three separate rules

1. No sales to a specified foreign entity. For §§45Q, 45U, 45X, 45Y, 45Z and 48E, the seller may not transfer to a buyer that is a "specified foreign entity" (§6418(g)(5)). Check your own ownership.
2. Seller status. For tax years beginning after July 4, 2025, no §45X credit is allowed if the taxpayer is a specified foreign entity or a foreign-influenced entity (Form 7207 instructions).
3. Material assistance. A §45X "eligible component" does not include property with material assistance from a PFE for tax years beginning after July 4, 2025. For clean electricity facilities under §§45Y and 48E that begin construction after December 31, 2025, the facility cannot include material assistance from a PFE (Notice 2026-15).

How "material assistance" is measured

The test is a material assistance cost ratio (MACR): the share of direct costs not attributable to a PFE must meet or exceed a statutory threshold. Notice 2026-15 (issued February 12, 2026) is interim guidance with safe harbors. The thresholds below come from a law-firm summary of the notice and the statute; read the notice itself before relying on them.

Eligible component (§45X), sold in	2026	2027	2028	2029	2030+
Solar energy components	50%	60%	70%	80%	85%
Inverters	50%	55%	60%	65%	70%
Qualifying battery components	60%	65%	70%	80%	85%
Wind components	85%	90%	Credit terminated after 2027

For facilities that begin construction in 2026, the thresholds are 40% (qualified facilities) and 55% (energy storage technology), rising 5 points a year (McGuireWoods summary). The statute directs Treasury to publish PFE safe harbor tables by December 31, 2026, and the effective-control and ownership rules were still unresolved when the summary was written.

What it does to price and structure (third-party data)

• Crux reports that PFE risk overtook deal size and investment-grade seller status as the dominant driver of tax credit pricing in H1 2026.
• Credits exempt from the rules, mainly legacy §45 and §48 credits from projects that began construction before 2025, traded at premiums of about $0.015 (ITC) and $0.020 (PTC) over PFE-exposed credits.
• Investment-grade sellers made up about 60% of current-year credit sales; exempt credits another 25%; and only about 15% of deals involved non-investment-grade sellers of PFE-exposed credits, which priced lower.
• Crux also reports that third-party insurers have been reluctant to cover most PFE risk, and some policies price at 5% or more.

Buyer protections to ask for

1. A representation that neither the seller nor the project or component involves a PFE, with supplier certifications supporting the MACR.
2. The MACR calculation and the method used (direct cost, identification safe harbor or cost percentage safe harbor).
3. A durable indemnity from a creditworthy seller, or a holdback, escrow or other credit support. See recapture risk and insurance.
4. Representations about the buyer's own status, so you can certify you are not a specified foreign entity.
5. A way to tell the buyer promptly if the seller learns the credit is at risk.

Why the stakes are real: an "excessive credit transfer" (the amount claimed over what was allowable) increases the buyer's tax by that amount plus 20%, unless the buyer shows reasonable cause (§6418(g)(2)).

Next: the 45X buyer guide, which credits are transferable, OBBBA changes and the diligence guide.

Educational information only, not tax, legal or investment advice, and no outcome is promised. Figures and rules were checked against the cited sources on October 29, 2026; confirm with your CPA and counsel before acting. See our disclaimer.