Prohibited Foreign Entity Due Diligence Framework

The One Big Beautiful Bill Act (OB3) enacted a tough new set of rules that limit the use of China’s supply chains and technology by taxpayers seeking to qualify for Internal Revenue Code (IRC) Section 45Y/48E/45X solar credits. The new rules are broadly characterized as the “Prohibited Foreign Entity” (PFE) provisions with three categories of restrictions that make a taxpayer ineligible for the 45Y/48E/45X solar credits: entity-level restriction, payment restrictions, and “Material Assistance” rules that limit supply chain purchases from a PFE.

This document, informed by tax opinions, legal counsel who advise the SEMA Coalition’s members, as well as public documents, seeks to highlight important considerations for taxpayers in the solar supply chain and their customers as they navigate these rules. As further discussed, some of these rules are ambiguous, while others are clear but challenging to comply with in practice.

Consequently, the solar industry is awash in attestations conferring “non-PFE” status, including from third-party counsel, that lack full documentation or transparency about the level of analysis performed. While industry players have focused on ownership percentages to determine PFE status, there are at least 32 different triggers in OB3 (found in 26 USC 7701(a)(51)) that could make an entity a PFE and thus ineligible for tax credits. The majority of the attestations the SEMA Coalition has seen thus far 1) do not cover all PFE triggers, 2) are not intended for customer use, and/or 3) are not compliant with the IRS Circular 230 standards on legal tax opinions.

While awaiting Treasury action on PFE definitional clarifications, the simplest form of risk management for taxpayers seeking to claim this credit is to buy solar components from U.S. and allied-owned and controlled supply chains.