One Big Beautiful Bill (“OB3”) and FEOC: Current Considerations for Debt Financings

The One Big Beautiful Bill Act (the “Act”), passed in July 2024, and related recent additional guidance, has created ripple effects through the renewable energy financing market. The Act not only changes how projects qualify for key tax credits, including the clean electricity investment tax credit under Section 48E of the Code and the clean electricity production tax credit under Section 45Y of the Code (including beginning of construction considerations), but also implements ways that projects can be disqualified from receiving those credits if certain foreign entity restrictions are triggered. For an in-depth look at how the credits changed, see Foley’s analysis of the ITC/PTC Changes Under the Big Beautiful Bill Act. 

One of the Act’s most consequential developments is the addition of certain “prohibited foreign entity” (“PFE”) limitations  (commonly referred to as the “foreign entity of concern” (“FEOC”) limitations, although the rules impose limitations beyond only FEOC entities).  These fall into three buckets, “material assistance” limitations that limit the amount of equipment from PFEs that can be included in a project, “effective control” limitations that prohibit taxpayers from claiming credits if any “specified foreign entity,” which is a subset of PFEs, has effective control over a project, and taxpayer-level limitations providing that a PFE is not entitled to claim the credits.

Treasury has since issued interim rules addressing how to measure “material assistance” for FEOC limitation purposes (which applies to projects on which construction begins on or after January 1, 2026), though it left some of the most relevant questions to be addressed in future guidance. That gap is quickly surfacing in renewable energy project finance transactions: while IRS Notice 2026-15 is widely viewed as incrementally helpful; investors, lenders and their counsel have flagged unresolved questions around ownership/control, debt attribution, and potential liability.  For a high-level overview of the material assistance guidance, see Foley’s summary in IRS Releases Guidance Regarding Material Assistance Rules. 

Lenders should pay special attention in debt financings where the underlying project has tax credits that are being sold or that are being monetized by tax equity investors, in particular if there is a bridge loan component. Because bridge loan repayment is tied to tax equity investor funding or tax credit purchases, lenders need certainty that the project will ultimately qualify for the tax credit.  Additionally, following a tax credit investment or sale, borrowers and their affiliates often continue to be on the hook to tax investors and tax credit purchasers in the event that the available tax credits are reduced or recaptured, which could result in competing obligations of the borrower.  Treasury’s recent interim guidance (Notice 2026-15) is helpful on one front: it provides a user manual for calculating the “material assistance” prong of the FEOC/PFE requirements via the Material Assistance Cost Ratio (MACR). But the same guidance is comparatively quiet on the some of the other questions financing parties are asking: (i) who is treated as a covered foreign party for entity-level restrictions and (ii) what “effective control” will mean in practice, particularly in common project contract and financing arrangements.

Lenders should consider ramping up their diligence on these topics as well as increasing their protections in the financing documents.  On the “who” prong, the market is still waiting for clearer rules around how far “covered” status reaches—particularly through ownership chains and affiliations—and what that means for routine project counterparties (e.g., sponsors, EPC contractors, and key suppliers) and, potentially, lenders themselves. Lenders should consider conducting diligence up the ownership chain of each project company that owns a financed project and should include comprehensive representations and warranties from the borrower on that topic in the loan documents.  They should also increase their diligence on supply and service contracts, looking for (or requesting to add) representations and warranties that the counterparty is not a PFE. On the “what” prong, “effective control” is important because it can be created (or avoided) through contract drafting. Provisions that are customary in project finance—in supply agreements, EPC terms, O&M arrangements, IP licenses, step-in rights, negative covenants—should be re-examined through a FEOC/PFE lens, depending on how Treasury ultimately draws the lines. For additional examples on increased diligence and protection in project documents, see Foley’s article on how Project-Level Documents Take Center Stage.

The enactment of OB3 and the release of material assistance guidance (and the uncertainty they created) is causing more targeted sponsor representations, compliance certificates tied to beginning of construction, covenants requiring ongoing supply chain documentation, and procurement-side requirements to obtain and preserve supplier attestations (including under-penalty-of-perjury certifications) for the required retention period. To that end, financing parties should analyze whether the sponsor has a credible process to document compliance in a way that will withstand future scrutiny—particularly given the “know or reason to know” overlay that can make reliance on certifications an important deal point.

The bottom line is that the Act is forcing debt financing parties in the renewables world to consider tax-credit eligibility in a more contract-and-supply-chain-specific way. For now, the interim “material assistance” guidance provides some structure to shape diligence and documentation practices, but not enough clarity to totally eliminate uncertainty—especially on ownership questions and effective control of projects. Expect loan agreements, EPC and supply contracts, and sponsor deliverables to continue evolving as projects seek to begin construction ahead of key deadlines and project participants await the release of expected guidance. For more background and continuing updates, please see Foley’s related posts on the ITC/PTC changes, the FEOC/PFE-related developments, the material assistance guidance, and current diligence considerations.  Foley is helping clients translate these and other recent developments into financeable transactions and practical diligence workplans. If you’d like to discuss how these issues could affect your financing plans, please contact your Foley relationship partner or the authors.