New prohibited-foreign-entity rules create three compliance buckets; supplier certifications and archived guidance may help, attorneys say
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Summary
Lawyers for Good Government summarized HR1's three PFE rule categories—entity-level, payment and material-assistance rules—urging early supplier certifications, careful review of municipal debt exposures, and documentation because Treasury/IRS guidance remains incomplete.
In a webinar for developers and public entities, Lawyers for Good Government attorneys outlined the three central compliance areas created by HR1's prohibited foreign entity (PFE) provisions and steps claimants can take while Treasury and IRS publish detailed guidance.
Senior tax attorney Camille Benninghoff said the statute establishes three buckets: entity-level rules (ownership and foreign influence tests), payment rules (whether prior payments or contracts give a specified foreign entity "effective control" of a facility) and material-assistance rules (the sourcing of components used to make the facility). "China is gonna be the big one because China produces a decent amount of solar panels," Benninghoff said, noting the practical supply-chain exposure.
Entity-level rules examine ownership and control (for example, whether a specified foreign entity can appoint covered officers or holds greater or equal to 25% ownership). Benninghoff flagged a municipal-debt complication: a statutory test turns on debt holdings (the law flags 15% of debt held by specified foreign entities as a potential trigger), and there is not yet Treasury/IRS guidance on how to identify bondholders for municipal debt.
Payment rules look at contracts and payments in the prior taxable year to determine whether a specified foreign entity has effective control (broadly defined in statute, including rights to output control or exclusive repair and maintenance agreements). Benninghoff warned Treasury can refine the effective-control standard in forthcoming guidance and noted a potential recapture for the investment tax credit if improper payments are identified within 10 years after a project is placed in service.
Material-assistance rules apply based on construction-start dates (projects that begin construction Jan. 1, 2026, or later must meet material-assistance ratios). Benninghoff said the statute sets a "material assistance cost ratio" that tightens over time; the rule compares non-PFE component cost to total cost and does not require zero PFE content. Until Treasury publishes safe-harbor tables, entities can rely on Notice 2025-8 and supplier certifications (signed under penalty of perjury and retained for six years), but the certifications must be reasonable and not known to be false to the claimant.
Benninghoff recommended that elective-pay entities inventory suppliers, request supplier certifications for components, and retain contemporaneous procurement records to support claims. She also said Lawyers for Good Government will monitor Treasury and IRS guidance and update resources on their website.
