On December 4, 2023, the Department of Energy (DOE), Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) published related proposed guidance on the eligibility of an electric vehicle for the section 30D tax credit, which provides that any vehicle placed in service after December 31, 2023, does not qualify for the section 30D credit if any of the battery components were manufactured or assembled by a foreign entity of concern (FEOC).

The substantive rules defining a FEOC were issued by the DOE in a notification of proposed interpretive rule (DOE proposed guidance). Treasury issued proposed regulations (Prop. Regs.) regarding the FEOC requirements under section 30D and in particular, certification of the satisfaction of such requirements by qualified manufacturers. The IRS issued Rev. Proc. 2023-38, providing updated procedural rules for qualified manufacturers of new clean vehicles to comply with the reporting, certification and attestation requirements, and, on December 26, 2023, issued Fact Sheet 2023-29, updating the frequently asked questions relating to the 30D, 25E and 45W credits for new, previously owned and qualified commercial clean vehicles.

Prior guidance from Treasury and the IRS on the 30D credit (see our prior legal alert) provided guidance with respect to the critical mineral and battery component composition thresholds in order for new clean vehicles to qualify for the 30D credit: $3,750 for meeting the critical mineral requirements and $3,750 for meeting the battery component requirements. A qualifying new clean vehicle placed in service on or after January 1, 2024 must have:

• Critical Minerals – 50 percent or more of the value of the critical minerals in a qualifying new clean vehicle’s battery must be either (i) extracted or processed in the US or a country with which the US has a free trade agreement, or (ii) recycled in North America; and
• Battery Components - 6 percent or more of the value of a qualifying new clean vehicle’s battery components must be manufactured or assembled in North America.
• Meet the FEOC requirements with respect to battery components. (The FEOC requirements for critical minerals do not take effect until January 1, 2025).

DOE Guidance Defining a FEOC

Under section 40207(a)(5) of the Infrastructure Investment and Jobs Act, a FEOC includes a foreign entity owned by, controlled by, or subject to the direction of or subject to the jurisdiction of the government of a covered nation. (FEOC also includes certain terrorist organizations and entities that have been identified by the Secretary of Energy as engaged in unauthorized conduct that is detrimental to US national security or foreign policy.) The covered nations are China, the Russian Federation, North Korea and Iran. With respect to batteries for new clean vehicles intended to qualify for the section 30D credit, China is the most relevant jurisdiction.

The DOE proposed guidance defines and supplements those concepts:

• Foreign Entity – the proposed DOE guidance defines a foreign entity as: (i) a government of a foreign country; (ii) a natural person who is not: a lawful permanent resident of the United States, a citizen of the United States or, any other “protected individual” (as defined in 8 U.S.C. 1324b(a)(3)); (iii) a partnership, association, corporation, organization, or other combination of persons organized under the laws of or having its principal place of business in a foreign country; or (iv) an entity organized under the laws of the United States that is subject to the ownership, control or direction of another entity that qualifies as a foreign entity.
• Government of a Foreign Country – the proposed DOE guidance defines a government of a foreign country as: (i) a national or subnational government of a foreign country, (ii) an agency or instrumentality of a national or subnational government of a foreign country; (iii) a dominant or ruling political party (e.g., Chinese Communist Party) of a foreign country or (iv) a current or former senior foreign political figure
  • Senior Foreign Political Figure – the proposed DOE guidance defines a senior foreign political figure as (a) a senior official, either in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not) or of a dominant or ruling foreign political party and (b) an immediate family member (spouse, parent, sibling, child or spouse’s parent and sibling) of any individual described in (a). “Senior official” means an individual with substantial authority over policy, operations, or the use of government-owned resources.
  • In the context of China, DOE considers a government of a foreign country to include: current members of Chinese People’s Political Consultative Conference and current and former members of the Politburo Standing Committee, the Politburo, the Central Committee and the National Party Congress.
• Subject to the Jurisdiction – the proposed DOE guidance provides that an entity is subject to the jurisdiction of a covered nation if: (i) the foreign entity is incorporated or domiciled in, or has its principle place of business in, a covered nation, or (ii) with respect to the critical minerals, components or materials of a given battery, the foreign entity engages in the extraction, processing or recycling of such critical minerals, the manufacturing or assembly of such components, or the processing of such materials, in a covered nation.
• Owned by, Controlled by, or Subject to the Direction – the proposed DOE guidance defines “owned by, controlled by, or subject to the direction” of a covered nation to include: (i) 25 percent or more of the entity’s board seats, voting rights, or equity interest are cumulatively held by that other entity, whether directly or indirectly via one or more intermediate entities (25 percent test) or (ii) with respect to the critical minerals, battery components or battery materials of a given battery, the entity has entered into a licensing arrangement or other contract with another entity (a contractor) that entitles that other entity to exercise effective control over the extraction, processing, recycling, manufacturing or assembly (collectively production) of the critical minerals, battery components or battery materials that would be attributed to the entity (effective control test).
  • Application of the 25 percent Test –
    • Cumulatively Held – For purposes of determining control by a foreign entity (including the government of a foreign country) control is evaluated based on the combined interest in any entity held, directly or indirectly, by all other entities that are foreign entities.
    • Formal Arrangements with Governments of Covered Nations – If an entity that qualifies as a “government of a foreign country that is a covered nation” enters into a formal arrangement to act in concert with another entity or entities that have an interest in the same third-party entity, the cumulative board seats, voting rights or equity interests of all such entities are combined for the purpose of determining the level of control attributable to each of those entities.
    • Indirect Control - in determining indirect control:
      • Parent and More than 50 percent Directly Owned Subsidiary Treated as the Same Entity - If a “parent” entity (including the government of a foreign country) directly holds 50 percent or more of a “subsidiary” entity’s board seats, voting rights or equity interest, then the parent and subsidiary are treated as equivalent in the evaluation of control, as if the subsidiary were an extension of the parent. Any holdings of the subsidiary are fully attributed to the parent.
      • Proportional Attribution for Parent and Less than 50 percent Owned Subsidiary – If a “parent” entity directly holds less than 50 percent of a “subsidiary” entity’s board seats, voting rights, or equity interest, then indirect ownership is attributed proportionately.
      • The DOE provided three illustrative examples:
        • If Entity A cumulatively holds 25 percent of Entity B’s board seats, voting rights, or equity interest, then Entity A directly controls Entity B. If Entity B cumulatively holds 50 percent of Entity C’s board seats, voting rights, or equity interest, then Entities B and C are treated as the same entity, and Entity A also indirectly controls Entity C.
          If Entity A is the government of a foreign country that is a covered nation, Entities B and C are both FEOCs.
        • If Entity A cumulatively holds 50 percent of Entity B’s board seats, voting rights, or equity interest, then Entity A is the direct controlling ‘‘parent’’ of Entity B, and Entities A and B are treated as the same entity. If Entity B cumulatively holds 25 percent of Entity C’s board seats, voting rights, or equity interest, then Entity C is understood to be directly controlled by Entity B and indirectly controlled by Entity A.
          If Entity A is the government of a foreign country that is a covered nation, Entities B and C are both FEOCs.
        • If Entity A cumulatively holds 25 percent of Entity B’s board seats, voting rights, or equity interest, then Entity A directly controls Entity B. If Entity B cumulatively holds 40 percent of Entity C’s board seats, voting rights, or equity interest, then Entity B directly controls Entity C.
          However, because Entity A does not hold 50 percent of the board seats, voting rights, or equity interest of Entity B, and Entity B does not hold 50 percent of the board seats, voting rights, or equity interest of Entity C, Entity A’s indirect control of Entity C is calculated proportionately (25% × 40% = 10%). Based on that proportionate calculation, Entity A will be considered to hold only a 10 percent interest in Entity C, which is insufficient to meet the 25 percent threshold for control contemplated under this proposed guidance.
          If Entity A is the government of a foreign country that is a covered nation, Entity B is a FEOC. But Entity A holds only a 10 percent interest in Entity C, which is less than the 25 percent threshold requirement to deem Entity C controlled by Entity A. Therefore, Entity C is not a FEOC via the indirect control of Entity A.
  • Application of the Effective Control Test
    • Control that Constitutes Effective Control: the right of the contractor in the contractual relationship:
      • To determine the quantity or timing of production
      • To determine which entities may purchase or use the output of production
      • To restrict access to the site of production to the contractor’s own personnel
      • The exclusive right to maintain, repair or operate equipment that is critical to production.
    • Reservation of Rights in a Contract with a FEOC – In the case of a contract with a FEOC, a contractual relationship will be deemed to not confer effective control by the FEOC over a non-FEOC, if the applicable agreement(s) reserves expressly to the non-FEOC entity all of the following rights:
      • To determine the quantity of critical mineral, component, or material produced (subject to any overall maximum or minimum quantities agreed to by the parties prior to execution of the contract)
      • To determine, within the overall contract term, the timing of production, including when and whether to cease production
      • To use the critical mineral, component, or material for its own purposes or, if the agreement contemplates sales, to sell the critical mineral, component, or material to entities of its choosing
      • To access all areas of the production site continuously and observe all stages of the production process; and
      • At its election, to independently operate, maintain, and repair all equipment critical to production and to access and use any intellectual property, information, and data critical to production, notwithstanding any export control or other limit on the use of intellectual property imposed by a covered nation subsequent to execution.

Proposed Treasury Regulations

The proposed Treasury regulations contain a comprehensive set of rules, some of which would not be effective until the implementation of the FEOC requirements with respect to critical minerals as of January 1, 2025. The discussion below focuses on the proposed regulations that relate to the FEOC requirements with respect to battery components, which apply to new clean vehicles placed in service on or after January 1, 2024. Note that new clean vehicles that were anticipated to be placed in service in 2023 but that remain unsold as of January 1, 2024, are subject to the FEOC requirements.

The proposed regulations provide that the determination of whether an entity is a FEOC is made through application of the DOE guidance, and is determined as of the time of the entity's performance of the relevant activity, which for battery components is the time of manufacturing or assembly. Prop. Treas. Reg. § 1.30D-6(c)(4)(iii).

Prop. Treas. Reg. § 1.30D-6(c)(1) establishes a three-step process for determining whether a battery is FEOC-compliant. As applicable to vehicles placed in service in 2024 pursuant to Prop. Treas. Reg. § 1.30D-6(e)(1), the three steps are as follows.

• The qualified manufacturer makes a determination of whether the battery components are FEOC-compliant.
• The FEOC-compliant battery components must be physically tracked to specific battery cells. Prop. Treas. Reg. § 1.30D-6(c)(3)(i). An exception to the physical tracking requirement may apply prior to finalization of the proposed regulations, if the qualified manufacturer determines that its supply chain of battery components with respect to new clean vehicles contains only FEOC-compliant battery components. This determination may be made with respect to specific models or classes of vehicles. Prop. Treas. Reg. § 1.30D-6(e)(1) & (2) (FEOC-compliant supply chain exception).
• The battery components, including battery cells, must be physically tracked to specific batteries. A serial number or other identification system must be used to physically track FEOC-compliant battery cells to batteries. Prop. Treas. Reg. § 1.30D-6(c)(2). A serial number or other identification system must also be used to physically track FEOC-compliant batteries to specific new clean vehicles. Prop. Treas. Reg. § 1.30D-6(c)(1). The FEOC-compliant supply chain exception described above may apply to these physical tracking requirements.

As relevant to vehicles placed in service in 2024, Prop. Treas. Reg. § 1.30D-6(b) requires the qualified manufacturer to conduct due diligence with respect to all battery components that are relevant to determining whether such components are FEOC-compliant. Such due diligence must comply with standards of tracing for battery materials available in the industry at the time the qualified manufacturer certifies compliance, and that enable the manufacturer to know, with reasonable certainty, the provenance of the battery components. Reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer does not know or have reason to know after its due diligence that the supplier attestation or certification is incorrect.

Under Prop. Treas. Reg. § 1.30D-6(c)(5), determinations of FEOC compliance may be made by a third-party manufacturer or supplier that operates a battery cell production facility, provided that the manufacturer performs due diligence and provides the qualified manufacturer with information sufficient to establish a basis for the determination. The manufacturer or supplier must be contractually required to make the certification and inform the qualified manufacturer of any changes in the supply chain that affect determinations of FEOC compliance. In the case of multiple third-party manufacturers or suppliers (or multiple levels of a supply chain), the due diligence and information requirements must be satisfied for each manufacturer or supplier, or at each level, either directly or indirectly through contractual relationships.

While the regulations generally call for a tracing methodology, there are exceptions. Prop. Treas. Reg. § 1.30D-6(c)(3)(ii) introduces a temporary rule allowing an allocation methodology for any new clean vehicle for which the qualified manufacturer provides a periodic written report before January 1, 2027. This allocation methodology is limited to applicable critical minerals and associated constituent materials that are incorporated into a battery cell or its battery components. Battery components, themselves, are excluded from the temporary rule and must be physically tracked. The number of FEOC-compliant battery cells will necessarily be limited by the lowest percentage of FEOC-compliant applicable critical minerals or associated constituent materials.

Additionally, Prop. Treas. Reg. § 1.30D-6(a)(13)(i) addresses the treatment of non-traceable battery materials: defined as specifically identified, low-value materials, that may originate from multiple sources and that are often commingled to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such materials. Under Prop. Treas. Reg. § 1.30D-6(b)(2), these materials are temporarily excluded from the tracing requirements. This transition rule is proposed to expire, for any new clean vehicles for which the manufacturer is required to provide a periodic report, after December 31, 2026. In order to use the transition rule, qualified manufacturers must submit a report during the up-front review process demonstrating how it will comply with the tracing rule once the transition rule expires. A list of eligible non-traceable battery materials will be included in the final regulations. In the Preamble to the Prop. Treas. Reg., the IRS noted that it is considering whether it should include applicable critical minerals contained in electrolyte salts, electrode binders, electrolyte additives or other low-value electrode active materials in that list.

The proposed regulations introduce a cure process for any inadvertent mistakes by qualified manufacturers in their attestations, certifications or documentation submitted to the IRS. Prop. Treas. Reg. § 1.30D-6(f)(2). Intentional disregard or fraud, however, could result in the loss of 30D eligibility for new clean vehicles and termination of a manufacturer’s ‘qualified’ status. Prop. Treas. Reg. § 1.30D-6(f)(3).

Several additional requirements in the proposed regulations would take effect as of 2025, including FEOC requirements for critical minerals, an upfront review system for FEOC-compliant batteries, tracking of FEOC-compliant batteries using a compliant-battery ledger, submission of estimates of FEOC-compliant batteries and supporting documentation to the IRS and DOE, and reduction of the compliant-battery ledger for each new clean vehicle reported to the IRS. See Prop. Treas. Reg. § 1.30D-6(c) and (d).

The proposed regulations request comments, which are due on or before January 18, 2024.

Rev. Proc. 2023-38

Qualified manufacturers and dealers are required to file periodic reports with the IRS identifying vehicles qualifying for the 30D, 25E and 45W credits. Rev. Proc. 2023-38 updates the requirements for such reports to take account of the FEOC requirements (including those not applicable until January 1, 2025, such as supporting documentation and information required to establish the FEOC-compliant battery ledger).

The Rev. Proc. also contains provisions relating to the cure of inadvertent errors, and the potential consequences for intentional disregard or fraud.

Fact Sheet 2023-29

The Fact Sheet adds two FAQs (Section A, Q&A 13 and 14) clarifying that: (1) vehicles that do not meet the FEOC requirements for battery components are not eligible for the section 30D credit in 2024, regardless of whether the vehicle otherwise would have been eligible based on meeting the critical mineral applicable percentage for 2024; and (2) the qualified manufacturer’s attestation of compliance with the FEOC requirements should be made to the best of the qualified manufacturer’s knowledge and belief.

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