Proposed regulations clarify FEOC restrictions and clean vehicle tax credit compliance for manufacturers aiming to produce eligible EVs.

As countries around the world accelerate the transition to clean energy, the race to gain shares in the electric vehicle (EV) manufacturing market is intensifying, with global sales of EVs rising 31% in 2023.[1]

To facilitate increased production of EVs in the United States, President Biden signed into law the Inflation Reduction Act (IRA) on August 16, 2022, thereby amending Section 30D of the Internal Revenue Code of 1986 (IRC). Section 30D offers taxpayers a maximum tax credit of $7,500 for a newly purchased EV if the vehicle meets the critical minerals and battery components requirements ($3,750 for each requirement). The clean vehicle tax credit is treated as a personal credit or a general business credit depending on the character of the EV. For more information on climate action from the IRA, see this Latham Client Alert.

On December 4, 2023, the US Department of the Treasury and the Internal Revenue Service published proposed regulations under Section 30D of the IRC (the Proposed Regulations).[2] The Proposed Regulations provide guidance on the excluded entity provisions within Section 30D of the IRC, and clarify the application of the foreign entity of concern (FEOC) clean vehicle tax credit eligibility exclusion, which will take effect in 2024 (battery components requirement) and 2025 (critical minerals requirement). The US Department of Energy (DOE) recently released regulations pertaining to the interpretation of FEOC,[3] and, together, the Proposed Regulations and the DOE regulations provide the scope of FEOC-related restrictions as they relate to the clean vehicle tax credit.

Proposed Regulations and the FEOC Restrictions

Whether an entity is a FEOC is crucial in determining whether the clean vehicle tax credit is available, given that, as of 2024, EVs containing battery components manufactured or assembled by a FEOC are ineligible for the clean vehicle tax credit. Additionally, as of 2025, EVs with batteries containing certain “critical minerals” (as defined in the IRC) that are extracted or processed by a FEOC are ineligible for the clean vehicle tax credit.

The Proposed Regulations define a FEOC by reference to the definition within Section 40207(a)(5) of the Infrastructure Investment and Jobs Act.[4] Section 40207(a)(5) generally includes entities that are owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation (e.g., China, Russia, Iran, and North Korea). The DOE regulations broadly define a “government of a foreign country” to include:

• a national or subnational government of a foreign country;

• an agency or instrumentality of a national or subnational government of a foreign country;

• a dominant or ruling political party of a foreign country; and

• a current or former senior foreign political figure.

Entities that are organized outside the jurisdiction of a covered entity are not precluded from being classified as a FEOC. If an entity is “owned by, controlled by or subject to the direction” of a government of a foreign country that is a covered nation, either directly or indirectly, then such entity can be classified as a FEOC. The DOE proposes that an entity is “owned by, controlled by or subject to the direction of” another entity (including the government of foreign country that is a covered nation) if:

• 25% or more of the entity’s board seats, voting rights, or equity interests are cumulatively held by the other entity, whether directly or indirectly via one or more intermediate entities; or

• With respect to critical minerals, battery components, or battery materials of a given battery, the entity has entered into a licensing agreement or other contract with another entity (a contractor) that entitles the 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 are attributable to such entity.

Illustrative Examples

The hypothetical scenarios below illustrate how the Proposed Regulations on FEOC can affect a tiered ownership structure.[5]

Scenario 1. An automobile manufacturer (Entity A) produces EVs that include batteries manufactured in Japan. The batteries contain the critical material nickel, and are processed by an Indonesian company (Entity B). The Indonesian company is 26% owned by a Chinese entity (Entity C). Here, Entity C is likely a FEOC because the company is registered in China. Entity B is also likely a FEOC because its Chinese ownership is greater than 25%. Entity A is likely not a FEOC.

Scenario 2. An automobile manufacturer (Entity X) produces EVs that include batteries manufactured in Indonesia. The batteries contain the critical materials cobalt and lithium, and are processed by an Indonesian joint-venture company (Entity Y). The Indonesian joint venture is between a Canadian mining company (60%) and a Singaporean battery producer (40%) (Entity Z). The People’s Republic of China holds an 80% interest in the Singaporean company. Here, Entity Z is likely a FEOC because its Chinese ownership is greater than 25%. Entity Y is likely a FEOC because, calculated proportionally (80% x 40% = 32%), it has Chinese ownership that exceeds the 25% threshold (China is considered to hold a 32% interest in Entity Y). Entity Y is likely a FEOC because of the indirect control by a covered nation.

What Do the Proposed Regulations Mean for Manufacturers?

Overall, the Proposed Regulations provide greater clarity regarding FEOC restrictions and clean vehicle tax credit compliance. While these Proposed Regulations are subject to change, manufacturers aiming to produce eligible EVs should carefully and strategically consider the structure of their supply chains, sourcing and manufacturing relationships, and participation in joint ventures.

This blog post was prepared with the assistance of Gina Kwon.

[1] U.S. News, Global Electric Car Sales Rose 31% in 2023 – Rho motion (Jan. 10, 2024), available at https://money.usnews.com/investing/news/articles/2024-01-10/global-electric-car-sales-rose-31-in-2023-rho-motion.

[2] Federal Register, Section 30D Excluded Entities – A Proposed Rule by the Internal Revenue Service and Treasury (Dec. 4, 2023), available at https://www.federalregister.gov/documents/2023/12/04/2023-26513/section-30d-excluded-entities.

[3] Federal Register, Interpretation of Foreign Entity of Concern – A Proposed Rule by the Energy Department (Dec. 4, 2023), available at https://www.federalregister.gov/documents/2023/12/04/2023-26479/interpretation-of-foreign-entity-of-concern.

[4] 42 U.S.C. 18741(a)(5).

[5] Federal Register, supra note 3, at 90.