Batteries and critical minerals: US Department of Energy issues final interpretive guidance on the definition of “foreign entity of concern”

Authors: Angela Morris, Mikayla Ware, Danielle MacGillivray, Hannah Whitton, Jay Leary

The US Department of Energy recently released its final form guidelines on the interpretation of a "foreign entity of concern" (FEOC). In this article, we run through the key elements of these guidelines, and the impacts of conducting business with a FEOC.

Executive summary

On 3 May 2024, the US Department of Energy (DOE) released the final form guidelines¹ on the interpretation of a “foreign entity of concern” (FEOC) under the Bipartisan Infrastructure Law² (BIL), and Internal Revenue Code³ (IRC) as amended by the Inflation Reduction Act of 2022 (IRA).

The guidelines provide that an entity is a FEOC if it meets the definition of a “foreign entity”, and is either:

1. “subject to the jurisdiction” of a covered nation government; or
2. “owned by, controlled by, or subject to the direction” of the “government of a foreign country” that is a covered nation.

The BIL and the FEOC guidelines aim to redirect participants in the electric vehicle (EV) supply chain process away from involvement with FEOCs and to domestic and friend-shored manufacturers who promote certainty and diversity in the supply chains for battery components and critical minerals.

This is incentivised by the IRC’s offering of tax credits to US taxpayers of up to US$7,500 for every new clean EV purchased (i.e., EVs produced without FEOC involvement), and the BIL’s significant US$6 billion battery manufacturing and recycling grants program.

The finalised FEOC guidelines follow from the proposed version released by DOE for public consultation on 1 December 2023. Public comments included calls for clarification of the terms: “foreign entity”, “subject to the jurisdiction”, “owned by, controlled by, or subject to the direction of”, and “government of a foreign country”).

While the changes to the guidelines themselves are relatively minor and remain largely the same as originally proposed in December 2023, the final guidance document as a whole (including the discussion regarding certain items raised in the consultation) is helpful in providing further clarity around the DOE’s approach and areas where they may potentially issue future guidance.

On the same date (3 May 2024), the US Treasury and Inland Revenue Commissioner also issued a ruling confirming that the term FEOC will be cross-referenced in section 30D of the IRC.⁴

Final Interpretive Rule on the Definition of FEOC

As mentioned above, determining whether a foreign entity is a FEOC requires the same two-step analysis as proposed in December:

1. is there a “foreign entity”; and
2. is that foreign entity a “FEOC”?

Both criteria must be satisfied and the time for making the analysis is when the activity occurs (e.g. upon the extraction of battery components).

Is there a foreign entity?

The DOE has made no changes to the interpretation of “foreign entity”. A foreign entity means:

1. a government of a foreign country;
2. a natural person who is not a lawful permanent resident of the US, citizen of the US, or any other protected individual⁵;
3. a partnership, association, corporation, organisation, or other combination of persons organised under the laws of or having its principal place of business in a foreign country; or
4. an entity organised under the laws of the US that is owned by, controlled by, or subject to the direction of an entity that qualifies as a foreign entity in paragraphs (a)–(c).

‘Covered nations’ means the People’s Republic of China, the Russian Federation, the Democratic People’s Republic of North Korea, and the Islamic Republic of Iran⁶.

Is the foreign entity a FEOC?

A foreign entity is a “FEOC” if it is either:

1. “subject to the jurisdiction” of a covered nation government; or
2. “owned by, controlled by, or subject to the direction” of the “government of a foreign country” that is a covered nation.

Subject to the jurisdiction

The DOE has made no changes to the interpretation of “subject to the jurisdiction”. A foreign entity is subject to the jurisdiction of a covered nation’s government if it:

1. is incorporated or domiciled in, or has its principal place of business in, a covered nation; or
2. with respect to the critical minerals, components, or materials of a given battery, it engages in the extraction, processing, or recycling of such critical minerals, or the manufacturing or assembly of such components, or the processing of such materials, in a covered nation.

Additional guidance on the determination of an entity’s principal place of business is provided in the explanation of the final interpretation.

Owned by, controlled by, or subject to the direction of

An entity is “owned by, controlled by, or subject to the direction” of another entity (including the government of a foreign country that is a covered nation) if:

1. 25% or more of the entity’s board seats, voting rights, or equity interest (including capital or profit interests and contingent equity interests) (evaluated independently) are cumulatively held by that other entity, whether directly or indirectly; or
2. 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 (i.e., the production) of the critical minerals, battery components, or battery materials that would be attributed to the entity. The guidelines set out more detail regarding the meaning of ‘effective control’ (which is a right of a FEOC contractor (whether via 25% control or via jurisdiction) to determine certain aspects relating to production.
   It is worth noting that in the explanation to the final interpretation, the DOE in relation to limb (a) above:
3. clarified that the metrics are evaluated independently, e.g. if an entity has 20% of its voting rights, 10% of its equity interests, and 15% of its board seats each held by the government of a covered nation, the entity would be 20% controlled; and
4. declined to expand the definition of “control” to incorporate companies that are controlled by the government of a covered nation through significant investments (e.g., subsidies, grants, or debt financing).

The DOE however indicated that it may consider significant levels in all the control metrics referred in (a) and (c) and investments referred to in (d) as part of applications for domestic grants⁷ or through the powers to designate an entity as a FEOC under section 40207(a)(5)(E) of the BIL on national security or foreign policy grounds⁸. The DOE indicated that it may revisit and provide further guidance on these areas in the future.

Government of a foreign country

The DOE has made minor clarifying changes to the interpretation of “government of a foreign country”.

A government of a foreign country is taken to mean:

1. a national or subnational government of a foreign country;
2. an agency or instrumentality of a national or subnational government of a foreign country;
3. a dominant or ruling political party (e.g., the Chinese Communist Party) of a foreign country; or
4. a current or former senior foreign political figure.

The DOE also clarified the interpretation of “senior foreign political figure” in response to public comments seeking clarity. A senior foreign political figure means: (1) a senior official, either in the executive, legislative, administrative, military, or judicial branches of a foreign government (whether elected or not), (2) a senior official of a dominant or ruling foreign political party, or (3) an immediate family member (spouse, parent, sibling, child, or a spouse’s parent and sibling) of any individual described in (1) or (2).

In order to be considered “senior”, an official must be, or have been in, a position of substantial authority over policy, operations, or the use of government-owned resources.

The final guidelines provides further guidance on the interpretation of senior foreign political figures in the PRC including in relation to former members.

IRS and Treasury rules and impacts for Conducting Business with a FEOC

As the definition of FEOC in section 40207 of the BIL is now cross-referenced in section 30D of the IRC, US taxpayers can obtain a maximum credit of US$7,500 per vehicle, consisting of:

1. US$3,750 if the vehicle meets certain critical minerals requirements; and
2. US$3,750 if the vehicle meets certain battery component requirements.

EVs with a battery containing critical minerals extracted, processed or recycled by a FEOC will be ineligible to receive this tax credit starting in 2025. Similarly, EVs containing battery components manufactured or assembled by a FEOC will be ineligible to receive the tax credit starting in 2024.

Moreover, entities may benefit from the BIL’s US$6 billion funding program if they avoid the use of FEOC-supplied battery materials. Such candidates will be prioritised for grants by the DOE.

References

1. See Department of Energy: 10 CFR Chapter III RIN 1901-ZA02 Interpretation of Foreign Entity of Concern and DOE press release (3 May 2024).
2. (42 U.S.C 18741).
3. 26 U.S.C. 30D.
4. See IRS, Treasury: Clean Vehicle Credits Under Sections 25E and 30D; Transfer of Credits; Critical Minerals and Battery Components; Foreign Entities of Concern (see Section II, paragraph B(2)) and U.S. Department of the Treasury press release (3 May 2024).
5. ‘Protected individual’ is defined in 8 U.S.C. 1324b(a)(3).
6. The term ‘covered nation’ is defined in 10 U.S.C. 4872(d)(2).
7. Applications for domestic battery material processing, manufacturing, and recycling grants under section 40207 of BIL
8. Pursuant to section 40207(a)(5)(E) of the BIL the Secretary may use authority to designate an entity a FEOC if it is ‘“engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States.”

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