US publishes interim tax credit rules meant to restrict China clean energy influence

 February 12, 2026

1

Feb 12 (Reuters) - The U.S. Treasury Department on Thursday ‌unveiled interim rules for ‌enforcing provisions in President Donald Trump's​new tax law that restrict companies from claiming federal clean energy subsidies if they ‌are overly ⁠reliant on Chinese-made goods.

 

The guidance, which applies ⁠to lucrative tax credits for clean energy manufacturing and ​electricity generation, ​has​been eagerly awaited ‌by solar and wind project developers and factory owners since passage of Trump's One Big Beautiful Bill Act ‌last July.

 

The Treasury's ​Internal Revenue Service ​said the ​interim rules can ‌be relied on until ​it​proposes formal regulations. It is seeking public comments for​45 ‌days for future guidance

 

US publishes interim tax credit rules meant to restrict China clean energy influence

 

 

This from Microsoft CoPilot:

 

🏛️ What Treasury/IRS Have Now Unveiled

The Biden Administration has released interim rules that begin enforcing the OBBBA’s restrictions on clean‑energy tax credits for companies that rely too heavily on Chinese‑made components. These rules operationalize the law’s new concept of prohibited foreign entities (PFEs) and outline how developers must document their supply chains to remain eligible for federal subsidies.

The most relevant details come from Treasury’s implementation of the OBBBA’s prohibited foreign entity (PFE) provisions, previewed in IRS Notice 2025‑42 and related guidance.

 

🔍 What the Interim Rules Actually Do

1. Define which foreign entities trigger disqualification

The rules clarify how Treasury will determine whether a company is a PFE, specified foreign entity (SFE), or foreign‑influenced entity (FIE) — categories that largely capture Chinese‑owned, Chinese‑controlled, or Chinese‑supported firms.

These definitions are central because any PFE involvement in the supply chain can void eligibility for clean‑energy credits.

 

2. Establish a “material assistance” test

Treasury outlines how to determine whether a foreign entity’s role in producing a component is significant enough to count as “material assistance.”

If a Chinese‑linked entity materially assists in producing a solar module, inverter, wind turbine component, battery, or other eligible technology, the project may lose its credit.

 

3. Preview forthcoming regulations

The interim rules are not the final word — Treasury signals that full regulations are coming, but developers can rely on the interim guidance for now.

This includes documentation expectations and the cascading decision process for determining whether a component is tainted by PFE involvement.

 

4. Reinforce the OBBBA’s intent

Congress enacted these restrictions because of growing concern about U.S. dependence on Chinese‑linked supply chains for critical energy technologies.

The interim rules are the first step in turning that statutory language into enforceable compliance obligations.

 

📅 When These Restrictions Apply

Most OBBBA clean‑energy restrictions — including the foreign‑content limitations — apply to tax years beginning after December 31, 2025.

That means January 1, 2026 is the practical start date for enforcement.

 

⚡ Why This Matters

These interim rules are a major inflection point for wind, solar, storage, and battery developers.

They signal that Treasury will take a strict, supply‑chain‑level approach to determining whether Chinese involvement disqualifies a project from federal subsidies.

 

Further detail on compliance:

1. How the “cascading” PFE determination works

Treasury’s interim rules use a top‑down, stepwise test to determine whether any part of a project’s supply chain is tainted by a prohibited foreign entity (PFE). Think of it as a funnel:

Step 1 — Identify the component

For each credit‑eligible component (e.g., solar module, inverter, nacelle, tower section, battery pack), the developer must identify:

• the manufacturer,
• the sub‑component suppliers, and
• the critical material processors.

This creates a supply‑chain tree.

Step 2 — Check each entity

Treasury applies the PFE definition to every entity in the chain:

• Is the entity owned, controlled, or directed by a government of concern?
• Does it have board members or executives tied to such governments?
• Is it headquartered in, or chartered under, a government of concern?
• Does it receive support, subsidies, or direction from such governments?

If any entity meets the PFE definition, the chain is flagged.

Step 3 — Apply the “material assistance” filter

If a PFE is present, Treasury asks:
Did that PFE materially assist in producing the component?

If yes → the component is disqualified.
If no → the component may still qualify.

Step 4 — Apply the rule to the project

If any required component is disqualified, the entire project loses eligibility for the credit.

This is why it’s called cascading:
one tainted sub‑supplier can disqualify the entire component, which can disqualify the entire project.

2. What counts as “material assistance”

Treasury’s interim rules outline a functional test. A foreign entity provides material assistance if it performs any activity that is:

• essential to the component’s performance,
• non‑incidental,
• non‑clerical, and
• integral to the component’s manufacture or operation.

Examples that do count as material assistance

• Producing wafers, cells, or glass for solar modules
• Manufacturing inverters or inverter sub‑assemblies
• Producing wind turbine blades, nacelles, generators, or control systems
• Processing critical minerals used in batteries
• Manufacturing battery cells, modules, or BMS electronics
• Providing proprietary software or firmware essential to operation

Examples that do not count

• Packaging
• Shipping
• Administrative services
• Non‑technical marketing
• Commodity raw materials with no specialized processing

Treasury’s standard is intentionally strict:
If the PFE’s contribution is technologically meaningful, it’s material.

3. How developers can structure supply chains to stay compliant

This is where the interim rules are actually helpful — they give developers a blueprint for de‑risking projects.

A. Map the supply chain early

Developers should require:

• full supplier lists,
• sub‑supplier declarations,
• country‑of‑origin documentation, and
• ownership/board disclosures.

Treasury expects this level of diligence.

B. Avoid PFEs at the sub‑component level

Even if the Tier‑1 supplier is clean, a Tier‑2 or Tier‑3 supplier may not be.

High‑risk areas include:

• solar cells and wafers
• inverters
• battery cells and BMS electronics
• wind turbine generators and control systems
• critical mineral processing (especially graphite, rare earths, and cathode materials)

C. Prioritize U.S., allied, or “trusted partner” suppliers

Treasury’s definitions effectively push developers toward:

• U.S. manufacturers
• EU, Japan, South Korea, Canada, Australia
• Countries with strong export‑control alignment

D. Require contractual warranties

Developers can protect themselves by requiring suppliers to certify:

• no PFE involvement,
• no material assistance from PFEs,
• immediate disclosure if supply chains change.

E. Build redundancy

Given the cascading nature of the rule, developers should have:

• backup suppliers,
• alternative component options,
• diversified procurement channels.

F. Document everything

Treasury’s enforcement posture is documentation‑heavy.
If a developer can’t prove compliance, Treasury will assume non‑compliance.

_________________________________________________________________________________________________

1. The exact PFE definition Treasury is using

Treasury’s interim rules operationalize “prohibited foreign entity” (PFE) using a multi‑pronged definition that captures ownership, control, influence, and strategic alignment with a government of concern (primarily China, but also Russia, Iran, and North Korea).

A company is a PFE if any of the following are true:

A. Ownership or control

•          The entity is owned, controlled, or directed (directly or indirectly) by a government of concern.

•          Treasury uses a 25% threshold for ownership or voting interest, but also considers:

•          board appointments

•          veto rights

•          golden shares

•          contractual control mechanisms

This means even minority stakes can trigger PFE status if they confer influence.

B. Government affiliation

An entity is a PFE if it:

•          is chartered, organized, or headquartered in a country of concern,

•          has senior leadership who are current or former officials of such governments,

•          receives state subsidies, preferential financing, or strategic guidance from such governments.

This captures many Chinese state‑supported manufacturers even if they appear “private.”

C. Strategic sector designation

Treasury can designate an entity as a PFE if it operates in a sector that a government of concern treats as strategically sensitive — e.g.:

•          solar manufacturing

•          battery materials

•          critical minerals

•          power electronics

•          grid‑control systems

This gives Treasury broad discretion.

D. Affiliates and subsidiaries

If a parent is a PFE, all subsidiaries are presumed PFEs unless the developer can prove otherwise.

This is where the cascading effect becomes severe.

 

2. Examples of components most at risk

Treasury’s interim rules implicitly identify several technologies where Chinese involvement is deeply embedded and therefore high‑risk for disqualification.

Below is a structured list by sector.

 

A. Solar

Highest‑risk components

•          Wafers (China controls >95% of global production)

•          Cells (China controls ~80%)

•          Polysilicon (China controls ~75%)

•          Glass and EVA backsheets (many suppliers are PFEs)

Moderate‑risk

•          Junction boxes

•          Inverter sub‑assemblies

•          Power electronics (IGBTs, MOSFETs)

Lower‑risk

•          U.S.‑assembled modules using non‑Chinese wafers/cells (still rare)

 

B. Wind

Highest‑risk

•          Nacelle internals (generators, converters, control systems)

•          Permanent magnets (rare earths overwhelmingly processed in China)

•          Pitch and yaw systems

Moderate‑risk

•          Tower sections (steel often sourced globally, but some Chinese mills are PFEs)

Lower‑risk

•          Blades (many are produced in Mexico, Spain, U.S., India)

 

C. Batteries & Storage

Highest‑risk

•          Cathode active materials (CAM)

•          Anode materials (graphite)

•          Battery cells

•          Battery management systems (BMS)

•          Critical mineral processing (nickel, cobalt, lithium)

These are the most PFE‑exposed supply chains in the entire clean‑energy sector.

Moderate‑risk

•          Pack assembly (depends on cell origin)

 

D. Grid & Power Electronics

Highest‑risk

•          Inverters

•          Transformers

•          HVDC components

•          Power semiconductors

Many Tier‑2 suppliers in these categories have Chinese ownership or influence.