What is a prohibited foreign entity?

Updated 2026-10-04

A prohibited foreign entity (PFE) is a company or person that US clean energy tax credits now treat as too close to China, Russia, Iran or North Korea. The 2025 budget law added the term to the tax code in July 2025. A storage project that relies too heavily on PFE-made equipment loses its credit, and a PFE cannot claim the credits itself.¹

The short version

An entity is a PFE if it is either:

• a specified foreign entity: on certain US lists, or organized in, governed from or controlled by a covered nation; or
• a foreign-influenced entity: owned, financed or steered by specified foreign entities above set thresholds.

The covered nations are China, Russia, Iran and North Korea, the countries listed in 10 U.S.C. 4872(f)(2).⁴

Specified foreign entities

Section 7701(a)(51)(B) of the tax code lists five kinds:¹

1. Foreign entities of concern under the CHIPS Act definition: designated foreign terrorist organizations, people and companies on Treasury's Specially Designated Nationals (SDN) list, and entities tied to certain espionage or export-control convictions or found by the Commerce Department to act against US national security.²
2. Chinese military companies named on the Defense Department's Section 1260H list.
3. Entities on the UFLPA Entity List, kept by the Department of Homeland Security under the Uyghur Forced Labor Prevention Act.
4. The six battery makers named in section 154(b) of the 2024 defense authorization act: CATL, BYD, Envision Energy, EVE Energy, Gotion High-tech and Hithium, and any successor to them.³
5. Foreign-controlled entities: the government of a covered nation at any level, its agencies, citizens of a covered nation who are not US citizens or green-card holders, any entity organized or headquartered in a covered nation, and any entity more than 50% controlled by one of those.

The last group is the broadest. Every company organized in China is a specified foreign entity, whatever its owners, and so is a company anywhere else that a Chinese company controls.

Foreign-influenced entities

A company that is not itself a specified foreign entity is still a PFE if, during the taxable year:¹

It is also a PFE if, in the previous year, it paid a specified foreign entity under a contract that gives that entity effective control over a facility or production line. Before Treasury writes rules, effective control means rights such as deciding output, timing or buyers, holding exclusive operation or repair rights, or, under certain licensing agreements, directing suppliers or receiving royalties for more than 10 years.

How ownership is counted

Ownership is counted through chains of companies using the attribution rule of section 318(a)(2): a share held by a company is treated as held proportionally by that company's owners. If a covered government owns 60% of a holding company that owns 40% of a cell maker, the government is treated as owning 24% of the cell maker. The directory's method follows the same arithmetic.

Status is checked as of the last day of the taxable year (the first day, for the first year after the law passed).

Publicly traded companies

Different rules apply to companies whose shares trade on a US exchange, or on a foreign exchange Treasury approves. Exchanges organized or based in a covered nation never qualify. For these companies:

• they are foreign-controlled only if more than 50% is held by specified foreign entities that must report their stakes under SEC Rule 13d-3 (or an equivalent rule);
• the 25% and 40% ownership tests likewise count only such reporting holders, and the debt test looks at publicly traded debt; and
• a company at least 80% owned by such a listed company gets the same treatment for the ownership and debt tests.

This matters less for Chinese battery makers than it might seem: a company organized in China is a specified foreign entity on that ground alone, and shares listed in Shanghai or Shenzhen are on exchanges in a covered nation.

Why it matters for battery storage

Energy storage that begins construction after December 31, 2025 does not qualify for the section 48E investment credit if its construction includes material assistance from a PFE.⁵ That is tested with a cost ratio: the share of the project's manufactured-product costs that did not come from PFEs must reach 55% in 2026, rising to 75% from 2030. See the material assistance cost ratio.

So a developer needs to know, for each supplier: is it a PFE? For a cell maker organized in China, the answer is yes. For a cell maker organized elsewhere, it turns on the lists above and on who owns, lends to and controls it, which is what the supplier directory traces.

What Treasury has said so far

Notice 2026-15, released February 12, 2026, gives interim rules for calculating the material assistance cost ratio and lets taxpayers rely on supplier certifications. It does not yet define PFE status in detail: Treasury and the IRS say they intend to issue proposed regulations on the definition of a PFE.⁵ The law also directs Treasury to issue guidance on effective control and licensing by December 31, 2026.

Some questions are still open, including whether Hong Kong counts as part of China for these rules. The directory lets you switch those readings on and off.