Treasury issued key tax credit guidance in H1, but what does it mean for FEOC?

In February 2026, Treasury released highly anticipated proposed regulations on the §45Z tax credit, settling the market on a variety of issues around clean fuel sales. This guidance confirmed that sales to related-party intermediaries can qualify for the credit, so long as the fuel is eventually sold to an unrelated person. The comment period ended in April, with taxpayers still seeking clarity on indirect land-use change (iLUC) modeling and "negative emissions" treatment for manure-based fuels. Reunion has published a summary of the §45Z guidance at www.reunioninfra.com/45z.

Less than a week after the publication of §45Z guidance, Treasury released a key piece of FEOC guidance (Notice 2026-15), providing a step-by-step breakdown on calculating Material Assistance Cost Ratios (MACRs) and various safe harbors. This guidance was a welcome relief for project-level compliance.

While the Notice provided mathematical clarity for project costs, it was notably silent on another key aspect of the statute: the taxpayer-level rules regarding authority, ownership, debt, and effective control. By solving the "how much" (the material assistance math) but deferring on the "who" (the contractual control), Treasury has left some developers in a high-stakes guessing game.

Navigating ambiguity in today's effective control landscape

Under the current statutory reading, any payment — regardless of dollar amount — to a Specified Foreign Entity (SFE) pursuant to an agreement that confers "effective control" can nullify a tax credit. The statute draws a distinction between two types of control:

1. Operational Direction: The statute identifies six categories of "unrestricted contractual rights" around management and operation. These range from obvious indications of control, such as determining production timing, to the seemingly benign, such as granting a counterparty the exclusive right to maintain and repair plant equipment.
2. Intangible Rights: The statute is at its most aggressive, laying out seven categories of IP-related "rights" that confer effective control to a counterparty. For example, any IP or licensing agreement with an SFE and entered into or modified after July 4, 2025 appears to create a per se violation, regardless of the content of the agreement.

The "Russian Nesting Doll" problem: Who is a specified foreign entity?

The severity of these control triggers is compounded by a more fundamental question: how far must a developer look through the corporate chain to identify the "SFE" behind a contract? For instance, even if a developer removes every "exclusivity" clause from their O&M agreement, they face a second hurdle: verifying the counterparty. The statute defines an SFE to include entities "controlled" by covered nations, but offers no "look-through" limit — meaning there is no clear stopping point for tracing ownership or control relationships. In practice, this could require developers to investigate layers of upstream affiliates, parent entities, and indirect ownership interests well beyond the immediate contracting party.

In this way, the current SFE definition creates a Russian Nesting Doll dilemma: a developer may be making a payment to a straightforward domestic vendor, only to realize that as they peel back the corporate layers, there is an SFE in the mix. Once that "inner doll" is identified as an SFE, a standard contractual right — such as an exclusive repair clause — can suddenly be transformed into a prohibited transfer of effective control. Thus, in the absence of further guidance and without a well-defined diligence standard, developers are forced to choose between halting procurement or assuming substantial risk.

This uncertainty has turned routine legal protections into existential project risks. Keith Martin, a partner at Norton Rose Fulbright, noted in a recent Currents podcast episode that even boilerplate warranties are now under the microscope — including common clauses granting a vendor the exclusive right to repair or maintain equipment, which may now constitute a transfer of operational direction to an SFE.

How the market is adapting

Uncertainty around FEOC's definition of effective control (and the broader question surrounding who is an SFE) has created hesitation in tax equity and insurance markets. Without a materiality threshold or a de minimis exception for control, some insurers may be reluctant to underwrite the risk.

Nevertheless, some transactions are still getting done prior to the release of further Treasury guidance. Buyers and sellers are performing extensive diligence across all elements of taxpayer and project-level FEOC compliance. Where residual risk remains, stakeholders are turning to broad seller representations, limited insurance coverage, and other forms of credit support. Lessons learned from the PWA and domestic content regimes are proving useful too: developers who built supply chain mapping and certification infrastructure are finding material assistance compliance to be familiar territory.

The tax equity and insurance markets have navigated ambiguity before, and the FEOC landscape, while genuinely novel, is not paralyzing deal flow. Treasury will eventually fill the gaps on effective control and the broader SFE look-through question. Until then, the market is doing what it always does: adapting, improvising, and closing deals.