[Federal Register Volume 89, Number 88 (Monday, May 6, 2024)]
[Rules and Regulations]
[Pages 37079-37091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08913]
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DEPARTMENT OF ENERGY
10 CFR Chapter III
RIN 1901-ZA02
Interpretation of Foreign Entity of Concern
AGENCY: Office of Manufacturing and Energy Supply Chains (MESC), U.S.
Department of Energy.
ACTION: Notification of final interpretive rule.
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SUMMARY: On December 4, 2023, the U.S. Department of Energy (DOE or the
Department) published in the Federal Register for public comment a
proposed interpretive rule on DOE's interpretation of the statutory
definition of ``foreign entity of concern'' (FEOC) in the
Infrastructure Investment and Jobs Act, also known as the Bipartisan
Infrastructure Law (BIL), which applies to multiple programs related to
the battery supply chain. This statutory definition provides that,
among other criteria, a foreign entity is a FEOC if it is ``owned by,
controlled by, or subject to the jurisdiction or direction of a
government of a foreign country that is a covered nation.'' In this
final interpretive rule, DOE responds to public comments, clarifying
the term ``foreign entity of concern'' by providing interpretations of
the following key terms: ``government of a foreign country;'' ``foreign
entity;'' ``subject to the jurisdiction;'' and ``owned by, controlled
by, or subject to the direction.''
DATES: This final interpretive rule is effective May 6, 2024.
FOR FURTHER INFORMATION CONTACT:
Widad Whitman, U.S. Department of Energy, Office of Manufacturing
and Energy Supply Chains at Email: [email protected], Telephone:
(202) 586-3302.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background and Purpose
II. Discussion of Comments
A. Summary of Comments
B. Foreign Entity
C. Government of a Foreign Country
D. Subject to the Jurisdiction
E. Owned by, Controlled by, or Subject to the Direction
F. Other Comments
III. Explanation of Final Interpretation and Changes From the
Proposed Interpretive Rule
A. Purpose
B. Foreign Entity
C. Government of a Foreign Country
D. Subject to the Jurisdiction
E. Owned by, Controlled by, or Subject to the Direction
IV. Regulatory Review
V. Final Interpretive Rule on the Definition of Foreign Entity of
Concern
A. Overview
B. Foreign Entity
C. Government of a Foreign Country
D. Subject to the Jurisdiction
E. Owned by, Controlled by, or Subject to the Direction
VI. Approval of the Office of the Secretary
I. Background and Purpose
Section 40207 of BIL (42 U.S.C. 18741) provides DOE $6 billion to
support domestic battery material
[[Page 37080]]
processing, manufacturing, and recycling. Section 40207(b)(3)(C)
directs DOE to prioritize material processing applicants that will not
use battery material supplied by or originating from a ``foreign entity
of concern'' (FEOC). Similarly, section 40207(c)(3)(C) directs DOE to
prioritize manufacturing applicants who will not use battery material
supplied by or originating from a FEOC and prioritize recycling
applicants who will not export recovered critical materials to a FEOC.
FEOC is defined in BIL section 40207(a)(5). The relevant paragraph
lists five grounds upon which a foreign entity is considered a FEOC,
described in subparagraphs (A) through (E). Subparagraphs (A), (B), and
(D) address entities designated as foreign terrorist organizations by
the Secretary of State, included on the Specially Designated Nationals
and Blocked Persons List (SDN List) maintained by the Department of the
Treasury's Office of Foreign Assets Control (OFAC), and alleged by the
Attorney General to have been involved in various illegal activities,
including espionage and arms exports, for which a conviction was
obtained, respectively. Subparagraph (C) states that a foreign entity
is a FEOC if it is ``owned by, controlled by, or subject to the
jurisdiction or direction of a government of a foreign country that is
a covered nation (as defined in [10 U.S.C. 4872(d)(2)]).'' The
``covered nations'' are the People's Republic of China (PRC), the
Russian Federation, the Democratic People's Republic of North Korea,
and the Islamic Republic of Iran (10 U.S.C. 4872(d)(2)). BIL section
40207(a)(5) provides no further definition of the term ``foreign
entity'' or of the terms used in subparagraph (C).
Subparagraph (E) of BIL section 40207(a)(5) provides an additional
means by which an entity may be designated to be a FEOC: a foreign
entity is a FEOC if it is ``determined by the Secretary [of Energy], in
consultation with the Secretary of Defense and the Director of National
Intelligence, to be engaged in unauthorized conduct that is detrimental
to the national security or foreign policy of the United States.'' The
Secretary of Energy has not exercised this authority, as of this date.
In addition to affecting which entities DOE will prioritize as part
of its BIL section 40207 Battery Materials Processing and Battery
Manufacturing and Recycling Grant Programs, the ``Foreign Entity of
Concern'' term is cross-referenced in section 30D of the Internal
Revenue Code (IRC) (26 U.S.C. 30D), as amended by the Inflation
Reduction Act of 2022 (IRA). Section 30D provides a tax credit for new
clean vehicles, including battery electric vehicles. Section 30D(d)(7)
excludes from the definition of ``new clean vehicle'' ``(A) any vehicle
placed in service after December 31, 2024, with respect to which any of
the applicable critical minerals contained in the battery of such
vehicle (as described in [section 30D(e)(1)(A)]) were extracted,
processed, or recycled by a [FEOC] (as defined in section 40207(a)(5)
[of BIL] (42 U.S.C. 18741(a)(5))), or (B) any vehicle placed in service
after December 31, 2023, with respect to which any of the components
contained in the battery of such vehicle (as described in section
30D(e)(2)(A)) were manufactured or assembled by a [FEOC] (as so
defined).''
On December 4, 2023, DOE published in the Federal Register its
notice of proposed interpretive rule and request for comments related
to the definition of FEOC contained in section 40207(a)(5) of BIL (88
FR 84082). The comment period closed on January 3, 2024.
After careful consideration of available information related to the
battery supply chain and comments received, DOE is now issuing this
final guidance regarding which foreign entities qualify as FEOCs, under
BIL 40207(a)(5)(C), as a result of being ``owned by, controlled by, or
subject to the jurisdiction or direction of a government of a foreign
country that is a covered nation.'' For the purposes of this document,
DOE uses the term ``interpretive rule'' and ``guidance''
interchangeably. At a future date, DOE may decide to initiate a
separate rulemaking to implement the Secretary's ``determination
authority'' contained in BIL section 40207(a)(5)(E) (42 U.S.C.
18741(a)(5)(E)).
To get the benefit of input from the public and interested
stakeholders, the Department specifically requested comments on its
proposed interpretation of the terms discussed in its proposed
interpretive rule (88 FR 84082). The proposed interpretive rule was
intended to solicit public feedback on DOE's interpretation to better
understand stakeholder perspectives prior to implementation of
finalized guidance. The Department considered all comments received
during the public comment period and modified its proposed approach, as
appropriate, based on public comment as described in section III of
this document.
This final guidance proceeds as follows: Section II of this
document provides a discussion of comments received and DOE's response
to those comments; section III of this document provides an explanation
of final interpretation and changes from the proposed interpretive
rule; section IV of this document provides information on Regulatory
Review of this interpretive guidance; section V of this document
provides DOE's final interpretive rule on the definition of Foreign
Entity of Concern; and section VI of this document provides the
approval of the Office of the Secretary.
II. Discussion of Comments
A. Summary of Comments
DOE received 84 comment submissions in response to the proposed
interpretive rule. Comments were received from original equipment
manufacturers; cell producers; materials suppliers; component
suppliers; trade organizations; a nonprofit organization; a consultant;
foreign governments; and individuals. Forty-two--half of the total
comments received--were from anonymous sources. Several comments
included confidential business information, along with a non-
confidential version to be uploaded to the docket for public viewing.
Additionally, at the request of the governments of the Republic of
Korea, Chile, and Australia, DOE met with delegations from each
country. Meeting notes of these ex parte communications have been
posted to the public docket. Commenters generally expressed support for
the issuance of guidance, welcoming additional clarity on the
definition of the term ``foreign entity of concern.'' Many comments
raised specific concerns about the feasibility of compliance without
bright-line administrable standards to govern which entities qualify as
FEOCs. Many other submissions raised specific concerns about rules that
too narrowly construe the term FEOC, raising concerns about
manipulation of the battery supply chain by covered nations. Other
submissions were more general in nature and did not provide specific
comments on the proposed interpretive rule itself. All submissions were
carefully reviewed, and DOE thanks the public for its engagement. DOE's
responses to comment within the scope of this interpretive rule have
been grouped by the topic area to which they pertain and are summarized
as follows.
B. Foreign Entity
Comment: Multiple commenters sought clarity on how the guidance
intends to treat a U.S.-headquartered company with its principal place
of business in the United States but operating in a covered nation.
Specifically, the commenters questioned whether such a U.S. entity's
operations within a covered nation can be considered a FEOC under the
guidance
[[Page 37081]]
even if the U.S. entity does not fall into the definition of ``foreign
entity.''
Response: The guidance includes in the definition of ``foreign
entity'' any ``partnership, association, corporation, organization, or
other combination of persons organized under the laws of or having its
principal place of business in a foreign country.'' If a U.S.-
headquartered company has operations in a foreign country but has not
organized under the laws of that country, then the guidance would not
consider them to be a foreign entity. However, entities that operate
within covered nations are typically required to be organized under the
laws of that nation, and if that is the case, then such entities will
be considered foreign entities, and thus subject to the jurisdiction of
the covered nation's government. In this scenario, even though the
operations of the U.S. entity located in the covered nation are
considered a FEOC, this designation would not flow back to the U.S.
entity's operations in the United States or other third-party
countries.
C. Government of a Foreign Country
Comment: One commenter requested that DOE provide a definitive list
of individuals who are considered to be current or former senior
government officials and therefore considered part of the ``government
of a foreign country.'' The commenter argued that determining which
officials are considered ``senior'' and whether their family members
hold interests in a company will not always be readily apparent.
Response: While DOE understands the commenter's concern, DOE
declines to make this change. Compiling a complete list of current and
former senior government officials would prove challenging given that
the list would likely be subject to frequent change, difficult to
predict, and very likely underinclusive. Furthermore, DOE does not have
the resources to do so for every company that may be in the battery
supply chain; however, individual participants in the battery supply
chain will be in a position to individually analyze their specific
upstream suppliers and ask those suppliers to provide information
necessary for such an evaluation. DOE's guidance provides additional
clarity for such evaluation by identifying markers of when an
individual official should be considered ``senior,'' and in the case of
the People's Republic of China (PRC), identifying particular Chinese
Communist Party (CCP) entities whose current and former members should
be considered senior foreign political figures.
Comment: Several other commenters requested that DOE provide
greater clarity for the definition of ``senior foreign political
figure,'' particularly regarding whether (a) there is a time period
that may pass after which a former official can no longer be considered
a part of the government of a foreign country; (b) what level an
official must be to be considered ``senior;'' and (c) for the PRC,
whether ``senior foreign political figure'' is limited to individuals
with membership on the CCP entities identified in the guidance.
Response: There is no designated amount of time for how long an
individual may be a former official and avoid being considered a
``senior foreign political figure.'' The concerns that arise from
representing the government in a senior role and from membership on the
CCP bodies identified in the guidance, for which former membership is
considered, do not dissipate over time just because an individual no
longer represents that government or political body.
The standard for determining whether a particular individual is a
``senior'' figure under the guidance is whether the individual
exercises ``substantial authority over policy, operations, or the use
of government-owned resources.'' In the context of the PRC, the
guidance identifies particular CCP entities whose members should be
considered to be senior officials of a ``dominant or ruling foreign
political party.'' These bodies do not constitute all senior foreign
political figures in the PRC, however. Apart from roles within a
dominant political party, a senior official who works for the
government of a covered nation in an official capacity, whether at a
government ministry, for a state-owned enterprise (SOE), or within the
military, may also be considered a ``senior foreign political figure.''
DOE declines to specify particular government positions that qualify as
``senior,'' but believes the standard provided (i.e., ``a position of
substantial authority over policy, operations, or the use of
government-owned resources'') provides a reasonable standard with which
to evaluate companies in the battery supply chain.
Comment: Other commenters argued that a determination of senior
political figure ownership and involvement in private companies would
be unduly onerous and may not be feasible. Relatedly, one commenter
asked for greater clarity on what level of diligence and processes
companies are expected to undertake to determine whether individuals or
their family members who control entities within their supply chain
qualify as senior foreign political figures.
Response: DOE's guidance has been drafted to provide a reasonable
interpretation of the statutory definition of FEOC contained in 42
U.S.C. 18741(a), while taking into account administrability concerns.
While outside the scope of this guidance, for the purposes of
determining eligibility for the 30D tax credit, the Treasury
Department's final regulations on Clean Vehicle Credits under Sections
25E and 30D; Transfer of Credits; Critical Minerals and Battery
Components; Foreign Entities of Concern published elsewhere in this
issue of the Federal Register and associated guidance (Rev. Proc. 2023-
38) identify due diligence measures, including the potential for
attestations of compliance from companies within a manufacturer's
supply chain, that can be used to provide reasonable assurance that an
entity's supply chain is free of FEOCs, including control by senior
foreign political figures.
Comment: One commenter noted that the proposed interpretive rule
suggests that local or subnational government-owned enterprises are
considered to be part of the ``government of a foreign country'' and
questioned whether all SOEs should be considered part of the
``government of a foreign country'' such that an entity controlled by
an SOE at a level of 25% or more would also be a FEOC.
Response: DOE agrees that all SOEs, whether local or national,
should be considered to be instrumentalities of a national or
subnational government, and thus part of the ``government of a foreign
country.'' As such, a national SOE's voting rights, equity interests,
or board seats in an entity can be combined with a local SOE's
ownership of the same entity to reach the 25% FEOC threshold for
control of that entity.
Comment: One commenter asked for clarity as to whether, with
respect to the PRC, a ``dominant or ruling political party'' in the
interpretation of ``government of a foreign country'' refers only to
the central party, or to local party apparatuses as well.
Response: The guidance includes local and subnational government
officials in the definition of government of a foreign country, and
therefore senior government officials at the local and subnational
level should be considered to be part of the government of a foreign
country. When it comes to senior officials from a dominant or ruling
party, DOE's final interpretive guidance also makes clear that the list
of specific CCP entities that are
[[Page 37082]]
considered part of the ``government of a foreign country,'' includes
current, but not former, members of local or provincial Chinese
People's Political Consultative Conferences (CPPCC).
D. Subject to the Jurisdiction
Comment: One commenter urged DOE to clearly define the term
``principal place of business'' in the guidance.
Response: DOE intends for the term ``principal place of business''
to be interpreted consistent with standard practice. The guidance is
informed by the United States Supreme Court's formulation in Hertz
Corp. v. Friend, in which a principal place of business is considered
to be the ``place where a corporation's officers direct, control, and
coordinate the corporation's activities [and] in practice it should
normally be the place where the corporation maintains its
headquarters--provided that the headquarters is the actual center of
direction, control, and coordination, i.e., the `nerve center.' '' 559
U.S. 77, 92-93 (2010).
Comment: Multiple commenters argued that all subsidiaries of FEOCs
should be considered FEOCs themselves, even when the parent entity is
only a FEOC via jurisdiction due to it being headquartered within a
covered nation.
Response: DOE declines to make this change. DOE's interpretive
guidance is intended to clarify the statutory terms in a way that gives
effect to the purpose of the statutory provisions to which it applies.
The term FEOC within section 40207, as it applies to both DOE's battery
materials processing and battery manufacturing and recycling grant
programs and to the 30D tax credit, is intended to both reduce reliance
upon covered nations in the battery supply chain and provide a pathway
for companies in the United States and third-party countries to
increase production of critical minerals, battery components, and
battery materials. At this time, DOE concludes that United States or
third-party country subsidiaries of entities that are headquartered
within a covered nation do not necessarily pose the same risk to the
battery supply chain as subsidiaries that are FEOCs by virtue of the
government of a covered nation holding, directly or indirectly, 25% or
more of the equity interests, board seats, or voting rights of the
subsidiary. This is due to: (a) their location within the United States
or third-party countries; and (b) the lack of direct control by the
government of a covered nation. In addition, DOE's interpretation
serves the intended purpose of the statute by providing a pathway for
the onshoring and friend-shoring of critical minerals, battery
components, and battery materials. This contrasts with the primary
purpose of the CHIPS and Science Act of 2022, and the implementation of
the Department of Commerce's substantially similar FEOC provision,
which concerns the prevention of transfers of semiconductor technology
to covered nation governments.
Comment: More than one of the commenters that urged that all
subsidiaries of FEOCs be considered FEOCs themselves, expressed concern
that companies headquartered in the PRC, even when privately held with
no formal control by the government of the PRC, may receive significant
government subsidy, grants, and debt financing to pursue expansion
outside of the PRC. One of these commenters urged DOE to aggressively
assess whether such companies are actually private or are engaged in
activities designed to avoid FEOC designation.
Response: DOE considered whether to expand the definition of
``control'' under this interpretive rule to incorporate companies that
are controlled by the government of a covered nation by virtue of
significant investments by that government of the kind identified by
the commenters (e.g., subsidies, grants, or debt financing) from the
government of a covered nation. However, DOE has not yet identified a
sufficiently bright-line rule for such investments that would be
administrable by entities in the battery supply chain or by vehicle
manufacturers. Accordingly, DOE declines to make this change to the
interpretive guidance at this time. With respect to its evaluation of
applications for domestic battery material processing, manufacturing,
and recycling grants under section 40207 of BIL, DOE notes that it will
conduct a holistic risk evaluation process related to research,
technology, and economic security. Such evaluation will include
consideration of financial support by countries of concern, including
the PRC. In addition, DOE may consider government investment as part of
its exercise of the Secretary of Energy's authority under BIL section
40207(a)(5)(E) 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.'' Furthermore, DOE will continue
to monitor the battery supply chain market and may consider revisiting
this issue in the future through updated interpretive guidance defining
control by the government of a covered nation based on significant
investments from that government. Any information that may assist DOE
in monitoring the battery supply chain market may be submitted to the
email address identified in the ``For Further Information'' section of
this document.
E. Owned by, Controlled by, or Subject to the Direction
Comment: Several commenters asked whether, when calculating an
entity's voting rights, equity interests, or board seats held by the
government of a covered nation, the guidance requires that these
calculations be made in combination or independently.
Response: DOE responds with the following clarification. The 25%
threshold applies to each metric independently, not in combination. For
example, and assuming no other relevant circumstances, 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, these
percentages would not be combined to equal 45% control, but would each
be evaluated independently, resulting in the entity being controlled at
the level of the highest metric (i.e., 20%) and thus not considered a
FEOC. That said, DOE recognizes that significant levels of government
control in all three metrics may still raise concerns. As such, as
indicated above in response to a previous comment, DOE may incorporate
such considerations into its evaluation of applications for grants
under section 40207 of BIL, through utilization of the Secretary's
authority under BIL section 40207(a)(5)(E), or through revisions to the
interpretive guidance upon evidence of evasive gamesmanship with
respect to the 25% threshold.
Comment: One commenter asked for greater clarity on what
constitutes voting rights, equity interests, and board seats for the
purposes of calculating whether a 25% controlling interest exists.
Specifically, the commenter asked (a) whether DOE intended to refer to
``traditional voting rights belonging to common stockholders or the
voting rights of owners'' or to ``the voting rights of a board;'' (b)
how to calculate the value of an individual board seat; and (c) what
constitutes equity interests for the purposes of the guidance.
Response: As previously stated, DOE notes that each of these
metrics of control is intended to be calculated independently. For
``voting rights,'' DOE intends to refer to the voting rights of owners,
as suggested by the commenter. This means that the voting power of
owners of different types of stock, to the
[[Page 37083]]
extent this information is reasonably ascertainable, should be
considered in calculating whether a FEOC controls 25% of the voting
rights in an entity. For ``board seats,'' DOE intends for the value of
a board seat to equal the value of its voting power on the board. So,
if one board seat is held by a representative of the government of a
covered nation and that seat holds 25% of the board voting power, then
that entity would be considered a controlled FEOC. For ``equity
interests,'' DOE intends to refer to percent value of the ownership
interest, to include capital or profit interests and contingent equity
interests, in the company held by an individual or entity, with the
amount of contingent interest that can be reasonably determined
included for the purpose of determining FEOC compliance.
Comment: Several commenters raised concerns that the analysis
required to evaluate the FEOC compliance of a manufacturer's supply
chain, including the voting rights, board seats, and equity interests
for privately held companies, will be unduly burdensome and create
administrability problems. Other commenters, however, stated that the
FEOC guidance is stringent but, for the most part, workable.
Response: DOE's guidance has been drafted to give a reasonable
interpretation to the statutory definition of FEOC contained in 42
U.S.C. 18741(a), while taking into account administrability concerns.
The due diligence measures required for determining FEOC compliance for
purposes of determining eligibility for the 30D tax credit and for
DOE's BIL 40207 grant programs are outside the scope of this guidance.
Comment: One commenter stated that the 25% threshold for control is
too bright-line and will allow an entity to drop its covered nation
government ownership stake to 24.9% to avoid being deemed a controlled
FEOC. Several other commenters stated their support for the 25% bright-
line threshold and the guidance's alignment with the Department of
Commerce's FEOC definition in its Final Rule on Preventing the Improper
Use of CHIPS Act Funding (CHIPS Rule) as published in the Federal
Register on September 25, 2023 (88 FR 65600).
Response: DOE declines to make a change. The guidance attempts, to
the greatest degree possible, to establish bright-line rules to allow
individual entities seeking to take advantage of BIL section 40207 and
IRC section 30D to readily evaluate whether their upstream suppliers
should or should not be considered FEOCs. Without that clarity,
individual entities would be unable to properly evaluate their supply
chains. To the extent that an entity changes its ownership structure to
fall below the 25% threshold, DOE views such restructuring as a
desirable dilution of covered nation government control, consistent
with the purposes of the FEOC restrictions in BIL section 40207 and IRC
section 30D, as DOE understands them.
Comment: Similarly, another commenter stated that DOE's
interpretation of indirect control allows for an entity to alter its
ownership structure to skirt the FEOC ban, by nesting control and
allowing control to defuse through levels of subsidiaries.
Response: DOE declines to make a change. First, not all ownership
stakes dilute in a tiered ownership structure. Specifically, DOE notes
that the guidance makes clear that the controlling stake of a parent
company with 50% or more interest in a subsidiary does not attenuate.
Thus, the covered nation government's level of control would not
attenuate in a situation where there exist tiers of subsidiaries that
are owned at a level of 50% or more. Second, DOE's approach to
calculating indirect control recognizes the reality that, in the case
of multiple tiers of minority control by a covered nation government,
the actual ability of the covered nation government to influence the
operations of a subsidiary may become materially attenuated.
Comment: One commenter asked for clarification on why DOE used the
parenthetical phrase ``(including the government of a foreign country
that is a covered nation)'' in the interpretation of ``control,'' since
the focus of the guidance relates to control by the government of a
covered nation.
Response: The interpretation of ``control'' in the guidance is
meant to encompass both situations where the government directly
controls an entity and when the government may indirectly control an
entity through another entity that is not itself the government of a
covered nation. In addition, the ``control'' definition is also
embedded into the interpretation of ``foreign entity,'' to identify
situations where a U.S. entity is considered to be ``foreign'' as a
result of control. The parenthetical is intended to make clear that
``control'' refers to both direct and indirect control by the
government, and control within the interpretation of ``foreign
entity.''
Comment: Several commenters asked for clarification on how to
evaluate levels of control within a joint venture. Specifically, the
commenters questioned whether a joint venture should be evaluated using
the licensing and contracting provision of the guidance or if joint
ventures should be evaluated solely under the 25% control prong.
Response: DOE responds by clarifying that whether a FEOC holds a
controlling interest in a JV entity (through voting rights, equity
interests, or board seats) is determined under the 25% control
threshold. Thus, a separate entity that exists as a 50-50 JV, in which
one of the members of the JV is a FEOC, would be considered to be a
FEOC. In a situation where a FEOC maintains less than 25% control of a
JV, the JV agreement would not confer ``effective control'' of the JV
entity unless, by its terms, it gives a FEOC the right to determine the
quantity or timing of production; to determine which entities may
purchase or use the output of production; to restrict access to the
site of production to the contractor's own personnel; or the exclusive
right to maintain, repair, or operate equipment that is critical to
production.
Comment: One commenter asked for clarification as to whether the
``effective control'' definition only applies when the other entity
(licensor/contractor) is a FEOC.
Response: DOE responds that the ``effective control'' definition in
the guidance is only relevant as it relates to licenses and contracts
with an entity considered to be a FEOC. The language of the guidance
has been edited to clarify.
Comment: Multiple commentors asked for clarification on whether the
``effective control'' test in the definition of ``owned by, controlled
by, or subject to the direction'' applies only when the licensor or
contractor is a FEOC because it is subject to at least 25% control by
the government of a covered nation or also when the licensor or
contractor is a FEOC due to being ``subject to the jurisdiction'' of a
covered nation.
Response: DOE responds by clarifying that an entity can be subject
to effective control through a license or contract with any entity that
is deemed a FEOC, whether via the 25% threshold for control or via
jurisdiction. The proximity of a FEOC to the government of a covered
nation, even when the government does not have a controlling stake in
the company, raises similar concerns in the context of a license or
contract with a non-FEOC, and the non-FEOC should retain the identified
rights to avoid effective control by the FEOC.
Comment: One commenter suggested that DOE modify the fifth right to
be reserved within a license or contract with a FEOC, which requires
that IP and technology that is the subject of the
[[Page 37084]]
contract be accessible to the non-FEOC entity ``notwithstanding any
export control or other limit on the use of intellectual property
imposed by a covered nation subsequent to execution.'' The commenter
suggested that the provision could be interpreted to call for the
defiance of foreign laws.
Response: To ensure that a license or contract with a FEOC does not
result in effective control, a non-FEOC should reserve the listed
rights at the time of entering into the license or contract. DOE's view
is that new export controls would not be applicable to IP that has
already been transferred, i.e., IP licenses with an effective date
prior to implementation of a new export control. That said, it is not
DOE's intent that this language place a manufacturer in the position of
having to violate a foreign law. Therefore, DOE has edited the fifth
right to state that the parties to the given license or contract commit
that the non-FEOC party will retain access to and use of any
intellectual property, information, and data critical to production
``for the duration of the contractual relationship.''
Comment: One commenter requested confirmation on their
understanding of the first and fifth rights identified by DOE to be
retained by a non-FEOC entity entering into a license or contract with
a FEOC. Specifically, the commenter stated its understanding that the
first right would allow the non-FEOC entity to acquire information from
the FEOC related to the quantity of critical minerals or components
necessary to manufacture a battery or battery component, and the fifth
right would allow the non-FEOC entity to obtain assistance from the
FEOC in operating, maintaining, and repairing equipment critical to
production.
Response: The commenter is correct that the non-FEOC entity would
be able to obtain information and assistance from the FEOC as described
above. The determining factor as to whether the retained rights have
prevented ``effective control'' by a FEOC under the guidance is whether
the non-FEOC entity has the right of access and the authority to make
decisions. In order to fully exercise those rights, however, it may be
necessary for the non-FEOC entity to obtain information and assistance
from the FEOC entity.
Comment: In the context of the ``effective control'' definition and
the safe harbor rights identified in the guidance, one commenter
requested that DOE provide a limited exception or transition period for
licenses and contracts that were signed between enactment of the IRA
and the issuance of DOE's proposed interpretive guidance, if the non-
FEOC entity can establish that the FEOC entity does not have effective
control through alternate means.
Response: DOE's guidance is limited to providing an interpretation
of the statutory term ``foreign entity of concern,'' and related terms.
Whether to provide an exception or transition period to eligibility for
a particular program or incentive is out of scope of this interpretive
guidance.
F. Other Comments
i. General Comments Related to Proposed Interpretive Rule
Comment: Several commenters urged DOE to create a definitive list
of entities considered to be FEOCs.
Response: DOE declines to make this change. The criteria for
``foreign entities of concern'' were articulated in the Infrastructure
Investment and Jobs Act (IIJA). DOE recognizes that, for some of the
criteria, in particular the criteria related to foreign entities that
have been alleged by the Attorney General to have been involved in
certain activities for which a conviction was obtained, there may not
be a consolidated, readily available list. For the criteria that are
the subject of this guidance (i.e., a foreign entity that is ``owned
by, controlled by, or subject to the jurisdiction or direction of the
government of a covered nation''), DOE is not in a position to provide
a comprehensive list of every entity that qualifies as a FEOC.
Providing a definitive list of FEOCs could result in attempts to evade
the rule through corporate restructuring that does not change actual
control and would be overly burdensome on DOE to create and maintain
such a list for the entire battery supply chain. Accordingly, the
guidance provides standards to assist companies in determining whether
the particular entities in their battery supply chain are FEOCs. These
companies are better positioned than DOE to conduct due diligence on
and obtain certifications from entities within their supply chain, with
whom they maintain a contractual relationship. DOE expects that, given
the guidance provided in this final interpretive rule, relevant
entities can exercise appropriate diligence to identify entities that
fall within the criteria articulated in the IIJA.
Comment: Several commenters urged DOE to establish a voluntary pre-
review process to allow manufacturers to submit to DOE potential
licenses and contracts with FEOCs to determine whether it would lead to
effective control by the FEOC. Several of the commenters also requested
that such a pre-review process be structured in a confidential manner.
Response: While DOE requested comment on the desirability of
establishing and the potential structure of a pre-review process for
licenses and contracts, DOE is declining to establish such process at
this time. Instead, as established in the Treasury Department's 30D
rule and associated guidance, DOE will play a pivotal role in reviewing
all of the documentation that is provided to the IRS for the purpose of
determining eligibility for the 30D tax credit. DOE's review of
licenses and contracts for effective control will take place through
that process.
Comment: Multiple commenters urged DOE to use the determination
authority provided in section 40207(a)(5)(E) of BIL to allow the
Secretary of Energy, in consultation with the Secretary of Defense and
the Director of National Intelligence, to designate an individual
entity as a FEOC ``engaged in unauthorized conduct that is detrimental
to the national security or foreign policy of the United States.''
Response: DOE responds that it continues to consider whether and
how to use the determination authority in BIL section 40207(a)(5)(E).
ii. Comments Related to Treasury's 30D Rule
Comment: One commenter urged DOE to clearly define the terms of
``critical minerals,'' ``components,'' and ``materials'' in this
guidance.
Response: DOE declines to make this change. The definitions
identified by the commenter are relevant to DOE's interpretative
guidance only insofar as it applies to eligibility for the 30D tax
credit. The Treasury Department has defined these terms in the relevant
regulations.
Comment: Several commenters suggested that the U.S. Government
should consider providing extensions of time for compliance with FEOC
sourcing rules or waivers of any penalties involving `unintentional'
transactions with entities later determined to be FEOCs as the industry
tries to implement these new rules. Another commenter expressed strong
support for phasing out the Treasury Department's transition rule for
non-traceable critical minerals.
Response: DOE's guidance is limited to providing an interpretation
of the statutory term ``foreign entity of concern,'' and related terms.
As such, comments related to extensions of time to allow for a
transition period, waiver of penalties associated with an
[[Page 37085]]
unintentional interaction with a FEOC, or transition rule phase-outs
are outside the scope of this interpretive guidance.
Comment: One commenter expressed concerns that the Federal
government has failed to provide a harmonized definition of the term
``foreign entity of concern,'' specifically noting its belief that DOE
and the Treasury Department, for the purposes of the 30D tax credit, do
not have a common definition of FEOC.
Response: DOE and the Treasury Department have harmonized their
FEOC definitions for the purposes of implementing the 30D tax credit,
as Treasury has incorporated DOE's FEOC guidance into its 30D rule.
Comment: One commenter expressed concern that some critical
minerals producers would not be able to certify compliance with FEOC
rules because they use a mixture of ingredients from FEOC and non-FEOC
sources that cannot be separated physically.
Response: DOE's guidance is limited to providing an interpretation
of the statutory term ``foreign entity of concern,'' and related terms.
This comment is out of scope of this interpretive guidance.
Comment: Several commenters requested clarification from DOE as to
what sort of documentation and materials DOE would deem sufficient to
certify FEOC compliance with the Internal Revenue Service for the
purposes of the 30D tax credit and for the battery ledger identified in
the Treasury Department's 30D rule. For instance, one commenter asked
whether a guarantee letter from a third-party manufacturer or supplier
that confirms it is a non-FEOC is sufficient to substantiate its non-
FEOC status to the IRS.
Response: DOE's guidance is limited to providing an interpretation
of the statutory term ``foreign entity of concern'' and related terms,
and this comment is outside the scope of this interpretive guidance.
The due diligence measures required for determining FEOC compliance for
purposes of determining eligibility for the 30D tax credit and for
DOE's BIL 40207 grant programs are outside the scope of this guidance.
iii. Comments Related to the Inflation Reduction Act
Comment: DOE received several comments, both positive and negative,
about the relative merits of the Inflation Reduction Act. Some of these
commenters stated that the IRA will support energy reliability, clean
energy production, and a variety of other goals. Other commenters
stated that IRA provisions limiting eligibility for government
incentives (e.g., excluding new clean cars from eligibility if they
source from FEOCs) is discriminatory, protectionist, and violates basic
principles of the World Trade Organization.
Response: DOE notes that all of these comments are directed at the
underlying statute, which is outside the scope of this interpretive
guidance.
III. Explanation of Final Interpretation and Changes From the Proposed
Interpretive Rule
A. Purpose
The term FEOC, as used in both BIL section 40207 and IRC section
30D, is intended to address upstream supply chains of individual
entities that may benefit from direct or indirect Federal government
financial support. As such, the interpretations proposed here are
intended to be structured as, to the greatest degree possible, bright-
line rules that allow individual entities to readily evaluate whether
their supply chain includes FEOCs. In the case of the Battery Materials
Processing and Battery Manufacturing and Recycling Grants programs in
BIL section 40207, a bright-line rule will afford eligible entities
using their grants for battery materials processing or advanced battery
component manufacturing greater clarity in avoiding using battery
materials supplied by or originating from a FEOC; similarly, such a
rule will afford those eligible entities using their grants for battery
recycling greater clarity in avoiding the export of recovered critical
materials to a FEOC.
B. Foreign Entity
DOE's final interpretive rule does not make any changes to its
interpretation of the term ``foreign entity.'' To be considered a FEOC
under BIL section 40207(a)(5) (42 U.S.C. 18741(a)(5)), the statute
requires that the entity be a ``foreign entity.'' However, section
40207 does not define ``foreign entity.''
The interpretation of ``foreign entity'' in this final guidance
aligns closely with the definition of ``foreign entity'' contained in
the 2021 National Defense Authorization Act (NDAA) (15 U.S.C. 4651(6)),
which informs certain Department of Commerce programs related to
semiconductors. Both the interpretation in this guidance and the 2021
NDAA definitions define foreign entities to include three main
categories of entities: (1) a government of a foreign country and a
foreign political party; (2) a natural person who is not a lawful
permanent resident of the United States, citizen of the United States,
or any other protected individual (as such term is defined in 8 U.S.C.
1324b(a)(3) (addressing unfair immigration-related employment
practices)); or (3) a partnership, association, corporation,
organization, or other combination of persons organized under the laws
of or having its principal place of business in a foreign country.
DOE's interpretation specifically provides that entities organized
under the laws of the United States that are subject to the ownership,
control, or direction of another entity that qualifies as a foreign
entity will also qualify as ``foreign entities'' for the purposes of
BIL section 40207(a)(5)(C). The 2021 NDAA definition of foreign entity
allows for U.S. entities to be considered foreign in this way and also
provides an additional list of criteria by which such persons may be
considered foreign due to their relationship with the three main
categories of foreign entities. While these criteria are relevant for
the purposes of the Department of Commerce programs at issue, which are
primarily concerned with preventing the transfer of semiconductor
technology to covered nation governments, DOE assesses that the
criteria are not necessary for the purpose of evaluating covered
nation-associated risk to the battery supply chains, because the
natural persons and corporate entities that are relevant to the battery
supply chain are already encompassed in the identified criteria for
``foreign entity.'' DOE's interpretation ensures that the government of
a covered nation cannot evade the FEOC restriction simply by
establishing a U.S. subsidiary, while otherwise maintaining ownership
or control over that subsidiary.
C. Government of a Foreign Country
DOE's final interpretive rule makes minor, clarifying changes to
its interpretation of the term ``government of a foreign country.'' The
term ``government of a foreign country'' is a term used to determine
whether an entity is ``owned by, controlled by, or subject to the
jurisdiction or direction of a government of a foreign country.'' It is
also used in the interpretation of ``foreign entity'' in paragraph (i)
of section V.B of this document.
DOE's interpretation of the term ``government of a foreign
country'' contained within this notice includes subnational
governments, which can have significant ownership or control of firms
in the vehicle supply chain. In the covered nations at issue here,
there exist many subnational and local government-owned entities, that
play a large role in their nation's economies,
[[Page 37086]]
and local SOEs are a large driver of regional economies. This term also
includes instrumentalities, which include separate legal entities that
are organs of a state but where ownership may be unclear, such as a
utility or public financial institution. This interpretation aligns
with the definition of ``foreign government'' promulgated by the
Department of the Treasury in its regulations implementing the
Committee on Foreign Investment in the United States (CFIUS) program
(31 CFR 800.221). That definition includes ``national and subnational
governments, including their respective departments, agencies, and
instrumentalities.''
DOE's interpretation of the term ``government of a foreign
country'' also includes senior foreign political figures. This
inclusion recognizes the reality of government influence over business
entities in covered nations, which is often exercised through
individuals representing the government on corporate boards or acting
at the direction of the government or to advance governmental interests
when serving as an equity owner or through voting rights in an
otherwise privately held business. This interpretation aligns with the
Defense Department's National Industrial Security Program Operating
Manual (NISPOM) regulatory definition of ``foreign interest'' (32 CFR
117.3) and associated ``foreign ownership, control or influence''
(FOCI) regulations (32 CFR 117.11), which recognize as FOCI the
influence of a representative of a foreign government with the power to
direct or decide issues related to a U.S. entity. In addition, in order
to deal with the situation in which officials leave their official
positions in order to exert the same type of influence on behalf of the
government, the interpretation also includes former senior government
officials and former senior party leaders. Inclusion of former
officials is consistent with regulatory definitions in other contexts.
As stated in response to comments above, the guidance does not limit
the ``former'' designation to a particular period of time, as the
concerns arising from membership on the CCP bodies identified below, do
not dissipate over time just because an individual no longer serves as
a member of that body. For example, the Bank Secrecy Act (BSA) private
banking account regulations (relating to due diligence program
requirements for private banking accounts established, maintained,
administered, or managed in the United States for foreign persons)
administered by the Department of the Treasury's Financial Crimes
Enforcement Network (FinCEN) include both current and former officials
in the definition of ``senior foreign political figure'' (31 CFR
1010.605(p)). Those regulations provide further interpretation of the
term ``senior official'' that DOE has also included to provide
additional clarity.
DOE's final interpretive rule clarifies that ``senior foreign
political figure'' includes both individuals who are senior officials
in the government and senior officials within a dominant or ruling
political party, as well as family members of such individuals. In the
specific context of the PRC, DOE considers ``senior foreign political
figure'' to include (a) individuals currently or formerly in senior
roles within the PRC government, at the central and local levels; (b)
individuals currently or formerly in senior roles within the Chinese
Communist Party (CCP) and bodies and commissions under the Central
Committee; (c) current and former members of the CCP Central Committee,
the Politburo Standing Committee, the Politburo, the National People's
Congress and Provincial Party Congresses, and the national Chinese
People's Political Consultative Conference (CPPCC); and (d) current but
not former members of local or provincial CPPCCs.
Finally, the inclusion of immediate family members of senior
foreign political figures in the interpretation of ``government of a
foreign country'' aligns with the BSA private banking regulation. Those
regulations include the immediate family members of a senior foreign
political figure in their definition of ``senior foreign political
figure'' (31 CFR 1010.605(p)(1)(iii)). Immediate family members in
those regulations mean spouses, parents, siblings, children, and a
spouse's parents and siblings (31 CFR 1010.605(p)(2)(ii)).
D. Subject to the Jurisdiction
DOE's final interpretive rule does not make any changes to its
interpretation of the term ``subject to the jurisdiction.'' If an
entity is ``subject to the jurisdiction'' of a government of a foreign
country that is a covered nation, the entity is a FEOC. DOE's
interpretation provides an objective standard, consistent with the
common understanding of ``jurisdiction,'' rather than a subjective
standard that relies upon an individual nation's understanding of its
own jurisdictional reach. As such, the interpretation first recognizes
that any organization formed under the laws of the government of a
covered nation is a national of that nation and therefore subject to
its direct legal reach. Cf. 28 U.S.C. 1332(c)(1) (noting that, for the
purposes of diversity jurisdiction, ``a corporation shall be deemed to
be a citizen of every . . . foreign state by which it has been
incorporated and of the . . . foreign state where it has its principal
place of business''). In addition and as stated above in response to
comments, determining an entity's principal place of business under the
guidance should be guided by the United States Supreme Court's
formulation in Hertz Corp. v. Friend, in which a principal place of
business is considered to be the ``place where a corporation's officers
direct, control, and coordinate the corporation's activities [and] in
practice it should normally be the place where the corporation
maintains its headquarters--provided that the headquarters is the
actual center of direction, control, and coordination, i.e., the `nerve
center.' '' 559 U.S. 77, 92-93 (2010).
Second, DOE's interpretation accounts for the fact that several
critical segments of the battery supply chain today are predominantly
processed and manufactured within covered nation boundaries,\1\ and
recognizes that a covered nation will be able to exercise legal control
(potentially forcing an entity to cease production or cease exports)
over an entity with respect to any critical minerals that are
physically extracted, processed, or recycled, any battery components
that are manufactured or assembled, and any battery materials that are
processed within those boundaries, even if the entity is not legally
formed under the laws of the covered nation. See Fourth Restatement
(Foreign Relations) (2018) section 408 (stating that ``[i]nternational
law recognizes a state's jurisdiction to prescribe law with respect to
persons, property, and conduct within its territory''). At the same
time, DOE's interpretation recognizes that such an entity, which is not
legally formed in a covered nation but has production activities inside
a covered nation, may also have separate production activities that
occur outside the covered nation. In that case, the covered nation does
not have jurisdiction over those outside production activities.
Therefore, under the guidance, an entity that is not legally
incorporated in a covered nation could nevertheless be considered a
FEOC under the jurisdiction prong with respect to the particular
critical minerals, battery components, or battery materials that are
subject to the jurisdiction of a covered nation. But the entity would
not be considered a FEOC
[[Page 37087]]
with respect to its activities related to other critical minerals,
battery components, or battery materials that are not subject to the
jurisdiction of a covered nation.
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\1\ 100-day-supply-chain-review-report.pdf (whitehouse.gov).
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Finally, when an entity is a FEOC due to it being ``subject to the
jurisdiction'' of a covered nation, subsidiaries of the FEOC are not
automatically considered to be FEOCs themselves based solely on their
parent being a covered nation jurisdictional entity. A subsidiary
entity would be considered a FEOC itself, however, if it is also either
(1) ``subject to the jurisdiction'' of the covered nation, pursuant to
section V.D of this document, or (2) ``controlled by'' a covered nation
government (including via direct or indirect control, such as through
joint ventures, or via contracts that confer effective control to a
FEOC), pursuant to section V.E of this document.
DOE's interpretation is supported by statutory and regulatory
choices made in similar contexts, including: the 2021 NDAA definition
of ``foreign entity'' (15 U.S.C. 4651(6)); and the NISPOM regulatory
definition of ``foreign interest'' (32 CFR 117.3). The interpretation
of ``subject to the jurisdiction'' provides clarity to original
equipment manufacturers (OEM) that removing FEOCs from their supply
chain will require removal of any critical minerals, battery
components, and battery materials that are directly produced within the
boundary of a covered nation.
E. Owned by, Controlled by, or Subject to the Direction
DOE's interpretive rule is largely consistent with the proposal but
makes some clarifying edits in response to comments. If an entity is
``owned by, controlled by, or subject to the direction'' (hereinafter
``control'') of a government of a foreign country that is a covered
nation, the entity is a FEOC. The term is also used in paragraph (iv)
of DOE's interpretation of foreign entity to account for situations
where a U.S. entity is sufficiently controlled to be considered
foreign. DOE's interpretation provides for both (1) control via the
holding of 25% or more of an entity's board seats, voting rights, or
equity interest, and (2) control via license or contract conferring
rights on a person that amount to a conferral of control.
As previously stated in response to comments, DOE considered
whether to expand the definition of ``control'' under this interpretive
rule to incorporate companies that are controlled by the government of
a covered nation by virtue of significant investments by that
government of the kind identified by commenters (e.g., subsidies,
grants, or debt financing). However, DOE has not yet identified a
sufficiently bright-line rule for such investments that would be
administrable by vehicle manufacturers in the context of the Treasury
Department's 30D tax credit. Accordingly, DOE declines to make a change
to the interpretive guidance at this time, but may incorporate
consideration of such government investments into its evaluation of
applications for domestic battery material processing, manufacturing,
and recycling grants under section 40207 of BIL, or through utilization
of the Secretary's exercise of her authority under BIL section
40207(a)(5)(E) 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.'' Furthermore, DOE will continue
to monitor the battery supply chain market and may consider revisiting
this issue in the future through updated interpretive guidance defining
control by the government of a covered nation based on significant
investments from that government. Any information that may assist DOE
in monitoring the battery supply chain market may be submitted to the
email address identified in the ``For Further Information'' section of
this document.
i. Control via 25% Interest
DOE's interpretation of control is informed by careful analysis of
corporate structure within the battery supply chain. In the battery
industry, the primary methods by which a parent entity, including the
government of a foreign country, exercises control over another entity
is through voting rights, equity interests, and/or its boards of
directors. Parent entities may exercise control via majority equity
interest, voting rights, or board seats, and also through minority
holdings. Furthermore, parent entities may act in concert with other
investors to combine minority holdings in order to exercise control. As
a result, an effective measure of control is one that considers
multiple permutations of majority and minority holdings of equity
interest, voting rights, and board seats that can cumulatively confer
control. In response to comments, DOE's final interpretation clarifies
that each of these metrics--voting rights, equity interests, and board
seats--are evaluated independently. As noted above, and assuming no
other relevant circumstances, 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, these percentages would not
be combined to equal 45% control, but would result in the entity being
controlled at the level of the highest metric (i.e., 20%), and thus,
not considered a FEOC. That said, DOE recognizes that significant
levels of government control in all three metrics may still raise
concerns. As such, as indicated above in response to comments, DOE may
incorporate such considerations into its evaluation of applications for
grants under section 40207 of BIL, through utilization of the
Secretary's designation authority under BIL section 40207(a)(5)(E), or
through revisions to the interpretive guidance upon evidence of evasive
gamesmanship with respect to the 25% threshold.
While there are several prominent companies within the battery
supply chain that are majority-owned by covered nation governments,
particularly in the upstream mining segment, the predominant form of
state ownership and influence in most segments of the battery supply
chain is through minority shareholding, voting rights, or board seats.
DOE has evaluated a range of supply chain entities for which covered
nation governments and officials with cumulative holdings between 25%
and 50% have meaningful influence over corporate decision-making, even
in cases of subsidiary entities operating in other jurisdictions and in
the case of multiple minority shareholders acting in concert. However,
DOE's assessment of the battery supply chain strongly suggests that
minority control can attenuate with multiple tiers of separation
between the state and the firm performing the covered activity.
DOE recognizes that a bright-line metric for control will be
necessary to ensure that OEMs can feasibly evaluate the presence of
FEOCs within their supply chains. Informed by empirical evidence in the
battery supply chain and choices made in other regulatory contexts, as
discussed further below, DOE's interpretation establishes a 25%
threshold and guidance on calculating the attenuation of control in a
tiered ownership structure. In the case of majority control by a
covered nation government, that control is not diluted such that
outright ownership (50%+) confers full control. This ensures that a
covered nation government is still considered to control, indirectly, a
majority-owned subsidiary of a government-controlled company. However,
multiple layers of minority control by a government may become so
attenuated that an entity would no longer be classified as a FEOC. This
[[Page 37088]]
bright-line threshold and guidance on how to calculate control will
enable an evaluation of battery supply chains and facilitate any
required reporting or certification of whether that supply chain
includes products produced by a FEOC. This same analysis applies to
joint ventures, such that if the government of foreign country that is
a covered nation controls, either directly or indirectly, 25% or more
of a joint venture, then that joint venture is a FEOC.
DOE's interpretation is supported by choices made in a variety of
statutory and regulatory regimes, while the identified methods of
control account for specific circumstances present in the battery
industry. DOE takes a broad approach to the interests that count
towards the 25% threshold, considering board seats, voting rights, or
equity interest. This is consistent with FOCI regulations, which
evaluate ownership based on equity ownership interests sufficient to
provide ``the power to direct or decide issues affecting the entity's
management or operations'' (32 CFR 117.11(a)(1)). The interpretation
that the interests of two entities with an agreement to act in concert
may be combined to establish a controlling interest is similar to
concepts in Securities and Exchange Commission rules defining
beneficial ownership in instances of shareholders acting in concert (17
CFR 240.13d-5) and CFIUS regulations that consider arrangements to act
in concert to determine, direct, or decide important matters affecting
an entity as one means by which two or more entities may establish
control over another entity (31 CFR 800.208(a)). Different thresholds
of control are used in different statutory and regulatory contexts
(see, for example, 26 U.S.C. 6038(e)(2), (3) (defining control with
respect to a corporation to mean actual or constructive ownership by a
person of stock possessing more than 50% of the total combined voting
power of all classes of stock entitled to vote or 50% of the total
value of shares of all classes of stock of a corporation, and control
with respect to a partnership to generally mean actual or constructive
ownership of a more than 50% capital or profit interest in a
partnership); and 26 U.S.C. 368(c) (defining control with respect to
certain corporate transactions to mean the ownership of stock
possessing at least 80% of the total combined voting power of all
classes of stock entitled to vote and at least 80% of the total number
of shares of all other classes of stock of the corporation)). However,
there are a number of analogous regulatory contexts in which a 25%
threshold for considering an entity controlled is used. For instance,
the Department of Commerce's CHIPS Rule, implementing a very similar
FEOC provision, uses a 25% threshold with respect to voting interest,
board seats, or equity interest. The State Department, in its
International Traffic in Arms Regulation (ITAR) regulations,
established a presumption of foreign control where foreign persons own
25% or more of the outstanding voting securities of an entity, unless
one U.S. person controls an equal or larger percentage (22 CFR 120.65).
FinCEN's BSA private banking account regulations (31 CFR
1010.605(j)(1)(i)) and Beneficial Ownership Reporting Rule (31 CFR
1010.380(d)) also contain 25% ownership thresholds. See also 15 CFR
760.1(c) (defining ``controlled in fact'' using a 25% threshold for
cases where no other person controls an equal or larger percentage of
voting securities). In some of these other contexts, the 25%
calculation is based on a particular form of control (e.g., only voting
rights). DOE's interpretation broadens the ways in which an entity can
be controlled at a 25% level, because doing so accords with statutory
concerns related to the corporate structure of the battery industry.
In response to comments above, DOE also clarified that ``equity
interests'' refers to all ownership interests, including capital or
profit interests and contingent equity interests. ``Contingent equity
interests'' is a defined term in the CFIUS regulations (31 CFR
800.207), and DOE intends for the concept of contingent equity
interests in the interpretive rule to be understood largely consistent
with the CFIUS regulations. For the purpose of determining FEOC
compliance, the amount of the contingent interest that can be
reasonably determined, as understood in 31 CFR 800.308(a)(3), should be
included in the 25% control calculation, without consideration of
whether conversion is imminent or within the control of the equity-
owning entity as set forth in 31 CFR 800.308(a)(1-2).
DOE's interpretation of indirect control includes guidance on how
to calculate the attenuation of control in a tiered ownership
structure. In the case of majority control at any level, that control
is not attenuated such that outright ownership (50%+) confers full
control. The proposed approach recognizes the reality that a parent
entity that holds a majority of the voting rights, equity interests, or
board seats in a subsidiary has unilateral control over that subsidiary
and can direct that subsidiary's ability to exercise influence and
control over its own subsidiaries. However, in the case of multiple
tiers of minority control by a government, the actual ability of the
government to influence the operations of a subsidiary may become
materially attenuated. This understanding of how to calculate a parent
entity's indirect ownership and control of sub-entities is similar to
OFAC's 50% Rule, under which ``any entity owned in the aggregate,
directly or indirectly, 50% or more by one or more blocked persons is
itself considered to be a blocked person.'' See U.S. Dept. of the
Treasury, Revised Guidance on Entities Owned by Persons Whose Property
and Interests in Property are Blocked (Aug. 13, 2014).
As previously stated, when calculating whether an entity is a FEOC
based on whether the government of a covered nation directly or
indirectly holds 25% or more of its voting rights, equity interest, or
board seats, DOE's interpretation would not factor in any voting share,
equity interest, or board seats held by an entity that is a FEOC solely
by virtue of being subject to the covered nation's jurisdiction.
The following scenarios illustrate indirect control in a multi-
tiered ownership structure, which could contain more tiers than
illustrated here. For simplicity, these examples only evaluate control
via voting rights and assume no other relevant circumstances.
1. If Entity A cumulatively holds 25% of Entity B's voting rights,
then Entity A directly controls Entity B. If Entity B cumulatively
holds 50% of Entity C's voting rights, then Entities B and C are
treated as the same entity, and Entity A also indirectly controls
Entity C.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entities B and C are both FEOCs.
2. If Entity A cumulatively holds 50% of Entity B's voting rights,
then Entity A is the direct controlling ``parent'' of Entity B, and
Entities A and B are treated as the same entity. If Entity B
cumulatively holds 25% of Entity C's voting rights, then Entity C is
understood to be directly controlled by Entity B and indirectly
controlled by Entity A.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entities B and C are both FEOCs.
3. If Entity A cumulatively holds 25% of Entity B's voting rights,
then Entity A directly controls Entity B. If Entity B cumulatively
holds 40% of Entity C's voting rights, then Entity B directly controls
Entity C. However, because Entity A does not hold 50% of the voting
rights of Entity B, and Entity B does not hold 50% of the voting rights
of Entity C, Entity A's indirect control
[[Page 37089]]
of Entity C is calculated proportionately (25% x 40% = 10%). Based on
that proportionate calculation, Entity A will be considered to hold
only a 10% interest in Entity C, which is insufficient to meet the 25%
threshold for control contemplated under this proposed guidance.
[cir] If Entity A is the government of a foreign country that is a
covered nation, Entity B is a FEOC. But Entity A holds only a 10%
interest in Entity C, which is less than the 25% threshold requirement
to deem Entity C controlled by Entity A. Therefore, Entity C is not a
FEOC via the indirect control of Entity A.
ii. Control via Licensing and Contracting
DOE is concerned that if its interpretation of the term ``control''
covered only direct and indirect holding of board seats, voting rights,
and equity interest by the government of a covered nation, then a
government may seek to evade application of the rule by instead
exercising its control over a FEOC that enters into a license or
contract with a non-FEOC entity such that the non-FEOC serves as the
producer of record while the FEOC maintains effective control over
production. Because such arrangements would defeat congressional
intent, DOE's interpretation of ``control'' includes ``effective
control'' through contracts or licenses with a FEOC that warrant
treating the FEOC as if it were the true entity responsible for any
production. DOE's interpretive rule clarifies that ``effective
control'' through a license or contract can be exercised by any entity
designated as a FEOC, whether through 25% control by the government of
a covered nation or through jurisdiction. The proximity of a FEOC to
the government of a covered nation, even when the government does not
have a controlling stake in the company, raises similar concerns in the
context of a license or contract with a non-FEOC, and the non-FEOC
should retain the identified rights to avoid effective control by the
FEOC.
Many contractual and licensing arrangements do not raise these
concerns. Therefore, to provide a reasonably bright-line test for
evaluation of battery supply chains that may include numerous contracts
and licenses, DOE's interpretation in section V.E of this document
contains a safe harbor for evaluation of ``effective control.'' A non-
FEOC entity that can demonstrate that it has reserved certain rights to
itself or another non-FEOC through contract would not be deemed to be a
FEOC solely based on its contractual relationships.
DOE also recognizes that even if an entity's contractual
relationship with a FEOC confers effective control over the production
of particular critical minerals, battery components, or battery
materials, for purposes of determining eligibility for the 30D tax
credit and for and DOE's BIL 40207 grant program, the contracting
entity would not necessarily be controlled by the government of a
covered nation for critical minerals, battery components, or battery
materials that were not produced pursuant to that contract or license.
Therefore, under the guidance, an entity could be considered a FEOC
with respect to the particular critical minerals, battery components,
or battery materials that are effectively produced by the FEOC under a
contract or license but not with respect to other critical minerals,
battery components, or battery materials that are produced by the
entity outside the terms of the contract or license with a FEOC.
The concept that an entity can be controlled via contract is
supported by choices made in various regulatory contexts, including
CFIUS regulations that include an understanding that control can be
established via contractual arrangements to determine, direct, or
decide important matters affecting an entity (31 CFR 800.208(a)).
Further, intellectual property can be licensed restrictively, or even
misused, to give the intellectual property owner rights beyond the
typical ability to exclude others from making, using, selling, and/or
copying the intellectual property for a limited time. In this scenario,
even if a non-FEOC entity owns a facility, which is not separately 25%
controlled by the government of a covered nation, the facility and/or
its operations could still be effectively controlled by a FEOC licensor
or contractor through other mechanisms. Accordingly, DOE's definition
of effective control identifies criteria that would indicate that a
license or contract provides the licensor or contractor with the
ability to make business or operational choices that otherwise would
rest with the licensee or principal. The criteria selected reflect
various known mechanisms in restrictive or overreaching licenses, such
as lack of access by the licensee or principal to information and data
(e.g., control parameters or specification and quantities of material
input for equipment) that are necessary to operate equipment critical
to production at necessary quality and throughput levels. This lack of
access could be tantamount to the licensor or contractor having
effective control over the licensee or principal.
IV. Regulatory Review
DOE considers this guidance to be a final interpretive rule under
the Department's authority to interpret section 40207(a)(5) of the
Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5)). As an
interpretive rule, this rule is exempt from the notice-and-comment
rulemaking requirements of the Administrative Procedure Act (APA) (5
U.S.C. 553(b)(A)). Because no notice of proposed rulemaking is
required, the Regulatory Flexibility Act does not require an initial or
final regulatory flexibility analysis (5 U.S.C. 603(a), 604(b)).
This interpretive rule is significant guidance under Executive
Order 12866 because of the substantial public interest and policy
importance with respect to the interpretation of the definition of a
FEOC. It also affects a variety of entities and other Federal agencies.
This interpretive rule has, thus, been reviewed by the Office of
Management and Budget (OMB), Office of Information and Regulatory
Affairs (OIRA).
The Department has determined that this final interpretive rule
does not impose any new or revise any existing recordkeeping,
reporting, or disclosure requirements on the public that would be
considered information collections requiring approval by the OMB in
accordance with the Paperwork Reduction Act (44 U.S.C. 3501-3521).
Finally, as required by 5 U.S.C. 801, DOE will report to Congress
on the promulgation of this interpretive rule prior to its effective
date. The report will state that OIRA has determined that the rule does
not meet the criteria set forth in 5 U.S.C. 804(2).
V. Final Interpretive Rule on the Definition of Foreign Entity of
Concern
A. Overview
DOE clarifies the term ``foreign entity of concern'' by providing
interpretations for the following terms within BIL section
40207(a)(5)(C) (42 U.S.C. 18741(a)(5)(C)): ``foreign entity;''
``government of a foreign country;'' ``subject to the jurisdiction;''
and ``owned by, controlled by, or subject to the direction.'' These
terms are interpreted separately, recognizing that the terms have
unique meaning. DOE also interprets additional terms as necessary to
provide clarity.
For DOE's final guidance, an entity is determined to be a FEOC
under BIL section 40207(a)(5)(C) if it meets the definition of a
``foreign entity,'' (section V.B of this document) and either is
``subject to the jurisdiction'' of a covered nation government (section
V.D of this
[[Page 37090]]
document) or is ``owned by, controlled by, or subject to the
direction'' (section V.E of this document) of the ``government of a
foreign country'' (section V.C of this document) that is a covered
nation.
B. Foreign Entity
DOE interprets ``foreign entity'' to mean:
(i) A government of a foreign country;
(ii) A natural person who is not a lawful permanent resident of the
United States, citizen of the United States, or any other protected
individual (as such term is defined in 8 U.S.C. 1324b(a)(3));
(iii) A partnership, association, corporation, organization, or
other combination of persons organized under the laws of or having its
principal place of business in a foreign country; or
(iv) An entity organized under the laws of the United States that
is owned by, controlled by, or subject to the direction (as interpreted
in subsection E) of an entity that qualifies as a foreign entity in
paragraphs (i)-(iii).
C. Government of a Foreign Country
DOE interprets ``government of a foreign country'' to mean:
(i) A national or subnational government of a foreign country;
(ii) An agency or instrumentality of a national or subnational
government of a foreign country;
(iii) A dominant or ruling political party (e.g., Chinese Communist
Party (CCP)) of a foreign country; or
(iv) A current or former senior foreign political figure.
Senior foreign political figure means (a) a senior official, either
in the executive, legislative, administrative, military, or judicial
branches of a foreign government (whether elected or not), (b) a senior
official of a dominant or ruling foreign political party, and (c) an
immediate family member (spouse, parent, sibling, child, or a spouse's
parent and sibling) of any individual described in (a) or (b). In order
to be considered ``senior,'' an official should be or have been in a
position of substantial authority over policy, operations, or the use
of government-owned resources.
D. Subject to the Jurisdiction
DOE interprets that a foreign entity is ``subject to the
jurisdiction'' of a covered nation government if:
(i) The foreign entity is incorporated or domiciled in, or has its
principal place of business in, a covered nation; or
(ii) With respect to the critical minerals, components, or
materials of a given battery, the foreign entity engages in the
extraction, processing, or recycling of such critical minerals, the
manufacturing or assembly of such components, or the processing of such
materials, in a covered nation.
E. Owned by, Controlled by, or Subject to the Direction
DOE interprets that 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:
(i) 25% or more of the entity's board seats, voting rights, or
equity interest, with each metric evaluated independently, are
cumulatively held by that other entity, whether directly or indirectly
via one or more intermediate entities; or
(ii) 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 (collectively, ``production'') of the critical minerals,
battery components, or battery materials that would be attributed to
the entity.
Cumulatively held. For the purposes of determining control by a
foreign entity (including the government of a foreign country), control
is evaluated based on the combined interest in an entity held, directly
or indirectly, by all other entities that qualify under the above
interpretation of ``foreign entity.'' Additionally, if an entity that
qualifies as a ``government of a foreign country that is a covered
nation'' enters into a formal arrangement to act in concert with
another entity or entities that have an interest in the same third-
party entity, the cumulative board seats, voting rights, or equity
interests of all such entities are combined for the purpose of
determining the level of control attributable to each of those
entities.
Indirect control. For purposes of determining whether an entity
indirectly holds board seats, voting rights, or equity interest in a
tiered ownership structure:
If a ``parent'' entity (including the government of a
foreign country) directly holds 50% or more of a ``subsidiary''
entity's board seats, voting rights, or equity interest, then the
parent and subsidiary are treated as equivalent in the evaluation of
control, as if the subsidiary were an extension of the parent. As such,
any holdings of the subsidiary are fully attributed to the parent.
If a ``parent'' entity directly holds less than 50% of a
``subsidiary'' entity's board seats, voting rights, or equity interest,
then indirect ownership is attributed proportionately.
Section III.E.i of this document, contains multiple examples
illustrating how to determine when an entity is indirectly controlled
under this interpretive rule.
Effective control means the right of the FEOC contractor, whether
the entity is a FEOC via 25% control or via jurisdiction, in a
contractual relationship to determine the quantity or timing of
production; to determine which entities may purchase or use the output
of production; to restrict access to the site of production to the
contractor's own personnel; or the exclusive right to maintain, repair,
or operate equipment that is critical to production.
In the case of a contract with a FEOC, a contractual relationship
will be deemed to not confer effective control to the FEOC if the
applicable agreement(s) reserves expressly to one or more non-FEOC
entities all of the following rights:
(i) To determine the quantity of critical mineral, component, or
material produced (subject to any overall maximum or minimum quantities
agreed to by the parties prior to execution of the contract);
(ii) To determine, within the overall contract term, the timing of
production, including when and whether to cease production;
(iii) To use the critical mineral, component, or material for its
own purposes or, if the agreement contemplates sales, to sell the
critical mineral, component, or material to entities of its choosing;
(iv) To access all areas of the production site continuously and
observe all stages of the production process; and
(v) At its election, to independently operate, maintain, and repair
all equipment critical to production and to access and use any
intellectual property, information, and data critical to production,
for the duration of the contractual relationship.
VI. Approval of the Office of the Secretary
The Secretary of Energy has approved publication of this
notification of final interpretive rule.
Signing Authority
This document of the Department of Energy was signed on April 18,
2024, by Giulia Siccardo, Director, Office of Manufacturing and Energy
Supply Chains, pursuant to delegated authority
[[Page 37091]]
from the Secretary of Energy. That document with the original signature
and date is maintained by DOE. For administrative purposes only, and in
compliance with requirements of the Office of the Federal Register, the
undersigned DOE Federal Register Liaison Officer has been authorized to
sign and submit the document in electronic format for publication, as
an official document of the Department of Energy. This administrative
process in no way alters the legal effect of this document upon
publication in the Federal Register.
Signed in Washington, DC, on April 22, 2024.
Treena V. Garrett,
Federal Register Liaison Officer, U.S. Department of Energy.
[FR Doc. 2024-08913 Filed 5-3-24; 8:45 am]
BILLING CODE 6450-01-P