An additional piece of the section 30D puzzle arrived last Friday when the Department of the Treasury (Treasury) and Department of Energy (DOE) released final rules (Treasury Rule and DOE Rule).  Largely tracking the proposed regulations, which we described in our prior blog posts (here and here), but with notable changes, these rules provide further clarity to the electric vehicle sector, essential to foster the widespread EV adoption in the United States.

DOE Rule

The framework provided in DOE’s final interpretive rule defining “foreign entity of concern” (FEOC) is generally unchanged.  Interpreting the phrase “owned by, controlled by, or subject to the jurisdiction or direction of a government of a covered nation” (i.e., China, Russia, North Korea, and Iran), the final rule maintains the approach of separating the phrases “subject to the jurisdiction of” and “owned by, controlled by, or subject to the direction of.”  (In this blog post, we refer to an entity that is a FEOC by reason of the first phrase as a “Jurisdictional FEOC,” and to an entity that is a FEOC by reason of the second phrase as a “Controlled FEOC.”) 

The provisions about what constitutes a Jurisdictional FEOC are consistent with the proposed regulations, but the Controlled FEOC provisions have been clarified or changed in a substantial way.  A Controlled FEOC test can be met in one of two ways: (1) having 25% or more of an entity’s board seats, voting rights, or equity interests cumulatively, directly or indirectly, held by a covered nation government (the “25% Test”) and (2) having entered into a contract with a covered nation government wherein the contract provides effective control to that covered nation government over the production of critical minerals, battery components, or battery materials (the “Contractual Control Test”).  Under the 25% Test, the 25% threshold applies independently to each metric (board seats, voting rights, and equity interests), and the highest metric is used for the FEOC analysis.  Thus, if an entity has 20% of its voting rights, 10% of its equity interest, and 15% of its board seats held by a covered nation government, 20% of the entity is treated as controlled by a covered nation government.  As clarified in the final DOE Rule, under the Contractual Control Test, a contract that entitles either a Jurisdictional FEOC or a Controlled FEOC to effective control over another entity’s production of critical minerals, battery components, or battery materials will result in the production of such minerals, components, or materials being attributed to the FEOC.  (Although the Contractual Control Test, as so articulated, does not fit easily within the definitions contained in the final rule, DOE’s intent to apply the rule in such fashion is clear from its discussion and summary of comments.)

In addition, the discussion of comments and explanation sections of the DOE Rule lack precision in a number of areas, arguably inconsistent with some of the definitions provided in the final interpretive rule itself, and potentially inviting future controversies.

For example, regarding the 25% control threshold for the Controlled FEOC provisions, DOE explains that a FEOC’s ownership of more than 25% of a JV will render that JV a FEOC:

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.

(Emphasis added.)  However, under the definition provided in the final interpretive rule, only the ownership of a JV by a Controlled FEOC (not a Jurisdictional FEOC), and specifically a Controlled FEOC that results in a covered nation government being attributed as having 25% ownership or control (as in the case of a 50/50 JV with a Controlled FEOC), will render that JV a FEOC.  The discussion thus could have been more precise and specifically referenced only a Controlled FEOC  in its discussion of 50/50 JVs.  That sentence in the discussion of comments appears to be an oversight, made in the context of DOE distinguishing the 25% Test from the Contractual Control Test.

In addition, while the final interpretive rule’s definitions of “senior foreign political figure” and “senior official” are consistent with the proposed rule’s, DOE’s discussion of comments and explanation contains additional details, and some changes, relative to the explanation in the proposed rule.  DOE noted that commenters requested more clarity regarding the definition of “senior foreign political figure” including “what level an official must be to be considered ‘senior;’ and “for the PRC, whether ‘senior foreign political figure’ is limited to individuals with membership on the CCP entities identified in the guidance.”  DOE responded as follows:

Response:… 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.

DOE provides further detail in the explanation section of the DOE Rule.  The following compares the related passages of the proposed interpretive rule and the final interpretive rule:

Proposed Interpretive RuleFinal Interpretive Rule
In the specific context of the CCP in the PRC, DOE considers its interpretation of “government of a foreign country” to include current members of Chinese People’s Political Consultative Conference and current and former members of the Politburo Standing Committee, the Politburo, the Central Committee, and the National Party Congress because they qualify as “senior foreign political figures.”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.

Treasury Rule

Similar to the DOE Rule, the final Treasury regulations remain generally consistent with the proposed regulations, while providing some important modifications and clarifications.  We summarize below some of the most significant changes, including those that relate to the critical minerals requirement, battery components requirement, and FEOC restriction.

Critical Minerals Requirement

  1. As part of a three-step analysis for determining whether the critical minerals requirement is met, qualified manufacturers must calculate the “qualifying critical mineral content” of a clean vehicle battery.  The proposed regulations provided that qualifying critical mineral content was to be calculated using the 50% Value Added Test, as described in our prior blog post.  The final regulations provide that the 50% Value Added Test is a transition rule that (1) must be used for vehicles for which a qualified manufacturer provides a periodic written report prior to May 6, 2024 and (2) can be optionally used for vehicles for which a qualified manufacturer provides a written report prior to January 1, 2027.

Replacing the 50% Value Added Test, the final regulations provide a more stringent test, referred to as the Traced Qualifying Value Test, for calculating qualifying critical mineral content.  The Traced Qualifying Value Test consists of the following steps:

Step 1 Determine Each Procurement Chain

Consistent with the proposed regulations, a qualified manufacturer must determine each procurement chain.

Step 2 Determine “Traced Qualifying Value” of All Applicable Critical Minerals and “Total Traced Qualifying Value”

For an applicable critical mineral that is extracted and processed into a constituent material, “traced qualifying value” is calculated by multiplying the value of the applicable critical mineral by the greater of (A) the value added to the applicable critical mineral by extraction that occurred in the U.S. or an FTA country divided by the total value added from extraction of the applicable critical mineral, or (B) the value added to the applicable critical mineral by processing that occurred in the U.S. or an FTA country, divided by the total value added from processing of the applicable critical mineral.  For an applicable critical mineral that is recycled into an associated constituent material, “traced qualifying value” equals the value of the applicable critical mineral multiplied by the percentage obtained by dividing the value added to the applicable critical mineral by recycling that occurred in North America by the total value added from recycling of the applicable critical mineral.  “Total traced qualifying value” is the sum of the traced qualifying values of all applicable critical minerals contained in the clean vehicle battery.

Step 3 Determine Qualifying Critical Mineral Content

Qualifying critical mineral content is determined by dividing the “total traced qualifying value” (calculated in Step 2) by the total value of critical minerals.  The total value of critical minerals is the sum of the values of all applicable critical minerals contained in a clean vehicle battery.

The Traced Qualifying Value Test is generally more stringent than the 50% Value Added Test because the original equipment manufacturer can treat as qualifying only a percentage of value of an applicable critical mineral, not the full value. 

In addition to the change to the qualifying critical minerals content calculation, Treasury provided several clarifications.  For example, in determining whether the critical minerals requirement and FEOC restriction are satisfied, the taxpayer must take into account each step of extraction, processing, or recycling of an applicable critical mineral through the step in which such mineral is processed or recycled into an associated constituent material.  This requisite analysis applies at each step, even if the mineral is not in a form listed in the definition of “applicable critical mineral” at every step of production.  Also, in response to requests for clarification on how to determine value added where multiple applicable critical minerals are processed together, the final regulations provide that, in such case, value added should be allocated to each procurement chain based on relative mass.

Battery Components Requirement

Unlike the calculation of qualifying critical mineral content, the final regulations retain the method of determining qualifying battery components content, but with a necessary clarification.

Relevant to the battery components requirement and the FEOC restriction, Treasury has clarified the definition of “battery components,” as distinguished from “battery materials.”  The proposed regulations provided a non-exclusive list of battery components, but as shown by the number of comments requesting clarity, it was challenging to determine whether a particular input to a battery was a battery component or not.  The final regulations and the preamble clarify that a component of a battery that is manufactured or assembled is a battery component and an input to a battery component that is produced through processing is a battery material, with the terms “manufacture,” “assemble,” and “process” defined in the regulations.  For example, a coated separator is a battery component as it is manufactured, whereas a separator base film and separator coating are generally battery materials as they are processed.  As a result, companies can generally import separator base films and coating from outside North America and manufacture coated separators in North America.  Such coated separators are North American battery components.

Impracticable-To-Trade Battery Materials

As provided in the proposed regulations, to ensure compliance with the FEOC restriction, qualified manufacturers must conduct due diligence in compliance with industry standards with respect to the tracing of all relevant battery components and applicable critical minerals.  Qualified manufacturers are permitted to reasonably rely on certifications and attestations from suppliers.  The final regulations provide a transition rule for “impracticable-to trace-battery materials,” under which the due diligence requirement may be satisfied by excluding identified impracticable-to-trace battery materials (and associated constituent materials).  Identified impracticable-to-trace battery materials (and associated constituent materials) may also be excluded from the determination of whether a battery cell is FEOC compliant.  The term “impracticable-to-trace battery materials” replaces the proposed regulations’ reference to “non-traceable battery materials,” and the guidance identifies as such materials graphite contained in anode materials and applicable critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives.  The transition rule may be relied on until January 1, 2027.

Other Clarifications

New qualified fuel cell motor vehicles are not subject to the critical minerals and battery components requirements and the FEOC restriction, as they do not have clean vehicle batteries that could be subject to those requirements.  Therefore, new qualified fuel cell motor vehicles are eligible for the full 30D credit amount of $7,500 as long as other requirements are satisfied.  However, a qualified fuel cell motor vehicle with a clean vehicle battery, such as a plug-in hybrid fuel cell EV, must satisfy the critical minerals and battery components requirements and the FEOC restriction because such vehicle draws electricity from the clean vehicle battery.

Finally, a manufacturer that modifies a new internal combustion engine vehicle into either a new clean vehicle or a qualified commercial clean vehicle may satisfy the “qualified manufacturer” requirement if (1) the modification occurs prior to the new motor vehicle being placed in service and (2) the manufacturer satisfies certain reporting requirements.

*    *    *

Overall, Treasury and DOE has provided numerous important clarifications that ease stakeholders’ efforts to comply with the section 30D requirements.  While there remains ambiguity on some of the rules, for which automakers and suppliers should continue to engage with Treasury and DOE, they are much better positioned to focus on non-legal challenges to mainstream EV adoption.

Photo of W. Andrew Jack W. Andrew Jack

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities…

Andrew Jack has a diverse corporate and securities practice with clients principally in the energy, industrial manufacturing, technology and sports and entertainment industries. He regularly represents corporations, board committees, and other forms of enterprises in mergers and acquisitions, strategic alliances, financing activities, securities law compliance, corporate governance counseling, and executive compensation arrangements. Mr. Jack also co-chairs the firm’s Energy Industry Group.

Photo of Daniel B. Levine Daniel B. Levine

Dan Levine has advised clients in strategic and financial transactions, principally involving China, for more than 17 years. He focuses his practice on inbound and outbound M&A, joint ventures, private equity and venture capital investments, and technology licensing transactions.

Dan provides strategic and…

Dan Levine has advised clients in strategic and financial transactions, principally involving China, for more than 17 years. He focuses his practice on inbound and outbound M&A, joint ventures, private equity and venture capital investments, and technology licensing transactions.

Dan provides strategic and transactional advice to Chinese and Western clients navigating critical political, legal, and regulatory hurdles to their international strategies—including national security reviews conducted by the Committee on Foreign Investment in the United States (CFIUS), China’s outbound investment review process, the U.S.’s proposed outbound investment screening regime, China’s overseas listing rules, and export controls.

Dan has extensive experience in the clean energy, life sciences, and technology sectors. In recent years this has included:

  • counseling leading global electric vehicle battery and energy storage companies with respect to incentive programs under the Bipartisan Infrastructure Law and Inflation Reduction Act;
  • advising a leading global medical device company in a joint venture with a Chinese state-owned entity to develop and commercialize imaging equipment in China; and
  • advising a Chinese gene therapy company in a complex pre-IPO outbound acquisition.

Dan’s pro bono work includes representing U.S. health care professionals and Chinese companies to procure and supply personal protective equipment from China to the United States during the COVID-19 pandemic.

Dan reads, writes, and speaks Mandarin and has lived in China for extended periods since 2001, including when resident in Covington’s Shanghai office from 2013-2022.

Photo of Jamin Koo Jamin Koo

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His…

Jamin Koo advises clients across a broad range of tax issues, including international and domestic tax planning and acquisition and financing transactions. He works with numerous U.S. and non-U.S. clients (in particular, several Asia-based clients) on cross-border investments, joint ventures, and restructurings. His expertise includes taxation of debt instruments, derivatives, and other financial instruments, and he has been providing tax advice related to digital assets to a number of clients.

Most recently, with his background in engineering and environmental science, Jamin has been advising clients in a number of industries on various issues involving tax credits and other tax provisions of the Chips & Science Act and the Inflation Reduction Act and drafting comments to Treasury and the IRS.

Photo of Justin Coutts Justin Coutts

Justin Coutts is an associate in the firm’s Palo Alto office. He is a member of the Tax Practice Group.