Prohibited foreign entities: How the market is navigating compliance amid evolving regulations

The One Big Beautiful Bill (OBBB) introduced the prohibited foreign entity (PFE) provisions, significantly expanding the Inflation Reduction Act's (IRA) prior foreign entity of concern (FEOC) framework. Notice 2026-15, published February 12, 2026, elaborated on the PFE provisions, which have rapidly become one of the most consequential compliance requirements in the clean energy tax credit market. With that initial regulatory clarity, practitioners across supply chain advisory, deal structuring, and transaction law are working diligently to operationalize rules that remain, in key respects, unsettled.

Crux Director of Research Katie Bays sat down with four leading PFE practitioners — Praveen Ayyagari (KPMG), Josh Morris (Novogradac), Elizabeth Crouse (Holland & Knight), and Gary Blitz (Aon) — to get a practitioner-level read on where the market stands on PFE compliance as guidance evolves. Their perspectives reveal common themes — the centrality of pragmatic, red flag–driven diligence, the limits of supplier certification as a compliance backstop, and the tools the market has developed to manage risks that formal guidance has not yet resolved — as well as important differences across deal structures and tax credit types. 

Together, these interviews offer an on-the-ground map of where the PFE compliance market stands today and what participants should expect next.

Table of contents

1. Interview: State of play & enforcement outlook — KPMG
2. Interview: PFE due diligence & evaluation — Novogradac
3. Interview: Transaction due diligence — Holland & Knight
4. Interview: Insurance underwriting & FEOC risk — Aon

Interview: PFE state of play & enforcement outlook 

Praveen Ayyagari, Managing Director, KPMG Tax

Praveen Ayyagari is a Managing Director in KPMG's tax practice specializing in clean energy tax incentives and federal tax policy. He brings a rare firsthand perspective to the PFE rules — having helped draft the IRA's clean energy incentives as Tax Counsel on the House Ways & Means Committee, then managed regulatory guidance for those same provisions as an Attorney-Advisor at the U.S. Department of the Treasury (Treasury), where he worked directly with IRS Chief Counsel and senior Treasury leadership on implementation. At KPMG, he advises energy sector clients on tax credit qualification, PFE and domestic content compliance, and evolving legislative developments.

Katie Bays spoke with him about what Notice 2026-15 signals about Treasury's broader implementation strategy, how the "reason to know" standard will operate in practice across its multiple statutory layers, and a provision that has not yet received enough market attention — the recapture rules in §48E that will begin to apply to projects placed in service starting in 2028.

Treasury's approach & what comes next

BAYS: Based on the initial guidance in Notice 2026-15, what does Treasury's approach tell us about how they intend to implement the PFE rules more broadly — and are there signals in that notice about where future guidance is headed?

AYYAGARI: The OBBB placed a large number of restrictions across several clean energy credits — the PTC, ITC, §45X, and others — and it is a very large piece of statutory text to unwind. When Treasury looked at what was most pressing, they focused on the beginning-of-construction (BOC) date: projects starting construction this year need to meet the material assistance cost ratio (MACR) restrictions, so they moved quickly. The result is a MACR-focused notice. The notice is half interim guidance and half a notice of intent to issue proposed regulations — signaling that new safe harbor tables will be published by year-end on the MACR calculation, while also flagging intent to provide more comprehensive guidance on the PFE definitions and material assistance more broadly. From my vantage point, Treasury was already working on that broader package before the MACR notice was released. I am hopeful they can get proposed guidance out in a timely manner.

BAYS: Does the priority guidance plan signal anything about timing on the broader PFE rules?

AYYAGARI: The priority guidance plan is usually a good indicator of what Treasury actually intends to accomplish. The most recent iteration was a slimmed-down version, which suggests it reflects a realistic list. PFE restrictions are on it, and those items are typically written broadly enough to encompass several pieces of guidance. So, yes, I read that as inclusive of the ownership and effective control tests, not just the MACR rules.

The "reason to know" standard

BAYS: The "reason to know" standard appears in several places in the statute. What does it mean in practice, and how would an IRS examiner assess whether a taxpayer did enough?

AYYAGARI: The "know or have reason to know" language shows up in at least three distinct places: 

1. As one of the optional certification statements a supplier can make.

2. As the basis for a supplier penalty if they certify inaccurately. 

3. As the standard a taxpayer must satisfy when relying on a certification they receive.

Multiple layers are operating simultaneously. The closest analogue in existing tax law is probably the withholding regime, which uses the concept of a reasonably prudent person — and I think those concepts are available to draw from here. A supplier meeting the certification safe harbor needs to check their internal records and, to a limited extent, look for any obvious public information that says something to the contrary. That is the floor.

Good-faith reliance and safe-harbor protection

BAYS: If a taxpayer relied in good faith on a certification that later turns out to be inaccurate, does the safe harbor protect them?

AYYAGARI: Up until the point where the taxpayer knows the certification is inaccurate, reasonable reliance — no obvious indication of inaccuracy, nothing in internal records that says otherwise—should hold. The safe harbor is a taxpayer-friendly tool, but the "reason to know" layer means it is not unconditional. The protection exists, but it is tied to the ongoing reasonableness of the reliance — it is not a one-time, check-the-box exercise.

Prior tax law analogues

BAYS: Are there analogues in prior tax law that will inform how examiners approach these rules?

AYYAGARI: The PFE concepts trace back to the CHIPS Act, which included FEOC rules tied to the semiconductor manufacturing investment tax credit, and then the IRA extended similar restrictions to batteries and critical minerals. The drafters of the OBBB PFE rules were certainly looking at those provisions — many concepts were incorporated directly into the statutory text. That said, the OBBB statute is highly prescriptive in ways that differ from those prior regimes, so you can draw on them for conceptual guidance, but you cannot simply import their conclusions.

What the market is not asking about

BAYS: What should people be asking you that they are not?

AYYAGARI: These rules are genuinely hard to navigate outside the safe harbor tables — taxpayers are being asked to go through supply chains, analyze bills of materials, and track direct material costs for each constituent material in a §45X context, which can run into the thousands. That undertaking is still underappreciated. But what I have not seen enough discussion of is the recapture provision within §48E. The statutory language is broad and the provision looks onerous — it applies to taxpayers who have been allowed a credit for tax years beginning 2 years after the date of enactment of the OBBB. The market has not fully grappled with the scope or what mitigation looks like. The best approach is to start raising awareness, and ensure clients can get out in front of it as early as possible.

BAYS: Is guidance expected on that recapture provision?

AYYAGARI: I hope it makes its way into proposed regulations regarding the PFE restrictions and MACR provisions. The language needs clarification, and the stakes are high enough that taxpayers deserve to know what they are working with before those credits start being placed in service.