The Department of Energy (DOE) on Friday issued proposed guidance on foreign battery content in EVs that could cut the federal tax credit for some models. But it also provides a clearer picture for automakers and battery suppliers.

Starting Jan. 1, EVs are ineligible for the federal tax credit of up to $7,500 if they have key battery components sourced from a “foreign entity of concern.” The exclusion initially applies to manufacturing and assembly or battery components, but extends to mining, processing, and recycling of critical minerals in 2025.

The entities covered by this guidance include companies or other organizations “owned by, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation.” The “covered nations” include China, Russia, Iran, and North Korea.

The exclusion also applies to corporate subsidiaries if a “parent entity” directly holds more than 50% of the subsidiary’s “board seats, voting rights, or equity interest.” So while most EVs sold in the U.S. have American-made batteries, and many automakers are planning increased U.S. assembly to comply with existing tax-credit rules, the foreign-entity-of-concern provision will once again tighten which EVs qualify for a credit.

Toyota and Redwood Materials battery recycling

According to recent reporting, for example, Chinese automaker Geely owns approximately a 79% interest in Volvo. So some models from Volvo and its spinoff brand Polestar might be affected by this despite U.S. assembly. The Volvo EX90 electric SUV otherwise looked like it might qualify for a tax credit thanks to South Carolina assembly and a base price just below the $80,000 price cap for SUVs set out in the current rules.

Volvo Car USA declined comment on the matter, but suggested seeking comment from Autos Drive America, an advocacy and trade group that claims membership by a range of foreign automakers. Green Car Reports is awaiting clarification on how it might affect some of the organization’s member-clients.

Last year the White House clarified that battery materials sourced from Japan, South Korea, Europe, and others would be tax-credit eligible. Recently a number of automakers have also acted to set up circular supply chains within the U.S. to make sure their domestic battery content is higher as a hedge against foreign battery-content rules. Toyota, for instance, is working with Redwood Materials to tap recycled Prius battery materials for future U.S. EV batteries.

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with additional reporting by Bengt Halvorson