International law experts have emphasized that South Korean battery companies should take proactive measures to reduce “China risk” in anticipation of the finalization of the “Foreign Entity of Concern” (FEOC) guidelines under the U.S. Inflation Reduction Act (IRA), with the U.S. Department of the Treasury expected to release FEOC guidelines later this year.

The advice was given during a seminar co-hosted by the Korea Battery Industry Association and Yulchon LLC, a Korean full-service international corporate law firm, in southern Seoul on Wednesday to discuss responses to the IRA.

During the seminar, legal experts from Yulchon and U.S. multinational law firm Covington & Burling LLP advised on the latest IRA developments and corporate responses to the Korean battery industry, which has been closely monitoring the FEOC provisions.

Last month, executives from the country’s three major battery makers - LG Energy Solution Ltd., Samsung SDI Co., and SK on Co., alongisde POSCO Future M Co. and Lotte Energy Materials Co., met with U.S. Deputy Secretary of Commerce Don Graves to request clarification on relevant regulations.

To qualify for electric vehicle tax credits under the IRA, companies cannot source key battery minerals from a FEOC in any proportion starting in 2025, with the IRA defining FEOC as companies owned or controlled by the governments of China, Russia, North Korea, and Iran. But the U.S. Department of the Treasury has yet to release specific guidelines regarding the provision.

The U.S. Department of Commerce’s Semiconductor Act defines Chinese companies and Chinese nationals residing in China as FEOCs, as well as companies in which the Chinese government, Chinese companies, or Chinese nationals hold 25 percent or more of the voting rights, directorships, or stock, according to Koo Jam-in, an associate at Covington & Burling.

“Currently, Korean battery companies are highly dependent on China and Chinese companies to procure key minerals and battery components,” Koo said. “If the definition of FEOC is adopted in line with the Semiconductor Act, the benefits of eco-friendly vehicle tax credits may become meaningless.”

Wee Choon-jae, a lawyer from Yulchon, pointed out that if a company imports precursors that are crucial to produce cathode materials from China, it would be difficult to meet the conditions for key mineral ratio. However, if a joint venture (JV) is established with a Chinese company, it could be possible to internalize production, he said, highlighting the advantages of setting up a JV in addressing the challenges posed by the FEOC provisions under the IRA. “Regarding FEOCs, it is necessary to make provisions for adjustment of equity in anticipation of changes in the IRA system,” he suggested.

By Jung You-jung and Yoon Yeon-hae

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