Overview
On September 30, 2025, the US Department of Commerce’s Bureau of Industry and Security (“BIS”) promulgated an interim final rule (“IFR”), effective immediately, imposing new restrictions on foreign entities that are at least 50 percent owned by one or more entities on the Entity List or the Military End-User (“MEU”) List. BIS has labeled such entities as “Affiliates” for the purpose of the IFR. Under the IFR, Affiliates will automatically be subject to Entity List/MEU List restrictions. The same approach will be extended to any entity that is owned 50 percent or more by one or more blocked persons subject to Office of Foreign Assets Control (“OFAC”)-administered sanctions programs identified pursuant to section 744.8(a)(1). Under Secretary of Commerce for Industry and Security Jeffrey Kessler called the IFR an effort to “close[] the loopholes” that “have enabled exports that undermine American national security and foreign policy interests.” This new “50 percent” rule is a significant expansion of the end-user controls under the Export Administration Regulations (“EAR”) and presents substantial compliance challenges and risks for exporters.
The New 50 Percent Rule
The IFR imposes a restriction on the export, reexport, or transfer (in-country) of items (including goods, software, and technology) subject to the EAR to Affiliates. Prior to the IFR, an entity would need to be specifically named on the Entity List or the MEU List in order to be subject to the corresponding end-user controls. The Entity List contains parties that BIS alleges are involved in activities contrary to US national security or foreign policy interests. Likewise, the MEU List contains parties that allegedly pose an unacceptable risk of using an item in, or diverting an item to, a military end use. Entities on both lists are subject to stringent export control restrictions and license applications to such entities are generally reviewed under a presumption of denial. The IFR now imposes these same restrictions and license review policies on unlisted Affiliates. Additionally, BIS is taking the same approach in extending restrictions with respect to Affiliates of persons blocked by OFAC pursuant to one of the sanctions programs identified in section 744.8(a)(1).
Members of industry may be familiar with the 50 percent rule maintained by OFAC with respect to the prohibition on US persons dealing in property of blocked persons subject to US economic sanctions. Under OFAC’s 50 percent rule, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person. The IFR states that the new 50 percent ownership standard imposed by BIS is designed to be consistent with OFAC’s long-standing practice. BIS stated that the adoption of a similar 50 percent rule will address circumvention of US export controls and reduce the administrative burdens on BIS and industry.
Compliance Burden
The IFR adds a significant number of new, unlisted parties to the scope of stringent end-user restrictions under the EAR. Exporters, reexporters, and transferors are responsible for compliance with the IFR and can be held liable for unauthorized exports, reexports, or transfers (in-country) on a strict liability basis. BIS described the IFR as “creating an affirmative duty to determine the ownership of other parties to [transactions] in order to comply.” Accordingly, we expect that some members of industry will face elevated compliance burdens. BIS acknowledges that the IFR “may require additional analysis by the private sector” in order to comply with the EAR, but noted its view that the private sector “should already be undertaking this analysis as part of a risk-based approach” under OFAC prohibitions.
Due to the EAR’s “party to the transaction” and Entity List “foreign direct product” rules, which will also apply to Affiliates, the IFR has the potential to have far-reaching effects on transactions involving US and non-US hardware, software and technology. Industry—including US and foreign financial institutions—will need to apply these rules to many more entities and transactions, complicating compliance considerations.
In addition to Affiliates, BIS has also warned industry that it should be aware that foreign parties with significant minority ownership by, or other significant ties to, an Entity List entity, an MEU List entity, or a Specially Designated National (“SDN”) subject to section 744.8(a)(1) of the EAR present a Red Flag of potential diversion risk to the listed entity. In this situation, BIS advises industry to perform additional due diligence. Further, BIS notes that if an exporter, reexporter, or transferor cannot determine the ownership percentage of a foreign entity that is owned by one or more listed entities on the Entity List or the MEU List, it must either (i) resolve the Red Flag prior to proceeding with any exports, reexports, or transfers (in-country) to that foreign entity, (ii) submit a license application to BIS, or (iii) identify an available license exception.
Temporary General License and Savings Clause
The IFR adds a new Temporary General License (“TGL”) that authorizes exports, reexports, or transfers (in-country) when an Affiliate is a party to the transaction in two situations. First, the TGL authorizes the export, reexport, or transfer (in-country) to or within any destination in Country Group A:5 or A:6. Second, the TGL authorizes the export, reexport, or transfer (in-country) to or within any country (other than Country Group E:1 or E:2) when the Affiliate that is party to the transaction is a joint venture with a non-listed entity headquartered in the US or Country Group A:5 or A:6 that itself is not owned 50 percent or more, directly or indirectly, individually or in aggregate, by one or more listed entities on the Entity List or MEU List or by unlisted entities that are subject to the Entity List or MEU List license requirements or restrictions. The TGL may only be used to overcome certain license requirements related to Affiliates and is scheduled to expire in 60 days.
The IFR also includes a savings clause for shipments of items that are removed from eligibility for a license exception or for export, reexport, or transfer (in-country) without a license as a result of the IFR if those shipments were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on September 29, 2025 pursuant to a contract. Such shipments may proceed to that destination provided that the export, reexport, or transfer (in-country) is completed within 30 days.
For more information on how the IFR may impact your business or to assist with analysis under the IFR, please contact a member of Steptoe’s Export Controls team.
