Extension of the 50% rule to US (re-)export control

On September 29, 2025, a new Interim Final Rule ("IFR") of the US Bureau of Industry and Security ("BIS") came into force, extending (re-)export control restrictions to affiliated companies of certain listed companies. According to the IFR, any company that is directly or indirectly owned by at least 50% of one or more companies on the Entity List, the Military End-User ("MEU) List or certain companies on the Specially Designated Nationals and Blocked Persons (“SDN) List is itself subject to the restrictions of the Entity List / MEU List. Furthermore, the IFR establishes additional due diligence obligations.

Background

The Entity List and the MEU List are part of the Export Administration Regulations ("EAR). They establish additional (re-)export control restrictions in the event that a listed company is involved in a transaction, i.e., additional authorization requirements for (re-)exports and domestic transfers, as well as the exclusion of exemptions from authorization requirements. The involvement of a company listed on the Entity List or the MEU List often automatically leads to the rejection of the authorization application. Previously, the scope of the Entity List and the MEU List was limited to the companies explicitly named therein burden of listing subsidiaries on the Entity List or the MEU list. To counteract such circumvention practices, the BIS has now introduced the so-called "Affiliates Rule". These states that the restrictions associated with listing on the Entity List and the MEU List also apply to companies that are at least 50% directly or indirectly owned by one or more companies listed on the Entity List, the MEU List, or under certain sanctions programs on the SDN List, or by unlisted companies that are subject to restrictions because they themselves are at least 50% owned by listed companies. The Affiliates Rule is similar to the 50% Rule of the US Office of Foreign Assets Control (OFAC), which has long been established in sanctions law. As with OFAC's 50% Rule, the concept of ownership includes both direct and indirect ownership, and it is sufficient for the combined stakes of several listed companies to reach 50% ownership. Like OFAC's 50% Rule—and unlike EU personal sanctions—the Affiliates Rule focuses exclusively on ownership and not on other forms of control. However, the BIS Affiliates Rule goes beyond OFAC's 50% Rule in certain aspects. First, the Affiliates Rule provides for the aggregation of ownership stakes across different listed companies. For example, if one direct or indirect owner is listed on the Entity List and another direct or indirect owner is listed on the MEU List, and their combined ownership of the company in question reaches 50%, the related company is subject to restrictions. Furthermore, if the restrictions applicable to the listed owners differ, the most restrictive restrictions apply to the related company in question (rule of most restrictiveness). As a result of the introduction of the IFR, the Foreign Direct Product Rules (FDPR) were also amended. According to the FDPR, certain products manufactured outside the US that are direct products of certain "controlled" (i.e., listed on the US Commerce Control List) US technologies or software, or that were manufactured in a facility outside the US that is itself a direct product of certain controlled US technologies or software, may not be supplied to certain entities listed on the Entity List without authorization. The question of which US technologies or software and which resulting goods manufactured abroad are covered is determined by the footnote (1, 3, 4, or 5) associated with the respective list entry. With the introduction of the IFR, the FDPR, which applies to a company listed with a footnote in the Entity List, is extended to unlisted companies in which companies whose entry is footnoted hold shares, whereby even a minority shareholding is sufficient if the company is owned in total by companies on the Entity List, the MEU List or certain SDN. For example, if an unlisted company is 20% owned by a company listed on the Entity List “subject to footnote 1”, 5% by a company listed on the Entity List “subject to footnote 3”, and 25% by a company listed on the MEU List, the unlisted company is subject to the FDPR under both footnote 1 and footnote 3. Additional Due Diligence Obligations: According to the newly introduced Red Flag 29 in the BIS “Know Your Customer” Guidance and Red Flags, (re-)exporters and domestic importers are required to verify ownership structures. to ascertain the ownership structure of the parties involved in a transaction, provided they have reason to believe that these parties may be owned by one or more entities listed on the Entity List, the MEU List, or the SDN List, or by unlisted entities subject to restrictions because they themselves are 50% or more owned by listed entities.

In practice, it is often not possible to assure the ownership structure of a party. In such a case, (re-)exporters and domestic re-importers must obtain a BIS license before (re-)exporting or domestic re-importing, unless an exemption applies. Furthermore, a minority shareholding in a company listed on the Entity List / MEU List, or other significant links to such a company (e.g., overlaps in board composition or other indications of control), is a red flag for a potential diversion risk, triggering additional due diligence obligations. What companies should do now: Companies should adapt their internal policies and processes to comply with the requirements of the Affiliates Rule. All parties involved in transactions must be screened to determine whether they are subject to restrictions under the Affiliates Rule. Unfortunately, relying on the Consolidated Screening List will no longer be sufficient, as it does not identify unlisted companies subject to the Affiliates Rule. Instead, companies should consider using sanctions list screening software that can determine whether companies are 50% or more owned by listed companies. Furthermore, companies should assess whether their pending transactions fall under the BIS's new Temporary General License (TGL), which is also part of the IFR and expires on November 28, 2025. The TGL specifically approves (re-)exports and domestic transfers to or within countries of country groups A:5 or A:6, if one party to the transaction is subject to the restrictions under the Affiliates Rule. All activities covered by this TGL are subject to documentation requirements.