PPP Eligibility for Foreign-Owned U.S. Subsidiaries

  • 4/10/2020
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The initial guidance released regarding the CARES Act loan programs was unclear on loan eligibility for foreign-owned U.S. subsidiaries, but recently released FAQs provide additional insight into this issue.

Update: This article was published on April 10, 2020 in relation to first draw eligibility for PPP loans. On May 8, 2020, the SBA updated it’s guidance related to the affiliation rules governing U.S. subsidiaries of foreign owned businesses through its frequently asked questions #44. FAQ #44 stated, in part, for purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules. The SBA acknowledged the change in guidance and grandfathered in all PPP loan applications that had been submitted prior to the May 8, 2020 change in guidance. Note that further changes in eligibility were made for second draw PPP applications. Read our article containing the recent guidance.

Key insights

  • The historical SBA affiliation rules do not necessarily apply to PPP and other CARES Act loan eligibility.
  • A U.S. subsidiary of a foreign-owned company may qualify for CARES Act loan programs.
  • Recently published FAQs provide additional clarity that foreign-owned companies may want to consider, even if their loan application was already rejected.

From the date President Trump signed the CARES Act into law — March 27, 2020 — businesses, individuals, lenders, and advisors have been trying to interpret the rather limited guidance regarding the Act, with only limited success. The Paycheck Protection Program (PPP) that is a key part of the Act has been particularly hard to interpret. That program contemplates that the Small Business Administration (SBA) will provide “relief to America’s small businesses expeditiously,” but the guidance on how to do so hasn’t been clear.

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Can foreign-owned U.S. subsidiaries qualify for CARES Act loan programs?

Many U.S. subsidiaries of foreign parents have been asking whether they qualify for the PPP or other CARES Act loan programs. Like many other U.S. companies, they are experiencing the impacts of the COVID-19 pandemic and want to know what relief is available.

There are two main questions that encapsulate their concerns:

  1. Is a company that is wholly or majority-owned by a foreign entity automatically ineligible for the PPP?
  2. If the answer to the above question is “no,” do the historical SBA affiliation rules requiring the number of employees of the entire global group to be used when determining eligibility apply?

Historically, applications for SBA funding would preclude a foreign-owned entity because that goes against the SBA’s purpose to support the growth and advancement of U.S. businesses and entrepreneurs. In other words, if a foreign-owned entity needed growth capital, that capital should come from the foreign parent or other sources — and not from the U.S. government. The SBA issued an Interim Final Rule (IFR) communication to address some of the confusion around eligibility. That communication starts by saying:

An entity generally is eligible for the PPP if it, combined with its affiliates, is a small business as defined in section 3 of the Small Business Act (15 U.S.C. 632,) ….

This statement has led many to a conclusion consistent with past SBA practice that a foreign-owned company is not eligible. However, the IFR communication goes on to say:

or 1) has 500 or fewer employees whose principal place of residence is in the United States or is a business that operates in a certain industry and meets applicable SBA employee-based size standards for that industry and (2) is [a qualifying tax-exempt nonprofit, tax-exempt veterans organization, or Tribal business] or any other business concern.

The key word there is “or,” meaning a company does not have to qualify as a small business under historical SBA rules to be eligible for the PPP.

Additional FAQs released April 6 add clarity

Because lenders, borrowers, and advisors continued to struggle to interpret this and other language governing the PPP, the SBA and Department of the Treasury issued a list of frequently asked questions (FAQs) on April 6, 2020. Question 3 of the FAQs asked if a business seeking a PPP loan has to qualify as a small business concern under the Small Business Act, to which the answer was:

No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates

We believe these subsequent communications clarify the answers to the above questions. Foreign-owned companies are not automatically excluded from being eligible for the PPP, and the employee-based size test under the affiliation rules applies only to employees whose principal place of residence is the United States. We are awaiting further clarification on how the term “principal place of residence is in the United States” will be applied to foreign citizens currently living and working in the U.S. and to U.S. citizens currently living and working outside the U.S.

It is possible your lender may have interpreted the IFR language differently or that your application may have been rejected before the April 6 FAQ guidance was issued. We encourage you to check with your lender when applying or re-engage with your lender if your application was improperly rejected. The FAQs do state that the borrower is responsible for determining the proper employee head count and that lenders do not need to make an independent determination. The U.S. government will not challenge lender PPP actions that conform to the guidance provided in the IFRs and FAQs.

The information coming from the SBA and Department of the Treasury continues to be fluid, and the interpretations by lenders, borrowers, and advisors can be inconsistent. However, the newly released clarifications align with the stated purpose and intent of the PPP, which is to preserve American jobs by providing relief to America’s small businesses.

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