COVID-19 Economic Relief for Foreign-Owned Companies

  • Tax strategies
  • 1/27/2021
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The Consolidated Appropriations Act, 2021 offers economic relief for some U.S. subsidiaries in the form of second draw PPP loans and employee retention credits.

Key insights

  • U.S. subsidiaries of foreign parent companies may be eligible for a second draw PPP loan if their global employee headcount is below 300.
  • As with the first round of PPP loans, you must demonstrate revenue reduction.
  • Employee retention credits may be available to larger organizations.

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The economic relief provisions in the newly passed Consolidated Appropriations Act, 2021 (CAA 2021) are expansive, but have left some organizations — especially U.S. subsidiaries of a foreign parent company — wondering whether they qualify for these benefits. Some of the new benefits are tied to employee headcount, which can become especially complicated for subsidiaries due to confusion about what determines the headcount. Is it the entire global group or a only the U.S. affiliated group? 

Examine two economic relief provisions — second draw Paycheck Protection Program (PPP) loans and employee retention credits — and compare the affiliation rules for each to review what benefits may be available as part of your recovery plan.

Second draw PPP loans

Generally, entities that were eligible to participate in the first round of the PPP, went on to receive a PPP loan, and have fully and properly used those funds are eligible to apply for a second draw loan (subject to certain additional eligibility requirements).

The initial round of PPP loans did not necessarily exclude borrowers that were owned by a foreign entity, though Small Business Administration affiliation regulations applied when determining headcount, which includes all domestic and foreign affiliates. The second draw program generally limits loans to borrowers with 300 or fewer employees (both foreign and domestic).1  As no PPP funds may be used to support non-U.S. workers or operations, loan sizing should be determined by examining only U.S. payroll.

Additional eligibility requirements

Companies also must have experienced a revenue reduction of at least 25% in 2020 from a comparable quarter in 2019. (Alternatively, the borrower can demonstrate that it meets a revenue reduction by comparing gross revenues for 2020 to 2019, in the aggregate.) This can be another tricky test for global companies, because the guidance requires borrowers to measure each period’s gross receipts for the U.S company as well as each affiliate and apply this reduction in aggregate.2

Even if these eligibility requirements are met, these specific classes of foreign ownership are ineligible for the second draw program:

  • Entities that are created or organized under the laws of the People’s Republic of China or Hong Kong
  • Entities with significant operations in the People’s Republic of China or Hong Kong
  • Entities that hold directly or indirectly 20% or more of a business concern or equity interest in a company that retains as a member of the board a resident of the People’s Republic of China
  • Companies that engage in political activities on behalf of a foreign principal

Examine these criteria to determine your global entity’s eligibility for second draw funding.

Employee retention credits

For organizations with larger worldwide employee counts that were precluded from second draw PPP loans, consider employee retention credits (ERCs). But if your U.S. subsidiary qualifies for a second draw PPP loan, read on to understand how ERCs can impact cash flow, as these credits may now be used in tandem with the first and second PPP draws.

The ERC — initially provided in the CARES Act and expanded upon in CAA 2021 — is available to companies that:

  • Retain employees even though the business was closed while a valid government shut down order is in effect
  • Retain employees in a quarter the business suffers a significant decline in gross receipts compared to a reference quarter

ERC — CARES Act versus CAA 2021

Review a comparison of the ERC under the CARES Act versus the CAA 2021. For full details, refer to our prior article.

CARES Act CAA 2021
Effective dates March 13, 2020 –
December 31, 2020
January 1, 2021 –
June 30, 2021
Credit amount Annual cap of $5,000 per employee ($10,000 in qualified wages times x 50%). Quarterly cap of $7,000 per employee for each
of the first two quarters of 2021 ($10,000 in qualified wages X 70%)
for a maximum credit of $14,000
Eligibility requirements —
government order
If a company is closed due to a
valid government order, the
credit is applicable for the dates
the government order is in
effect. Note that mere
guidelines impacting business
operations may not qualify.
Eligibility requirements — gross receipts Gross receipts were less than
50% of gross receipts for the
same quarter in 2019.
Gross receipts are less than
80% of gross receipts for the same quarter in 2019.
Eligibility requirements —
employer size (affiliation applies
in calculating these
  • A company with 100 or
    fewer employees was
    eligible for the credit
    even if the employee was working.
  • A company with more
    than 100 employees
    could not take the
    credit for wages paid to
    an employee
    performing services for
    the employer (either
    teleworking or not,
    even at a reduced
    capacity due to
    reduction in business).
  • The threshold increases
    to 500. An employer
    with 500 or fewer
    employees is eligible for
    the credit, even if
    employees are working.
1Note that affiliation rules are waived in limited circumstances for business entities with a NAICS code beginning with 72, certain news organizations, and certain religious organizations.
2However, gross receipts do not include proceeds from transactions between a concern and its domestic and foreign affiliates


As the above chart illustrates, employer size plays a key role in identifying eligible employees to calculate the benefits. The affiliation definition for purposes of the ERC is slightly different than the definition from the PPP; the ERC generally follows controlled group definitions in the tax rules, which require all companies to be treated as a single employer if they meet one or more of the following criteria:

  • Parent–subsidiary — Are members of a parent–subsidiary group where the parent owns 50% or more of the voting power or value of the company.
  • A part of a brother–sister controlled group — Five or fewer individuals, estates, or trusts own more than 50% of the combined voting power or value of the stock of each company (considering only the stock ownership percentage of each shareholder that is identical with respect to each corporation).
  • Combined group — There are three or more corporations — each of which is a member of a parent–subsidiary or brother–sister group — and at least one is both the common parent corporation of a parent–subsidiary controlled group and a member of the brother–sister controlled group.

For purposes of performing this affiliation, foreign corporations that are organized under a jurisdiction other than the United States or do not have income effectively connected to the U.S. are generally not included in this affiliation. Exceptions may apply in affiliated service organization and employee leasing situations, but these exceptions are beyond the scope of this article.

Based on this affiliation test, many companies may have a larger employee count for purposes of the PPP compared to the ERC. This may help global companies identify more eligible employees for the ERC, as they may be under the 500-employee threshold in 2021.

How we can help

The CARES Act and CAA 2021 both can provide cash benefits as companies build their recovery plan. CLA is here to help you navigate this new legislation and understand these opportunities and the application of these benefits to your organization.

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