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Are U.S. Subsidiaries of Foreign Entities Eligible for Loans Under the Paycheck Protection Program?

Under the CARES Act, a business is eligible for a paycheck protection program (PPP) loan if it has 500 or fewer employees whose principal place of residence is in the United States, or if it has more than 500 employees and operates in an industry that meets certain employee-based size standards for that industry. The PPP is designed to provide immediate assistance to small businesses that have been adversely affected by the coronavirus pandemic (COVID-19). Businesses are preparing and in many cases have filed their 7(a) loan applications in order to secure funds and make forgivable payments during the 8-week period after the loan is made. But while this financial assistance is aimed at helping struggling businesses in the United States, what happens if a business is foreign-owned?

At a basic level, the Small Business Administration (SBA) defines a small business concern eligible for assistance from the SBA as:

  • a business entity organized for profit,
  • with a place of business located in the United States, and
  • which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.

Further, the SBA determines whether an entity qualifies as a small business concern by counting its receipts, employees, or other measures including those of all its domestic and foreign affiliates, regardless of whether the affiliates are organized for profit. 13 C.F.R. §121.103(a)(6). The SBA has a specific set of rules that explain when another person, business or entity is considered an affiliate for purposes of these rules.

Please reach out to Withum’s International Tax Service Team for more guidance on this program or any related matter.

In a decision of the SBA’s Office of Hearings and Appeals (OHA), the OHA wrote that the SBA regulations “do not bar foreign-owned small businesses from participating in small business set-asides, provided that the small business is based in the U.S. and contributes to the U.S. economy.” Size Appeal of Global Summit, Inc. SBA No. SIZ-5804(2107).

Question 7 of the final PPP Borrower Application Form, Form 2483, asks whether all of the employees included in the payroll calculation have a principal place of residence in the United States. Thus, U.S. businesses owned by foreign entities may be eligible provided the loan will benefit the U.S. employees. This is further confirmed by the SBA regulation defining “business concern.” Those regulations state that a small business concern may consist of a variety of entities, but if the entity is structured as a joint venture, then “there can be no more than 49 percent participation by foreign business entities.” 13 C.F.R. §121.105(b). A joint venture is an association of individuals or concerns and “may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity. . . .” 13 C.F.R. §121.103(h).

Based on the above, it does not appear a business would be precluded from applying for a 7(a) loan if it is foreign-owned.

An interesting question arises when a US business has less than 500 US-based employees but its foreign affiliate has a sufficient number of non-US employees such that the aggregate number of US and non-US employees would exceed 500 under the affiliate rules. The FAQs released by the SBA on April 6, 2020, and supplemented on April 8,2020, do not seem to foreclose US borrowers in this situation from obtaining a loan under the PPP because the answer to question #3 states that “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 . . .” We understand the SBA intends to issue additional guidance with regard to the applicability of affiliation rules to PPP loans.

The rules and interpretations regarding eligibility for PPP loans is changing rapidly. Please note the date of any article or guidance you review to make sure it represents the latest and most current information.

Our trusted advisors are here to help navigate this unprecedented wave of business disruption. We will work with you to see how this program or others can help your company get through these tumultuous times. Please reach out to Withum for more information or to learn how to begin the process of applying.

International Tax Services

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