Inclusion of Foreign Affiliate Employees in PPP Loan Eligibility
Congress enacted the CARES Act to provide immediate assistance to individuals, families and organizations affected by the COVID-19 emergency. Among the provisions contained in the CARES Act are provisions authorizing SBA to temporarily guarantee loans under the Paycheck Protection Program (“PPP”). In recent weeks, employers have had many questions with regards to the inclusion of foreign affiliate employees in determining a company’s eligibility for PPP loans.
Under the CARES Act, an entity is eligible for a PPP loan if it is (1) a small business concern, or (2) a business concern, nonprofit organization described in section 501(c)(3) of the Internal Revenue Code, veterans organization described in section 501(c)(19) of the Internal Revenue Code or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs no more than 500 employees or, if applicable, SBA’s employee-based size standard for the industry in which the entity operates. Under existing SBA regulations, an entity is generally considered together with its affiliates for purposes of determining the entity’s eligibility for SBA loan. SBA issued an interim final rule on affiliation (posted April 4, 2020) stating that PPP applicants are subject to the affiliation rules set forth in 13 C.F.R. 121.301. See 85 FR 20817 (April 15, 2020). Those rules deem entities to be affiliates based on factors including stock ownership, overlapping management and identity of interest. Of relevance here, SBA’s affiliation rules provide that in determining an entity’s number of employees, employees of the entity “and all of its domestic and foreign affiliates” are included. As a result, in most cases, a borrower is considered together with its U.S. and foreign affiliates for purposes of determining eligibility for the PPP. Based on that methodology, the borrower application form (SBA Form 2483), which all applicants must complete and submit, includes a certification that the applicant “employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.” To provide further clarification of this methodology, SBA issued guidance on May 5, 2020 (FAQ 44) stating that 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 initial uncertainty regarding whether PPP applicants must include employees of foreign affiliates in their employee counts stems from the SBA’s previously issued guidance stating that an entity is eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States. See 85 FR 20811, 20812 (April 15, 2020). As described above, the generally applicable 500-employee size standard is subject to the application of SBA’s affiliation rules, as well as numerous other eligibility requirements. See, e.g., 13 C.F.R. 120.110 (listing 18 types of ineligible businesses); SBA Form 2483 (including mandatory applicant representations regarding defaults on previous government loans or guarantees, federal suspension or debarment and criminal backgrounds). The reference in SBA guidance to employees whose principal place of residence is in the United States is relevant to a PPP applicant’s calculation of payroll for purposes of determining the PPP loan amount and to the calculation of loan forgiveness. The fact that an applicant might be eligible for a PPP loan if it has 500 or fewer U.S. employees does not mean the applicant is not also subject to the other requirements applicable to the PPP. Instead, an applicant is eligible for a PPP loan only if it meets all applicable eligibility criteria. If an applicant, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard, it is not eligible for a PPP loan.
To calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates, except in those limited circumstances where the affiliation rules expressly do not apply to the entity. Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan.
However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.