On May 18, 2020, the U.S. Small Business Administration (“SBA”) posted a twelfth Interim Final Rule on Treatment of Entities with Foreign Affiliates. This Interim Final Rule supplements the previously posted interim final rules by providing guidance on additional Paycheck Protection Program (“PPP”) eligibility requirements related to entities with foreign affiliates. This Interim Final Rule is effective without advance notice and public comment because section 1114 of the Act authorizes SBA to issue regulations to implement Title I of the Act without regard to notice requirements. This rule is being issued to allow for immediate implementation of this program.
SBA acknowledges there may be uncertainty regarding whether PPP applicants must include employees of foreign affiliates in their employee counts because of 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 Interim Final Rule 1 originally posted on April 2, 2020. 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 that 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.
Section 1. The CARES Act specifies that an entity is eligible for a PPP loan only if it is:
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- a small business concern, or
- 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 not more than the greater of 500 employees, or,
- if applicable, meets SBA’s employee-based size standard for the industry in which the entity operates.
SBA’s affiliation regulations provide that to determine a concern’s size, employees of the concern “and all of its domestic and foreign affiliates” are included. (13 C.F.R. 121.301(f).) Therefore, 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.
Previously issued guidance from the SBA caused substantial confusion among borrowers and their advisors with respect to whether employees of non-U.S. affiliated businesses should be included in the employee count. On May 5, 2020, the SBA published FAQ #44, which confirmed that employees in non-U.S.-affiliated businesses must be included in the employee count. This Interim Final Rule provides a “safer harbor” for those borrowers who excluded employees of non-U.S. affiliated businesses in their PPP loan applications submitted prior to May 5, 2020. Such borrowers will not be deemed to have made an inaccurate certification of eligibility, even if their total employees exceeded 500 when including employees of non-U.S. affiliated businesses.
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For additional information on the Paycheck Protection Program, as well as other Federal, state and local relief measures, please visit our COVID-19 Resource Center on our website. If you have any questions, please contact your Tronconi Segarra & Associates advisor or a member of our response team at covid19team@tsacpa.com
