The Small Business Administration has issued interim final rules clarifying how foreign affiliates affect a borrower’s qualification to obtain a Payroll Protection Program (PPP) loan.[1]

The IFR deals with whether an applicant must count employees of foreign affiliates who will generally have residences outside the United States when determining if the entity has more than 500 employees and thus is not eligible for a PPP loan. The SBA concludes that the answer will be yes if the foreign entity fits the definitions found in the SBA’s own affiliation rules.

The IFR states:

1. Treatment of Foreign Affiliates

Are employees of foreign affiliates included for purposes of determining whether a PPP borrower has more than 500 employees?

Yes. The CARES Act specifies that an entity is eligible for a PPP loan only 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 not more than the greater of 500 employees, or, if applicable, 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, the SBA concludes that the agency’s guidance prior to May 5 may have led a borrower to reasonably conclude that foreign affiliates could be excluded from the 500-employee test. Thus, the IFR provides relief for a borrower who applied before the issuance of the May 5 frequently asked questions (FAQ). The IFR continues:

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.

[1] RIN 3245-AH44, “Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment of Entities with Foreign Affiliates,” Small Business Administration, May 18, 2020, https://home.treasury.gov/system/files/136/Interim-Final-Rule-on-Treatment-of-Entities-with-Foreign-Affiliates.pdf (retrieved May 18, 2020)