Employees of foreign affiliate of a small business based in the United States count toward the 500-employee limit under SBA guidance issued on May 18, 2020 (SBA-2020-0030) for loan eligibility under the Paycheck Protection Program (“PPP”), economic assistance for employers affected by COVID-19, authorized in section 1102 of the CARES Act, Pub. L. No. 116-136. SBA published on its website an overview on April 3, 2020, which provided criteria for determining affiliates of an employer seeking PPP financing.
SBA regulations, 13 C.F.R. 121.301, set forth four tests for affiliation based on control, which apply to loan applications in the PPP. In summary, the four respective tests are affiliation based on ownership, affiliation arising under stock options, convertible securities, and agreements to merge, affiliation based on management and affiliation based on identity of interest.
Under SBA guidance issued initially on April 2, 2020 (85 Fed. Reg. 20,811, 20,812 (Apr. 15, 2020)), generally, an applicant would be eligible for a PPP loan if, among other things, it has “500 or fewer employees whose principal place of residence is in the United States” and is a small business concern defined in section 3 of the Small Business Act, 15 U.S.C. 632. There was uncertainty in the practitioner community regarding whether employees with a principal place of residence in a foreign jurisdiction would be excluded from the 500-employee limit.
In question and answer guidance, Q&A 44 added on May 5, 2020, the SBA clarified that for purposes of the employer size PPP eligibility standard, an employer must count all of its employees and the employees of its U.S. and foreign affiliates, absent an applicable waiver or exception. Employers seeking to qualify as a small business concern, a prerequisite for PPP eligibility, on the basis of the 500-or-fewer-employee-based size standard, must do the same.
Among other qualifications, to be a small business concern, under an SBA regulation, 13 C.F.R. 121.105, an employer must have a principal place of residence in the United States and operate primarily within the United States or make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.
In turn, SBA regulation section 121.106 sets forth the rules for determining a number of employees. For calculating the number of employees, an employer takes into account all individuals employed on a full-time, part-time, or other basis. An employer calculates an average number of employees for each of the pay periods for the preceding completed 12 calendar months. In the average number, the employer includes employees of domestic and foreign affiliates. Thereafter, the average number of employees of a business concern with affiliates is calculated by adding the average number of employees of the business concern with the average number of employees of each affiliate.
Thus, employers with a principal place of residence in the U.S. first must apply the interim final rule (85 Fed. Reg. 20,817 (Apr. 15, 2020)) originally posted on April 3, 2020 and the four factors in the SBA regulations to identify the affiliates, if any, for purposes of the PPP. An employer must determine whether any affiliate under the affiliation rule is a foreign affiliate under the principles in April 3 and April 15, 2020 SBA guidance and SBA regulations.
An employer includes the affiliates in the number of employees reported on SBA Form 2483, the Borrower Application Form, the loan forgiveness application with respect to which was released on May 15, 2020. SBA regulations provide exceptions for some employers from the affiliation rules for PPP eligibility, such as franchise operations. International small businesses needing economic assistance to support their ongoing operations affected by COVID-19 may consult with a tax advisor on meeting the 500-employee limit under the SBA guidance for purposes of determining eligibility for PPP financing.