Does New Guidance Make PPP Loans Viable for U.S. Subsidiaries (of Foreign Parents)?

May 15, 2020

In short, “yes.”

Under the paycheck protection program (“PPP”) of the CARES Act, approximately $670 billion in loan assistance was allocated to small businesses in the United States. The program is administered by the U.S. Small Business Administration (“SBA”) and is intended to fund payroll for employees whose principal place of residence is the United States. The PPP “loans” are intended to be forgiven assuming that loan proceeds are spent predominantly on employee compensation. Borrowers also may spend up to 25 percent of PPP funds on mortgage interest, rent and utilities and still qualify for loan forgiveness.[1]

In general, a borrower is eligible to receive a forgivable PPP loan upon meeting several conditions, each of which is discussed in brief below. The discussion focuses on the eligibility for the program of U.S. subsidiaries of foreign enterprises. Guidance issued on May 13, 2020, and discussed in Condition 5 below, affirms that for loans of less than $2 million a U.S. subsidiary of a foreign parent may appropriately seek liquidity in the first instance from a PPP loan as opposed to its foreign related party. The following survey of the eligibility requirements reveals that a U.S. subsidiary of a foreign parent would not be precluded from meeting the eligibility criteria simply due to the presence of the foreign owner.

Condition 1—The borrower must be a business concern, a nonprofit organization, a veterans organization, or a Tribal business concern.

A business concern may take the legal form of an individual proprietorship, partnership, limited liability company, corporation, association, trust, cooperative or joint venture. However, in the case of a joint venture, SBA rules permit no more than 49 percent participation by foreign business entities.

A U.S. corporate subsidiary of a foreign parent would meet the definition of a “business concern.”

Condition 2—The borrower must (i) have a place of business located in the United States and (ii) 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.

A U.S. subsidiary of a foreign parent is not precluded from meeting this condition.

Condition 3—The borrower must qualify as a small business, either under SBA rules that define “small business concerns” or because the business employs 500 or fewer employees.

Under SBA rules, a borrower may qualify as a small business if it meets an SBA employee-based or revenue-based size standard corresponding to its primary industry. Additionally, a business may qualify if its maximum tangible net worth does not exceed $15 million while its two-year, average after-tax net income does not exceed $5 million. Alternatively, under the CARES Act a business may qualify as a small business if it has 500 or fewer employees whose principal place of residence is in the United States.

For purposes of the employee-based standards, a borrower generally must count all of its employees and the employees of its U.S. and foreign affiliates.

A U.S. subsidiary of a foreign parent is not precluded from meeting this condition.

Condition 4—The loan must be made between February 15, 2020 and June 30, 2020.

The CARES Act originally authorized $349 billion in forgivable loans to small businesses. Congress later authorized an additional $321 billion in extra funds after the original allotment was exhausted. Reportedly, about 40 percent of these additional funds remain currently available.[2]

If funds are available under the program, a U.S. subsidiary of a foreign parent should be able to meet this condition by timely filing a loan application.

Condition 5—The borrower must make a good faith certification that “the uncertainty of current economic conditions makes necessary the loan request to support [its] ongoing operations….”

Prior to May 13, 2020, it was unclear to what extent a U.S. subsidiary of a foreign parent should look to its foreign related party for financing in the first instance before turning to a PPP loan. Then extant guidance provided:

[B]efore submitting a PPP application, all borrowers should review carefully the required certification that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.

In newly issued guidance, the Treasury and the SBA have addressed concerns over the ability of borrowers to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Guidance issued on May 13, 2020, creates a conclusive presumption of good faith certification regarding the necessity of PPP loans under $2 million:

Any borrower that, together with its affiliates, received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

Loans of $2 million or more remain subject to SBA’s prior guidance and are subject to audit by the SBA. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance. If the borrower repays the loan however, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. Accordingly, the penalty for the erroneous certification of need appears to be a demand for repayment of the loan.

A U.S. subsidiary of a foreign parent borrowing less than $2 million will be presumed to have a need for the PPP loan.

Condition 6—The United States must be the principal place of residence for all employees included in the calculation of the loan amount.

A residence used the majority of the time during the year is ordinarily considered one’s principal residence.[3]

A U.S. subsidiary of a foreign parent should base its PPP loan request only on employees whose principal residence is in the United States.

Condition 7—The borrower must have been in operation on February 15, 2020 and had employees for whom it paid salaries and payroll taxes (or paid independent contractors, as reported on Form(s) 1099-MISC).

A U.S. subsidiary of a foreign parent is not precluded from meeting this condition.

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Please contact us if you have any questions about the CARES Act or the PPP loan application process. Croke Fairchild can help with finding an SBA-approved bank partner. We look forward to your questions and calls.

About Croke Fairchild Morgan & Beres

Croke Fairchild Morgan & Beres is a corporate law firm providing services to businesses, private equity and venture firms and their portfolio companies, public companies, founders and family offices. Formed by partners who worked at preeminent international law firms, the firm boasts a deep bench of sophisticated and experienced corporate lawyers. With offices in Chicago, Lake Forest, and Milwaukee, our team provides exceptional legal service while affording our clients the benefits of working with a small, agile, and driven law firm. For more information, please visit us online at crokefairchild.com