Now We Know it Was “Mud”: The SBA “Walks Back” Its Prior Rules and FAQs Regarding Treatment of Foreign Affiliates
On May 18, 2020, the US Small Business Administration (SBA) released its twelfth interim final rule (IFR #12) on treatment of entities with foreign affiliates and purporting to “clarify” its own prior “guidance” noting that:
“Some market participants have indicated that there may be uncertainty regarding whether PPP applicants must include employees of foreign affiliates in their employee counts, because SBA has 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).”
Presumably, the prior “guidance” to which the SBA refers includes the SBA’s own FAQs #3 and #31 (as well as the SBA’s prior IFR #2 originally posted on April 3, 2020 (published as 85 FR 20812 (April 15, 2020)), which effectively indicated that the relevant number of employees was for only those “whose principal place of residence was in the United States”.
IFR #12 states that:
“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.1 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.”
Conceding that its own prior “guidance” had been less than clear, the SBA then offers the following:
“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)2 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.”
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