UPDATE: Paycheck Protection Program Form Now Does not Disqualify Businesses for Foreign Ownership

UPDATE: The form this post references has been revised to ask whether the United States is the “principal place of residence for all employees of the Applicant included in the Applicant’s payroll calculation”.

Based on the text of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the fact that a company has foreign owners shouldn’t necessarily disqualify it from participating in the Paycheck Protection Program (PPP).

But the form used to apply says otherwise.

A company seeking to participate in the program must fill out an application designated as Small Business Administration Form 2483. It requires the applicant to answer several questions, one of which is whether it is a U.S. Citizen or Permanent Legal Resident. If the applicant answers “no” to the question, the application, according to the form, is automatically denied.

You can’t leave it blank either. The form requires an answer from “Applicants who are individuals and all 20% or greater owners of the business[.]” Thus, if a foreign individual or entity owns one fifth or more of the business, the application will be automatically denied.

But should it be?

The program is for “small business concerns” not necessarily domestically-owned small business concerns. In fact, the CARES Act defines small business concern according to the Small Business Act. In general, the Small Business Act gives the SBA the authority to determine what businesses are small and what are not. As mentioned previously, the SBA has defined a “business concern” as “a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.”

Did you catch the “or” in there? As we’ve written about before—although under wildly different circumstances—that “or” means that a foreign-owned entity can be a small business under the SBA’s rules so long as it is 1) organized for profit, 2) has a place of business in the U.S., and 3) contributes to the U.S. economy by paying taxes or using American products, materials, or labor.

In short, if you have a U.S. office and you contribute to the U.S. economy such as by employing U.S. citizens, the SBA says you can be a small business concern.

Similarly, the CARES act defines “eligible recipient” as any individual or entity that is “eligible to receive a covered loan[.]” The covered loans here are the SBA 7(a) loans—so called because they arise from Section 7(a) of the Small Business Act. According to the SBA, a business must be “engaged in, or propose to do business in, the U.S. or its territories” to be eligible for a 7(a) loan.

So why does the PPP application say you have to be a U.S. citizen or permanent resident? No idea.

We know the purpose of the program is provide funds that allow businesses to keep workers on payroll who might otherwise be laid off due to the coronavirus. In fact, the form in question requires the applicant to certify that it will use the funds to retain workers and maintain payroll (or to make certain payments) or face criminal fraud charges. So, there should be no reason why a domestically-owned entity that employs 20 U.S. citizens should be eligible while a foreign-owned entity that employs 400 U.S. citizens should not if the overall goal is to keep American jobs from going away.

You might be asking yourself, what’s to prevent such an entity from using that money to fund overseas jobs? Well, the application requires the offeror to make certain promises as to how it will use the money or face criminal fraud charges. Furthermore, the CARES Act explicitly states that payroll costs do not include “any compensation of an employee whose principal place of residence is outside of the United States[.]” So, doing so would be fraud.

Reportedly, the approval process will be handled by the lender, with no SBA oversight. That means, even if the SBA might consider a foreign-owned entity eligible, a lender would probably default to what the form says, and the form says applications by entities with more than one-fifth foreign ownership must be denied.

Where does that leave a foreign-owned entity with a significant U.S. presence, and more importantly where does that leave their workers? Potentially, in the lurch.

If this is a mistake, there’s not much time to correct it. PPP loans are live as of April 3.

This post has been updated to include additional information.

Questions about this post? Email us or give us a call at 785-200-8919.