SBA Releases Guidance on Counting Employees for Entities with Foreign Affiliates for Purposes of PPP Eligibility

On Monday, May 18, 2020, the SBA issued an Interim final rule with regard to the eligibility of affiliated groups with foreign affiliates for the Paycheck Protection Program (PPP) loans.   As background, under the CARES Act, a business is eligible for a PPP loan if it, generally, has fewer than 500 employees, or alternatively meets applicable employee or revenue-based size standards within its industry.  Under existing SBA regulations, a business entity is generally considered together with its affiliates for purposes of determining eligibility for SBA loans.  SBA’s affiliation rules provided that in determining an entity’s number of employees, the entity must include its employees and the employees of all of its domestic and foreign affiliates.  For example, a US business, with 400 employees, that has a foreign affiliate with 200 employees would have a total of 600 employees within its affiliated group and would, therefore, generally, not be eligible for a PPP loan.

However, the SBA muddied the waters when on April 15, 2020, it issued FAQ #3 stating that “a business is eligible for PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States…[emphasis added]”  This led many businesses to reconsider whether all employees or only those employees residing within the US should be counted for purposes of the PPP eligibility.  Recalling the previous example, the US business, with 400 employees residing in the US, could reasonably assert that since the employees of the foreign affiliate do not reside in the US, they should not be counted when determining PPP eligibility and that it, therefore, qualifies for the PPP since its affiliated group has less than 500 employees residing in the US.

In a clumsy attempt to clarify the rule, on May 5, 2020, the SBA issued FAQ #44 stating that for purposes of the affiliation rules in determining eligibility for a PPP loan, an applicant must count all of it employees and the employees of its US and foreign affiliates.  However, since the FAQ #44 neither confirmed nor revised the previous guidance regarding the “whose principal place of residence is in the United States” caveat, some businesses still held that the previous FAQ provided sufficient basis to assert that only employees residing in the US should be counted.  FAQ #44 also provided that an applicant may apply for a waiver of the affiliation rules.

The Interim final rule issued on May 18 recognizes that previous guidance may have caused reasonable borrower confusion, and states that the 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-US employees from the borrower’s headcount if the borrower, together with its affiliates, had fewer than 500 employees whose principal place of residence is in the US.  It reiterated though that under no circumstances may the PPP funds be used to support non-US workers or operations.  Applicants that applied for a PPP loan after May 5, 2020, would not qualify for such relief and may consider applying for a waiver of the affiliation rules if they would not be eligible for a PPP loan when including the employees of its foreign affiliates.

The May 18, 2020 Interim Final Rule may be found here.

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