The CARES Act, enacted March 27, 2020, (P.L. 116-136) includes the new Paycheck Protection Program (PPP), which offers forgivable loans from $1,000 up to $10 million to small businesses for salaries (up to $100,000), rent, utilities, mortgage interest, and other payroll expenses. For a more detailed discussion of the CARES Act and PPP terms, see our post from earlier this week here. 

Eligibility for small foreign-owned businesses

Unlike traditional 7(a) loans offered by the Small Business Act, the CARES Act makes small businesses, nonprofits, veteran organizations, and tribal organizations eligible for PPP loans, provided that the applicants have fewer than 500 employees, or:

• Meet the employee size standard established by the Small Business Administration if such standards exist in the applicant’s industry; or
• Has fewer than 500 employees per location if the applicant entity is in the Accommodation and Food Services industry.

The PPP also makes sole proprietors and independent contractors eligible for loans, including self-employed individuals and gig workers.

Additionally, although the applicant business must have operations in the US to receive a PPP loan, the CARES Act does not expressly prohibit foreign-owned businesses or US based businesses with international operations from taking loans; in the latter’s case, the PPP loan must be used only for the benefit of domestic operations. 

Loan criteria for foreign-owned small businesses

On April 4, 2020, the SBA issued guidance for the implementation of Sections 1102 and 1106 of the CARES Act (respectively, the sections that deal with loans covered by the PPP and PPP loan forgiveness). Available here: https://www.sba.gov/sites/default/files/2020-04/PPP–IFRN%20FINAL_0.pdf

According to this Guidance, borrowers do not have to satisfy the lending criteria imposed on small business loan applicants by 13 CFR Section 120.150. These requirements traditionally require lenders to analyze applicant reputation, credit history, character, experience, stress of the business, past earnings, cash flow, potential for long term success, ability to repay, nature and value of the collateral, and effect of the affiliates. However, for PPP loans, lenders must only rely on certifications provided by the borrowers and on “specific documents” to determine the amount borrowed and forgivable.  

To determine the eligibility of businesses with foreign shareholders (either entities or individuals) and/or businesses that are entirely controlled by non-resident aliens (NRA) or foreign based entities, it is necessary to refer to the SBA’s Standard Operating Procedure (“SOP”) 50 10, Subpart B, Chapter 2. https://www.sba.gov/sites/default/files/2019-02/SOP%2050%2010%205%28K%29%20FINAL%202.15.19%20SECURED%20copy%20paste.pdf

Eligibility requirements for certain industries and visa holders

The SOP establishes criteria for loan eligibility, which may depend in part on a combination of foreign ownership, industry, and the activity conducted. Thus, businesses owned by non-US citizens may be eligible for SBA loans under limited circumstances. If those businesses conduct activities not covered by the PPP, however, they lose their eligibility. So, for example, businesses engaged in lending, investments, financing and factoring (e.g. banks and/or life insurance companies) are not eligible.

In general, a business owned by a foreign national who is an undocumented alien does not qualify.

To be eligible, a business must be at least 51% owned by a legal permanent resident (LPR, green card holder) or by a non-US citizen with a working visa (qualified either as non-immigrant or immigrant). A working visa allows the non-US citizen to manage the US business (as a result, non-US citizens without a visa or a working visa are either undocumented if residing in the US or passive investors if permanently residing overseas).

Non-immigrant visa holders must have one of the following visas to be eligible for PPP loans: B1; F1; H1B; O1; E2 (Treaty investor); EB3; L1. Eligible immigrant-owned businesses are individuals with, for example, the following visas: K1; K3; F2A; F2A; E1/E2/E3 (employment based immigrants); SD. 

In any case, lenders must collect USCIS documentation from the non-US applicant, implement a written Customer Identification Program (CIP) to identify its non-US customers and, if required, have an anti-money laundering compliance program in place (31 CFR Section1200-220). To identify non-US citizens, banks are required to collect “a taxpayer identification number; passport number and country of issuance; alien identification card number; or number and country of issuance of any other government-issued document evidencing nationality or residence and bearing a photograph or similar safeguard.”

Non-US owned businesses are eligible provided that management assures that the business will continue indefinitely and that the business has been established and in operations for at least 1 year before application. Lender must require personal guarantee for PPP loans to businesses owned by foreign nationals; the collateral must have a liquidation value equal to the approved loan amount (unless waived).  

Passive investment companies are, in general, not eligible, with certain exceptions: Real estate developers that do not actively use or occupy their property are not eligible, nor are businesses engaged in the leasing or managing of real estate (with the exception of hotels, motels, recreational parks or similar type of businesses). Nursing homes are eligible.

Finally, certain businesses owned by non-US individuals or foreign entities engaged in the activities listed in Appendix 1 of the SOP are not eligible. Among them, businesses engaged in, for example: 

• the production of atomic energy;
• owning vessels for the transportation of passengers or merchandise; 
• acquisition right of way of oil or leasing for mining coal or certain minerals;
• radio or television broadcasting;
• aeronautic activity;
• purchasing overseas private investment corporation (OPIC)

Other restrictions for foreign-controlled US businesses

A foreign-controlled enterprise engaged in certain activity does not qualify unless its management complies with certain requirements:

• a foreign-controlled US bank must have all directors as US citizen;
• a foreign-controlled vessel engaged in dredging and salvaging operation must have US citizens as president and CEO; and
• a foreign-controlled vessel must obtain certain vessel insurance.

Conclusion and proposal

Foreign-owned (either individuals or entities) US companies with operations in the US have an additional hurdle to overcome: the lack of clarity resulting from the combination of the CARES Act and the SBA normative platform. The CARES Act makes no reference to foreign-owned US companies in its determination of eligibility for PPP loans. However, its legislative purpose is wide in scope and inclusiveness. Guidance from the SBA, on the other hand, refers to the definitions given by the Small Business Act (15 USC 632) to determine eligibility. This definition is primarily quantitative and therefore gives a narrower sense of qualified businesses. The SOP is the only source addressing the eligibility of foreign-owned US companies. As a result, the SOP imposes restrictions and limitations that runs against the spirit and the scope of the CARES Act, opening potential applicants to the risk that lenders will implement the PPP arbitrarily.

There should be a provision in the SBA Guidance clarifying that, in case of doubts, the eligibility criteria for foreign-owned US companies regulated under the CARES Act should prevail over the SOP. In particular, in determining eligibility, lenders should refer only to the existence of the following basic components:

• operations conducted in the US;
• local personnel (either W2 or 1099);
• payroll costs;
• mortgage and mortgage costs;
• at least 1 year of continuous operations with tax returns and financials.

The increased loan eligibility provided by the CARES Act is a net benefit to the US economy. By keeping PPP loans open to foreign-owned/controlled businesses, the SBA would, in effect, make millions of workers eligible for paycheck protection.