U.S. Subsidiaries of Foreign Companies Can Also Benefit from the CARES Act

Of importance, under the CARES Act, U.S. subsidiaries of non-U.S. companies can obtain access to various relief programs, including the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDL), and the Main Street lending program. Similarly, U.S. subsidiaries are also eligible to take advantage of the tax benefits. 

Below, we provide information on the eligibility of U.S. affiliates of foreign companies to benefit from the various measures available under the CARES Act and an overview of some of the measures currently in place. This information is subject to change as Treasury, the Federal Reserve, and the SBA continue to develop and releases additional guidance.

• For more information on the PPP, see our April 1, 2020 client alert and our March 27, 2020 client alert.
• For more information on EIDL, see our March 27, 2020 client alert.
• For more information on the Main Street Program, see our April 9, 2020 client alert.
• For more information on tax relief measures, see our March 26, 2020 client alert.

Eligibility for Financial Relief Measures
Under the relevant provisions of the CARES Act, a business that has not otherwise received “adequate economic relief” in the form of loans or loan guarantees may be eligible for support where it:

1. is created or organized in the United States or under the laws of the United States;
2. has significant operations in the United States; and
3. has a majority of its employees based in the United States.

Therefore, provided a U.S. subsidiary of a foreign entity is able to satisfy these criteria, there are currently no indications that such a company would not be eligible for relief under the CARES Act. 

Given the eligibility criteria listed above, a non-U.S. subsidiary of a U.S. company would not be eligible for relief under the CARES Act.

For the Main Street programs, no guidance has yet been given as to how “significant operations” or “majority of employees” are defined. It is unclear whether the “majority of employees” will be calculated only by reference to the U.S. subsidiary or if it will include any foreign affiliates. The interpretation of these concepts will need to come from any further guidance or a developed practice from the U.S. Treasury or the Federal Reserve.

Other Considerations
Loans granted under the Main Street lending program will be subject to restrictions preventing the recipient from paying dividends or making other distributions to affiliates, for varying amounts of time.

It is likely that the loan documentation in respect of any financial relief granted under the CARES Act will include further restrictions on dividend payments and other distributions (including inter-company loans) to non-U.S. affiliates of the beneficiary.

Multijurisdictional groups seeking relief should therefore consider any restrictions that might impact cashflows from U.S. companies to its foreign affiliates.

Similarly, soon-to-be-issued guidance may limit Main Street lending recipients from outsourcing or offshoring jobs until two years after the loan is repaid. Companies will need to consider this restriction in respect of any international expansion plans.

Overall, the CARES Act is intended to provide support to U.S. businesses and workers. Therefore, while qualifying U.S. subsidiary of a foreign entity can benefit from many of the available measures, eligibility will need to be considered on a case-by-case basis. Subject to further guidance, businesses with significant operations abroad or those that rely predominantly on a foreign workforce may be restricted from accessing relief.

Where a U.S. affiliate of a foreign entity is entitled to financial assistance, loan terms must be carefully reviewed to ensure that companies are not bound by restrictions that might constrain their business operations.

For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.

Pillsbury’s experienced multidisciplinary COVID-19 Task Force is closely monitoring the global threat of COVID-19 and providing real-time advice across industry sectors, drawing on the firm’s capabilities in crisis management, employment law, insurance recovery, real estate, supply chain management, cybersecurity, corporate and contracts law and other areas to provide critical guidance to clients in an urgent and quickly evolving situation. For more thought leadership on this rapidly developing topic, please visit our COVID-19 (Coronavirus) Resource Center.