CARES Financial Assistance for Subsidiaries of Foreign Companies Incorporated in the United States | Skadden, Arps, Slate, Meagher & Flom LLP
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act or Act) was enacted. The law provides much needed financial assistance to businesses in the United States. While most assistance is limited to companies based in the United States, nothing published to date suggests that subsidiaries of foreign companies incorporated in the United States will not be eligible. However, the extent of their eligibility cannot yet be determined with absolute certainty, as measures taken under this new legislation have so far only been presented in general terms. Their implementation is expected to take place in the coming weeks, with questions and ambiguities likely to be resolved over time, rather than through a single full final settlement.
Additional funding for Federal Reserve lending programs
The financial relief measures include more than $ 450 billion in funding from the US Treasury for several loan programs administered by the Federal Reserve. In this regard, the CARES law supports the measures previously announced by the Federal Reserve. Federal Reserve Act requirements for Federal Reserve loan programs would continue to apply.
Typically, Federal Reserve loan programs that derive part of their funding from the U.S. Treasury under the CARES Act are available to businesses that:
- are created or organized in the United States or under the laws of the United States;
- have significant operations in the United States;
- have a majority of their employees based in the United States;
- have not otherwise received adequate economic relief in the form of loans or loan guarantees under the CARES Act; and
- comply with certain conflict of interest provisions prohibiting the participation of entities in which elected federal officials, heads of executive services or members of their families exercise dominant influence.
While there is no guidance on the US link requirements described in the bullets above, based on a simple reading of the CARES Act, the eligibility criteria could generally be met by US affiliates. by foreign companies or by US companies that are otherwise owned by foreigners. To date, no indication has been provided that companies owned directly or indirectly by foreigners do not meet the US-Nexus requirements described above.
The following three programs, which are at varying stages of development, provide for the possibility of lending directly to general contractors (that is to say, companies for which no sectoral aid program has been set up):
- The Primary Market Business Credit Facility, on its terms, will be for investment grade companies that meet certain requirements. The program will provide interim funding for a period of up to four years with the ability to defer interest and principal for six months.
- The Mid-Sized Business Assistance program will target businesses (and, where possible, non-profit organizations) with 500-10,000 employees who meet certain requirements. The program provides funding to banks and other lenders to provide direct loans to eligible borrowers at interest rates not exceeding 2% per annum and with the ability to defer interest and principal payments for the first six month of loan. A prerequisite for this program is that the borrower certifies in good faith compliance with a number of job requirements.
- Two programs – the New Main Street Loan Facility and the Expanded Main Street Loan Facility – aim to provide credit to U.S. businesses with no more than 10,000 employees or no more than $ 2.5 billion in revenue. in 2019. Both programs rely on banks to grant and manage low-interest term loans. The originating bank can then sell a 95% stake in the qualifying special purpose vehicle loans backed by funding from the Federal Reserve and the US Treasury.
Other Federal Reserve loan programs target aspects of the financial market crisis. For example, the Term Asset Backed Securities Lending Facility (TALF) aims to support the flow of credit to consumers and businesses by providing non-recourse loans through a special purpose vehicle to credit holders. certain assets backed by AAA rated assets. newly and recently created student loan-backed securities, auto loans, credit card loans, and other consumer and small business loans. With respect to the TALF and certain other Federal Reserve lending programs, US branches and agencies of foreign banks are also not excluded from the beneficiary pool.
For more on the Federal Reserve’s loan programs, see Skadden’s March 29, 2020 Customer Alert, “Federal Reserve loan programs to support the US economy during the COVID-19 pandemic. For more information on the two Main Street programs, see the Skadden Customer Alert for April 13, 2020, “Main Street Guide to the Federal Reserve and Other Lending Programs in Response to the COVID-19 Pandemic. “
Additional loans for small businesses
The law further expands the ability to obtain Small Business Act (SBA) loans through the new $ 349 billion Paycheck Protection Program (P3). The program was launched on April 3, 2020 and loans will be available to eligible borrowers until June 30, 2020. Applications can be made through existing SBA lenders or any federally insured depository institution, federally insured credit union or institution of the agricultural credit system.
The PPP is open to businesses, businesses and nonprofits with fewer than 500 employees, including foreign affiliates and accommodation and food services businesses with fewer than 500 employees per location, which indicates that foreign companies are not excluded. in itself. Loans are made to cover payroll, health care costs, mortgage interest payments, rent and utility payments, and interest on pre-existing debts. Applicants must, however, confirm that the amount claimed for payroll is for employees whose primary residence is in the United States.
The sum of a loan cannot exceed 2.5 times the average monthly salary cost during the year preceding the loan and must be capped at $ 10 million with a maximum interest rate of 4%. Fees are waived and payments are deferred for at least six months. Collateral and personal guarantees are not required. Loans are eligible for cancellation subject to certain conditions.
To learn more about the Paycheck Protection Program, see the Skadden Customer Alert for April 6, 2020, “COVID-19 Pandemic Small Business Loans Under the CARES Act Paycheck Protection Program. “
The law also offers a number of improvements to taxpayers, which are likely to benefit US subsidiaries of foreign multinationals to the same extent as companies that operate solely in the United States. Corporate taxpayers can now carry forward net operating losses (NOL) that arose in 2018-2020 for up to five years. (Under the old set of rules, the Tax Cuts and Jobs Act (TCJA), no carryback was allowed.) For 2020 and prior years, corporations and relays can fully offset their income using NOL (previously a ceiling of 80% was imposed). Additionally, for 2019 and 2020, taxpayers can deduct interest up to 50% of adjusted taxable income plus business interest income (30% limit under the TCJA).
To learn more about tax issues related to the CARES Act, see the Skadden Customer Alert of April 2, 2020, “Tax Considerations Under the CARES Act. “
For employer payroll tax payments that would otherwise be due before January 1, 2021, 50% of those payments are now due on December 31, 2021, with the remainder due on December 31, 2022. In addition, employers severely affected by COVID-19 (either subject to a closure order or a 50% drop in gross revenue) are eligible for a refundable payroll tax credit of 50% of salary paid to some employees, with certain limitations.
To learn more about the payroll and compensation issues, see the Skadden Customer Alert of March 30, 2020, “CARES Act provides for payroll relief and compensation restrictions. “