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The Consolidated Appropriations Act of 2021 (“CAA”) that was passed into law contains important changes to the Paycheck Protection Program (PPP). The CARES Act passed earlier in 2020 created the Paycheck Protection Program (“PPP”) which allowed businesses to borrow up to 2.5X their monthly payroll in what essentially amounted to tax-free money (read here for more information) to many US businesses.

The CAA provides for an extension of the PPP loan program (PPP2) with similar terms (read here for more information) on the amount of the loan and repayment. However, there are several aspects of the new loan program (PPP2) that create obstacles for certain businesses that have affiliations with China and Hong Kong.

Namely, the law deems “not eligible” to qualify for the PPP2 any business that:

  • Any business concern or entity operating in the US directly (as a branch) which is created or organized under the laws of the China[1] or the Hong Kong[2], or that has significant operations in China or Hong Kong
  • Any business entity that is 20% owned[3], directly or indirectly, by a business concern or entity which is created or organized under the laws of China or Hong Kong, or that has significant operations in China or Hong Kong
  • Any business entity which has one of its board members (or directors) a person who is a resident[4] of China.

Taxpayers who have affiliations with Chinese and Hong Kong businesses should take into consideration the exclusions above in addition to the rest of the PPP2 loan stipulations for eligibility.

WG Observation

It appears that the restrictions above do not apply to the Employee Retention Credit (ERC) provisions, therefore taxpayers may be eligible to claim the credits contained in the ERC. For more information on the ERC under the new tax law please read here.

Please contact your WilkinGuttenplan advisor for further information.

[1] People’s Republic of China
[2] Special Administrative Region of Hong Kong
[3] Equity interest in the interim final rule is defined as: (A) a share in an entity, without regard to whether the share is transferable or classified as stock or anything similar; (B) a capital or profit interest in a limited liability company or partnership; or (C) a warrant or right, other than a right to convert, to purchase, sell, or subscribe to a share or interest described in (A) or (B), respectively
[4] Although the text of the interim final rule does not define the meaning of resident, it appears that the residency definition may follow the constructs of tax residency under the US-China tax treaty, or similar Model Treaty language.

Questions? Ask a WG Advisor