Tax
Limitation on benefits
Also known as LOB
A limitation on benefits article restricts a tax treaty's benefits to residents meeting objective ownership and activity tests — publicly traded status, ownership by qualifying residents, an active trade or business, or a discretionary grant by the tax authority. It is the mechanical counterpart to the principal purpose test.
In plain terms: A checklist in the treaty itself deciding who is allowed to use it.
Why it matters
United States treaties have used limitation on benefits articles for decades, which is why US treaty planning has always been harder than European treaty planning. Failing every objective test leaves only a discretionary application to the competent authority.
Common misunderstanding
Reading the withholding rate table without reading the limitation on benefits article. The rate is only available to a person who qualifies, and a newly formed holding company usually does not.
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