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# Limitation on Benefits (LOB)
- URL: https://university.heavnn.io/glossary/limitation-on-benefits/
- Published: 2026-10-11T22:46:00.000Z
- Updated: 2026-10-11T22:49:14.000Z
- Description: Limitation on Benefits (LOB) refers to an anti-treaty-shopping provision in tax treaties under which only residents meeting ownership, listing or activity tests obtain treaty benefits.
- Author: Heavnn
- Tags: #glossary, #Import 2026-10-11 07:56

## What Is Limitation on Benefits (LOB)?

Limitation on Benefits (LOB) refers to an anti-treaty-shopping provision in tax treaties under which only residents meeting ownership, listing or activity tests obtain treaty benefits.

*Also known as: LOB Clause, LOB Article.*

## How Limitation on Benefits (LOB) works

Limitation on Benefits (LOB) is a treaty article which denies reduced withholding rates and other treaty benefits to a resident of a contracting state unless the resident qualifies under objective tests, such as being an individual, a government body, a publicly traded company or an entity sufficiently owned by qualifying residents. The 2016 US Model Income Tax Convention places the rule in Article 22, under which a resident must be a qualified person when the benefit would otherwise apply. Entities outside the qualified-person categories may still obtain benefits through alternative routes, depending on the treaty. LOB clauses appear mainly in US treaties, and the exact tests differ treaty by treaty.

## Limitation on Benefits (LOB) vs Principal Purpose Test

Unlike the Principal Purpose Test, which examines whether obtaining a treaty benefit was one of the principal purposes of an arrangement, Limitation on Benefits applies mechanical ownership and activity tests regardless of intent.

## Example

Illustrative example: A holding company resident in Country A, owned by individuals resident in Country C, receives dividends from a US subsidiary and claims the reduced rate under the treaty between Country A and the United States. If the LOB article requires ownership by qualifying residents of Country A and no alternative test applies, the reduced rate is denied.

## Common misconception

**Myth:** Incorporating a company in a treaty country is sufficient to claim that country's treaty rates.

**Reality:** Under a Limitation on Benefits article, treaty residence alone generally does not secure benefits, because the entity must also satisfy the ownership, listing or activity tests set by the specific treaty.

## Frequently asked questions

### What is a qualified person under LOB?

A qualified person under a Limitation on Benefits article is a treaty resident within listed categories, such as individuals, governments, certain listed companies and pension funds in the 2016 US Model.

### Do individuals need to pass LOB tests?

Under the 2016 US Model Income Tax Convention, individuals resident in a contracting state are listed as qualified persons, so Limitation on Benefits tests mainly affect companies and other entities claiming treaty benefits.

## Related terms

- [Principal Purpose Test](https://university.heavnn.io/glossary/principal-purpose-test/) — Purpose-based alternative often confused with LOB
- [Treaty Shopping](https://university.heavnn.io/glossary/treaty-shopping/) — Practice which LOB clauses are designed to restrict
- [Anti-Treaty Shopping Rule](https://university.heavnn.io/glossary/anti-treaty-shopping-rule/) — Wider category of rules including LOB
- [Conduit Company](https://university.heavnn.io/glossary/conduit-company/) — Typical structure failing LOB ownership tests

## Related guides

- [Tax treaties and international taxation](https://university.heavnn.io/tax-treaties-international-taxation/) — How treaty benefits and their limits operate
- [Incorporation options for location-independent entrepreneurs](https://university.heavnn.io/incorporation-for-location-independents-whats-the-best-solution/) — Company location choices interacting with treaty access

## Sources

- [LOB article in US Model](https://home.treasury.gov/system/files/131/Treaty-US-Model-2016%5F1.pdf?ref=university.heavnn.io)
- [Treaty benefits depend on residence](https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z?ref=university.heavnn.io)

*Last verified: 2026-10-08\. This entry is general information, not tax or legal advice; rules vary by country and change over time.*