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 — Purpose-based alternative often confused with LOB
- Treaty Shopping — Practice which LOB clauses are designed to restrict
- Anti-Treaty Shopping Rule — Wider category of rules including LOB
- Conduit Company — Typical structure failing LOB ownership tests
Related guides
- Tax treaties and international taxation — How treaty benefits and their limits operate
- Incorporation options for location-independent entrepreneurs — Company location choices interacting with treaty access
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
