Limitation-of-benefits article
A treaty article that restricts who can claim treaty benefits, typically targeting treaty-shopping abuse.
Definition
Limitation-of-benefits (LOB) articles in US tax treaties restrict treaty benefits to qualifying residents and prevent treaty shopping by entities established to artificially access treaty rates. LOB tests typically include ownership tests, base-erosion tests, and active-business tests.
Context
Article XXIX-A of the Canada-US treaty and similar provisions in many modern US treaties. Newer treaties have stricter LOB provisions.
Example
A Pakistani founder's Delaware LLC claims Pakistan-US treaty benefits via W-8BEN-E. The LOB article may require proof that the founder qualifies as a Pakistani resident under specific ownership and activity tests.
Common pitfalls
- LOB analysis is technical; engage a CPA familiar with cross-border treaty work.
- Failing LOB tests means default 30% withholding applies even though the country has a treaty.