Limitation of Benefit (LoB) Clause – Anti-Treaty Shopping Measures

Limitation on Benefit clause restricts treaty shopping by conditioning treaty benefit entitlement on ownership and activity tests.

Limitation on Benefit clauses are targeted anti treaty shopping measures that condition entitlement to tax treaty benefits for non individuals on objective tests. Common tests include an ownership test requiring qualifying resident or national beneficial ownership, a base erosion test preventing substantial payments to non qualified persons, an active business test excluding passive investment activities, and a recognized stock exchange test for regularly traded companies. Treaties typically set the precise formulation and may permit competent authority relief; inclusion of LoB clauses in Indian treaties responds to the absence of an inherent anti abuse rule.