Access to Treaty Benefits

S. 3961. Introduction

In order to apply treaty benefits, it is not enough for a person to be a resident of one of the contracting states as is derived from the update of OECD MC in 2017 following the BEPS Project. In light of the emergence of treaty abusive practices and the crisis of the modern concept of corporate tax residency, double taxation conventions (hereinafter DTCs) required new rules that would restrict third parties from indirectly and unjustifiably claiming tax treaty benefits. These rules were introduced in Article 29 of OECD MC 2017 as “limitation on benefits” (hereinafter LOB) clause. In fact, the LOB rules further narrow the pool of treaty benefits recipients (tax residents) therefore, some researchers, consider it as an additional residency test complementing the already existing test of Article 4 of the OECD MC 2017 or even new concept of tax residency.

The LOB clause is a system of consistently applied tests that makes it possible to determine whether a person has a significant nexus with the state of residence and prevent treaty shopping. In the case of passing even one of the tests, the person is recognized as eligible for benefits under a tax treaty.

The LOB tests ar...