Treaties exist to prevent double taxation, not to hand out benefits to companies inserted to harvest them. The US and the EU both fight treaty shopping, with opposite tools. LOB draws bright lines you fall inside or outside of. The PPT asks about your intentions. Knowing the difference decides whether a structure keeps its withholding relief.
The problem both rules attack
A tax treaty lowers withholding between two countries. That creates an incentive: route an investment through a third country with a better treaty, using a company that does little more than hold the investment. The benefit is captured without any real presence behind it.
The OECD's BEPS project, Action 6, made anti-abuse rules a minimum standard. Countries had to choose: a detailed limitation-on-benefits clause, a principal purpose test, or both. The US and the EU landed in different places.
LOB: rules-based
Objective tests. To claim treaty benefits a company must be a qualified person: by ownership and base erosion, a stock exchange listing, an active business, or derivative benefits. The tax authority can grant discretionary relief.
PPT: purpose-based
One subjective standard. A benefit is denied if obtaining it was one of the principal purposes of an arrangement, unless granting it fits the object and purpose of the treaty. Applied case by case.
LOB: certainty through bright lines
The US has used limitation-on-benefits clauses since the 1980s and remains their strongest proponent. LOB does not ask why a structure exists; it asks whether it meets defined criteria. Pass one of the tests and the benefit is yours. Fail them all and it is not, whatever your intentions.
The upside is predictability: a well-advised taxpayer knows in advance whether a structure qualifies. The cost is rigidity. LOB clauses are long and technical, and can deny benefits to entirely genuine structures that simply fall outside the boxes.
PPT: flexibility through judgement
The Multilateral Instrument made the PPT the default anti-abuse rule for most of the world's treaties, and most EU countries, including the Netherlands and Luxembourg, apply it. It asks one question: was the treaty benefit one of the principal purposes of the arrangement?
That is far more flexible than LOB, and far less certain. Two structures that look the same on paper can be treated differently depending on the business reasons and substance behind them.
LOB asks what you are. The PPT asks why you are here. A structure spanning the US and the EU has to answer both.
Test your holding against both
Passing one test tells you nothing about the other. Answer six questions and see where your EU holding stands on each side.
Does your holding pass both tests?
Answer for the EU company that claims the US treaty rate.
How the two regimes differ
| LOB (US) | PPT (OECD and EU) | |
|---|---|---|
| Nature | Objective, mechanical | Subjective, purpose-based |
| Core question | Do you fit a category? | Was a benefit a principal purpose? |
| Predictability | High | Lower |
| Flexibility | Low | High |
| Main risk | Genuine structures denied on technicalities | Uncertainty and discretion |
| Evidence | Ownership, listing, activity | Business reasons and substance |
| Used by | The United States | OECD and EU countries |
| Introduced through | Bilateral US treaties | The Multilateral Instrument |
Transatlantic structures face both
The friction appears in the structures our clients build most: US investors holding EU operating companies, or EU groups with US shareholders, with a Dutch or Luxembourg holding in between. On the US side, that holding must pass LOB to get reduced US withholding. On the EU side, it must survive the PPT to keep treaty and directive benefits in Europe.
- Pass one, fail the other. A company can pass the PPT on substance and still fail an LOB ownership test.
- Tick a box, still challenged. A company can fit an LOB category and still be challenged under the PPT if its purpose looks tax-driven.
- Run them in parallel. Derivative benefits and beneficial ownership must be checked together, not one after the other.
So transatlantic structures cannot be optimised for one regime. They need real substance and business reasons, and an ownership that survives the US mechanical tests at the same time.
Both fight treaty shopping: one with categories, one with intent.
Most of the world moved to the PPT through the MLI.
Under the PPT, function and records matter more than paper.
Design to pass LOB and PPT at the same time.