The United States polices treaty access with a mechanical Limitation on Benefits clause. The OECD and the EU rely on a subjective Principal Purpose Test. Same goal, very different logic — and structures that cross the Atlantic have to satisfy both.
Tax treaties exist to prevent double taxation — not to hand out benefits to entities inserted purely to harvest them. Both the US and the OECD/EU want to stop that “treaty shopping,” but they reach for opposite instruments. LOB draws bright lines you either fall inside or outside of. PPT asks a question about your intentions. Understanding the difference is the difference between a structure that survives scrutiny and one that quietly loses its withholding relief.
A double tax treaty lowers withholding tax between two countries. That creates an incentive: an investor in a country with an unfavourable treaty routes an investment through a third country with a better one, using an intermediate entity that does little more than hold the investment. The benefit is captured without any real presence behind it.
For decades this was the central abuse that treaty policy tried to address. The OECD’s BEPS project (Action 6) made anti-abuse rules a minimum standard, and jurisdictions had to choose how to implement it — through a detailed Limitation on Benefits clause, a Principal Purpose Test, or both. The US and the EU landed in different places.
A mechanical set of objective tests. To claim treaty benefits, a company must fit into a defined category of “qualified person” — based on who owns it, whether it is listed, and what it actually does.
A single subjective standard. Benefits are denied if obtaining that benefit was one of the principal purposes of an arrangement — unless granting it would accord with the object and purpose of the treaty.
The US has used Limitation on Benefits clauses in its treaties since the 1980s and remains the strongest proponent of the approach. The logic is objective: rather than asking why a structure exists, LOB asks whether it meets defined criteria. If a company passes one of the qualifying tests — sufficient local ownership, a stock-exchange listing, a genuine active business, or qualifying “derivative” owners — it gets the benefit. If not, it does not, whatever its intentions.
The advantage is predictability. A well-advised taxpayer can usually tell in advance whether a structure qualifies. The cost is complexity and rigidity: LOB clauses are long, technical, and can deny benefits to structures that are entirely genuine but simply fall outside the defined boxes.
The OECD Multilateral Instrument (MLI) made the PPT the default anti-abuse rule for the majority of the world’s treaties, and it is the standard most EU member states — including the Netherlands — apply. Instead of categories, the PPT asks a question: was obtaining the treaty benefit one of the principal purposes of the arrangement? If so, the benefit is denied, unless granting it would be in line with the object and purpose of the relevant treaty provisions.
This is far more flexible than LOB — and far less certain. Two structures that look identical on paper can be treated differently depending on the commercial rationale and substance behind them. That places a premium on genuine economic function and on documentation that evidences it.
LOB asks “what are you?” The PPT asks “why are you here?” A structure spanning the US and the EU has to answer both — convincingly.— On the two logics of treaty anti-abuse
| Dimension | LOB (US) | PPT (OECD / EU) |
|---|---|---|
| Nature of test | Objective, mechanical | Subjective, purpose-based |
| Core question | Do you fit a qualifying category? | Was a benefit a principal purpose? |
| Predictability | High — bright-line tests | Lower — case-by-case judgement |
| Flexibility | Low — rigid categories | High — adapts to facts |
| Key risk | Genuine structures denied on technicalities | Uncertainty; authority discretion |
| Documentation focus | Ownership, listing, activity tests | Commercial rationale & substance |
| Typical champion | United States | OECD, EU member states |
| Adopted via | Bilateral US treaties | Multilateral Instrument (MLI) |
The friction appears in exactly the structures BCA’s clients most often build: US investors holding EU operating companies, or EU groups with US shareholders, using an intermediate holding — frequently a Dutch B.V. — in between. Such a structure sits on both sides of the divide.
On the US-facing treaty, the intermediate entity must pass the LOB tests to access reduced withholding on dividends flowing to or from the US. On the EU-facing side, the same entity must survive the PPT to keep treaty and directive benefits within Europe. Satisfying one does not satisfy the other:
The practical consequence is that transatlantic structures cannot be optimised for one regime alone. They must be built with real economic substance — local decision-making, genuine function, defensible commercial rationale — and with ownership that survives the US mechanical tests at the same time.
LOB and PPT both fight treaty shopping — one with categories, one with intent.
Most of the world moved to the PPT via the MLI; the US kept LOB at the core of its treaties.
Under the PPT, genuine economic function and documentation matter more than structure on paper.
US–EU structures must be engineered to pass LOB and PPT simultaneously, not one or the other.
Participation exemption, the treaty network and the PPT in Dutch practice.
Read the guide → StructureHow a Dutch B.V. channels EU dividends under directives and exemptions.
See the structure → ReferenceHow Europe’s exemption regimes interact with anti-abuse rules.
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