What is Treaty Shopping?

Treaty shopping is considered to be a means of tax avoidance. The bilateral tax treaties are done to reciprocate the benefits between the residents of two countries but when someone from a third country invests in any of them just for the sake of avoiding tax and derives the benefits of low taxation, this is termed as treaty shopping. Countries use anti-treaty-shopping provisions such as Limitation of Benefit (LOB) clause and/or beneficial ownership provisions to counter the treaty shopping. For example, India included such LOB clause in relation to bilateral tax treaty with Singapore.

Limitation Of Benefit (LOB)

Limitation Of Benefit (LOB) refers to the rules that are put in place to counter the menace of treaty-shopping/ Such rules restrict availing of the treaty benefits by a conduit (compromised) entity formed for the purposes of treaty-shopping {they call it a letterbox entity}. It also restricts entities who attempt to claim double non-taxation; for example, LOB clause under India-Singapore tax treaty.