“LOB” Clause agreed between India and Mauritius
Mauritius and India agreed on the principle of including a Limitation Of Benefit (LOB) or anti-treaty shopping law clause in the revised tax treaty to ring-fence its jurisdiction from any attempts of round-tripping and money laundering activities.
The LOB clause limits treaty benefits to those who meet certain conditions including those related to business, residency and investment commitments of the entity seeking benefit of a Double Taxation Avoidance Agreement (DTAA).
What is Limitation Of Benefit (LOB) provision ?
- An anti-abuse provision that sets out where residents of the Contracting States are entitled to the treaty’s benefits
- Purpose : Aimed at preventing ‘treaty shopping’ or inappropriate use of tax pacts by third-country investors.
- To limit the ability of third country residents to obtain benefits under the said treaty.
- India’s desire is to discourage ‘Treaty shopping’ by the ‘LOB’ policy.
What is ‘Treaty shopping’ ?
The practice of structuring a multinational business in order to take advantage of more favorable tax treaties available in certain jurisdictions. A business that resides in a home country and not having a tax treaty with the source country (from which it receives income), can establish an operation in a second source country having a favorable tax treaty, in order to minimize its tax liability with the home country.