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INTRODUCTION
No aspect of United States tax treaty policy has been the focus of as much creative and high-level attention as the effort to limit treaty benefits to intended beneficiaries. The United States has fought vigorously to shut down treaty shopping techniques, and the principal weapon in its arsenal is the limitation on benefits ("LOB") clause in treaties and protocols. At least since the 1989 U.S.-Germany treaty, LOB clauses have been central to the negotiations of every income tax treaty signed by the United States.3
As its role has increased in importance, the LOB clause has undergone rapid change in both scope and structure. This article outlines the elements of the modern LOB clause as found in Article 22 of the 1996 U.S. Model Income Tax Treaty ("1996 Model"), surveys the key events in the development of LOB provisions in the years leading up to the 1996 Model as well as the years since, and reflects on the future of LOB provisions in the ongoing battle against treaty shopping.
Treaty shopping has been defined as "the use, by residents of third states, of legal entities established in a Contracting State with a principal purpose to obtain the benefits of a tax treaty between the United States and the other Contracting State." 4 For the sake of clarity, the authors will use throughout this article the shorthand provided by the following treaty-shopping scenario.
X Co, which is based in Country X, derives income from Country S (source country) and pays a 30% withholding tax on its earnings. Country X has no tax treaty with Country S but Country S has a favorable tax treaty with Country R. X Co therefore establishes a subsidiary, R Co, in Country R (residence country) and routes its investments in Country S through R Co. The effect is to reduce the Country S withholding tax on the income of X Co even though X Co was not an intended beneficiary of the treaty between Country R and Country S.5
Legitimate operations can look quite similar to this treaty-shopping scenario. Suppose, for example, that X Co established its subsidiary R Co in Country R for legitimate business reasons. Suppose further that after some time, R Co had prospered and was seeking...