What Is the LOB Clause?
The Limitation on Benefits (LOB) clause is the anti-treaty-shopping mechanism characteristic of the US treaty model. Its purpose is to prevent treaty shopping: using an intermediary entity in Spain or the US to access bilateral treaty benefits without having a genuine economic connection to either country.
The LOB clause in the Spain–US Convention was introduced by the 2019 Protocol (BOE-A-2019-15166, in force since November 27, 2019) as part of a comprehensive modernization of the Convention. It is set out in Article 17 of the Convention. Unlike the OECD MLI’s Principal Purpose Test (PPT) — a subjective intent-based test — the LOB is an objective test: an entity must fit within one of the qualified person categories defined exhaustively in the treaty text.
Who Qualifies as a Qualified Person?
Art. 17.2 of the Convention defines the following categories of qualified persons who have automatic access to treaty benefits:
Individuals: Individual residents of either contracting state qualify automatically. A Spanish national living in Spain or a US citizen residing in Spain is a qualified person with no further analysis required.
Government entity: State bodies, political subdivisions, and state-controlled entities.
Publicly traded company: A company whose shares are regularly traded on a recognized stock exchange in the state of residence (US or EU exchanges for a Spanish company; NAFTA exchanges for a US company).
Subsidiary test: 50% or more of the voting rights and value of the entity is held by five or fewer qualified publicly traded companies.
Non-profit entity: Religious, charitable, scientific, or cultural entities meeting the applicable incorporation requirements.
Pension fund: As defined in Article 3(j) of the Convention.
Base erosion test (Art. 17.2.e): A resident entity qualifies if less than 50% of its gross income is paid or accrued to persons who are not residents of either contracting state through deductible payments. This test filters conduit structures with no genuine substance.
Alternative Paths to Treaty Benefits
Entities that do not qualify under any of the above categories may still access treaty benefits through three alternative routes:
Active business test (Art. 17.4): The resident of one state is actively conducting a trade or business in the other state, and the income for which treaty benefits are claimed derives from — or is incidental to — that activity. The activity must be genuine and substantial, not merely nominal.
Derivative benefits test (Art. 17.3): 95% or more of the entity’s value is owned by seven or fewer equivalent beneficiaries — residents of EU member states or NAFTA countries who would be entitled to equivalent or greater benefits under their own treaties with the other state.
Competent authority discretion (Art. 17.7): For cases not covered by the other tests, the competent authority of the state where the income arises may grant treaty benefits on a discretionary basis, based on the specific facts and circumstances.
Application to LLCs: The Role of Art. 1.6 of the Convention
An LLC that is fiscally transparent for IRS purposes (whether as a disregarded entity or as a partnership) does not claim the treaty in its own name. Instead, Art. 1.6 of the Convention (introduced by the 2019 Protocol) allows income attributed by the LLC to “flow through” to the beneficial-owner partner, who then claims treaty benefits in their own right. A Spanish individual partner, as an automatically qualified person, does not need to pass any additional LOB test.
By contrast, if the LLC has elected to be treated as a C-Corporation (via a check-the-box election), it becomes an opaque entity for IRS purposes, Art. 1.6 no longer acts as a gateway, and the LLC itself must demonstrate that it qualifies under Art. 17. If it is not publicly traded and does not pass the base erosion test, it will need to establish substantial economic activity or seek competent authority relief.
At BMC, we always review the LOB position before advising on reduced withholding rates for dividends, interest, or royalties in cross-border Spain–US structures. It is the first gate of the treaty, and overlooking it can result in applying reduced rates to which no entitlement actually exists.