DEFINITION of 'Loophole'

A technicality that allows a person or business to avoid the scope of a law or restriction without directly violating the law. Used often in discussions of taxes and their avoidance, loopholes provide ways for individuals and companies to remove income or assets from taxable situations into ones with lower taxes or none at all.

Loopholes are most prevalent in complex business deals involving tax issues, political issues and legal statutes. They can be found within contract details, building codes, tax codes, among others.

BREAKING DOWN 'Loophole'

A person or company utilizing a loophole isn't considered to be breaking the law, but circumventing it in a way that was not intended by the regulators or legislators that put the law or restriction into place. Most loopholes will close in time, as those who have the power to do so rewrite the rules to cut off the opportunity for loophole advantage. Some tax loopholes exist perennially, especially in nations like the United States where the intricate tax code amounts to tens of thousands of pages - which can lead to many opportunitoes for those seeking to exploit it.

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