Cannot open or preview pdf with view only and restricted download access in Microsoft Teams

If you try to open a read only pdf file from Microsoft Teams channel, you may encounter an error "Hmm… looks like this file doesn't have a preview we can show you." with a download button. Clicking the Download button does not do anything.

The preview error occurs if you modify the permissions and restrict download using SharePoint permissions or IRM settings (Information Rights Management).

Observations

1. You see a Read-only icon near the file stating its 'Read-only.'
2. Clicking the file shows message "Hmm… looks like this file doesn't have a preview we can show you.".
3. Clicking the Download button does nothing.
4. Problem occurs only with pdf files. Other Microsoft Office file types like Word, PowerPoint, Excel, image, etc. can be opened without any problem.
5. You can successfully open the file by clicking "Open in SharePoint" link from the Files tab in Teams.
6. Modifying the permissions and granting minimum Read/View access from SharePoint allows the file to open successfully.
7. Behavior is same in public and private channels.
8. Behavior is same in Desktop Client, Mobile App and Web browser.
9. Behavior is same for organizational and external users.

Looks like Microsoft Teams expects minimum read permissions with download rights in order to preview the pdf file. Note that Teams has only 2 permission sets (Owner and Member), unlike SharePoint (Owners, Members, Visitors, plus custom permissions sets).

So if you want to restrict downloading of PDF's for your users, do it through SharePoint as it will break in Teams.