Article 11 - Interest - International Taxation - Income Tax

Article 11 - Interest As per OECD Model Tax Convention Confers the Right to tax Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. [ Para 1 of Article 11 ] Interest arising in a Contracting State may also be taxed in that State according to the laws of that State, if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 10% of the gross amount of the interest . The UN Model Tax Convention leaves this percentage to be established through bilateral negotiations. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation. [ Para 2 of Article 11 ] Exception of Para 1 2 of Article 11 if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply. [ Para 4 of Article 11 ] Taxability of Excess payment made above specified percentage in Para 2 of article 11 Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. [ Para 6 of Article 11 ] Interest Deemed to be arise in Contracting State Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated. [ Para 5 of Article 11 ] Meaning of Interest Interest means Income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor s profits, and income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Exclude - Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. [ Para 3 of Article 11 ] Definition of interest in OECD and UN Model Convention are same. As per UN Model Tax Convention Article 11 of the United Nations Model Convention reproduces Article 11 of the OECD Model Convention except The UN Model Convention varies from the OECD Model convention in the Following aspect Exception of Para 1 and 2 of Article 11 if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the debt claim in respect of which the interest is paid is effectively connected with (a) such permanent establishment or fixed base, or with (b) business activities referred to in (c) of paragraph 1 of Article 7. In such cases the provisions of Article 7 or Article 14, as the case may be, shall apply. [ Para 4 of Article 11 ] Interest Deemed to be arise in Contracting State Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base , then such interest shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. [ Para 5 of Article 11 ] As per Indian Law As per section 115A of Income Tax Act, 1961 deals with the tax on Dividends, Interest Royalty and Fees for Technical Service in the case of Non-Corporate Non-Residents and Foreign Companies. [ For more details refer this chapter ]