(1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest.
(3) Notwithstanding the provisions of paragraph 2, interest arising in a Contracting State and derived by the Government of the other Contracting State, including a local authority thereof, the Central bank or any financial institution controlled by that Government, shall be exempt from tax in the first mentioned State.
(4) For the purposes of paragraph 3, the terms "the Central Bank" and "financial institution controlled by that Government" mean:
- (a) In the case of Sri Lanka:
- (i) The Central Bank of Sri Lanka;
- (ii) Such other financial institution, the capital of which is wholly owned by the Governments of Sri Lanka, as may be agreed upon from time to time between the Governments of the Contracting States.
- (b) In the case of United Arab Emirates:
- (i) The Central Bank of United Arab Emirates;
- (ii) Such other financial institution, the capital of which is wholly owned by the Government of the United Arab Emirates, or its local authority or local government as may be agreed upon from time to time between the Governments of the Contracting States.
(5) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by a mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
(6) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State I 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 under (c) of paragraph 1 of Article 7. in such case, the provisions of Article 7 or Article 14, as the case may be shall apply.
(7) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a local authority, or 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 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.
(8) 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 payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of the Agreement.