(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 beneficial owner of the interest is a resident of the other Contracting State the tax so charged shall not exceed 5 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.
*(3) Notwithstanding the provisions of paragraph (2), interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by, or derived in connection with a loan or credit granted, guaranteed or insured by the Government, a political-administrative subdivision or a local authority of the other Contracting State, or the Central Bank of that other State or by any financial institution owned or controlled by the Government of that other State.
For the purposes of this paragraph, the terms "the Central Bank" and "any financial institution owned or controlled by the Government of that other State" mean, unless the context otherwise requires:
- (a) in the case of Ukraine:
- (i) the National Bank of Ukraine-the Central Bank;
- (ii) the State Savings Bank of Ukraine (Oschad Bank);
- (iii) the State Export Import Bank of Ukraine (Ukreximbank); and
- (iv) any financial institution owned or controlled by Ukraine as may be agreed upon between the competent authorities of the Contracting States;
- (b) in the case of the Czech Republic:
- (i) the Czech National Bank;
- (ii) the Czech Export Bank (CEB);
- (iii) the Export Guarantee and Insurance Company (EGAP); and
- (iv) any financial institution owned or controlled by the Czech Republic as may be agreed upon between the competent authorities of the Contracting States.
*(4) The term "interest" as used in this Article 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 in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purposes of this Article. The term "interest" shall not include any item of income which is considered as a dividend under the provisions of paragraph (3) of Article 10.
*(5) The provisions of paragraphs (1), (2) and (3) 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 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 such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14 of this Convention, as the case may be, shall apply.
*(6) 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 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.
(7) 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.