(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 in accordance with 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 10 percent of the gross amount of the interest.
(3) Notwithstanding the provision of paragraph (2) of this Article, the following shall apply to:
- (a) interest arising in the Federal Republic of Germany and if the interest is paid to the Government, National Bank, or State Petroleum Fund of Azerbaijan, shall be exempted from German taxes;
- (b) interest arising in the Republic of Azerbaijan; if the interest is paid on a secured loan guaranteed by the German Federal Government for exports or direct investments abroad, or paid to the German Federal Government, the German Federal Bank (Bundesbank), or the Credit Institute for Reconstruction (Kreditanstalt für Wiederaufbau) or the DEG German Investment and Development Corporation Ltd. (DEG Deutsche Investitions-und Entwicklungsgesellschaft mbH), shall be exempted from Azerbaijani taxes.
(4) Notwithstanding the provisions of paragraph 2, interest for the purposes of paragraph 1 shall be taxable only in the Contracting State of which the recipient is a resident, if the recipient of the interest is the beneficial owner and the interest is paid in conjunction with the sale of industrial, commercial, or scientific equipment on credit.
(5) 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 attached to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest under the meaning of this Article.
(6) The provision of paragraphs (1) and (4) of this Article shall not apply if the beneficial owner of interest, being a resident of a Contracting State carries on commercial activity in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs an independent personal services from a fixed place of business situated therein, and the debt-claim in respect of which the interest is paid, is effectively connected with such permanent establishment or fixed place of business. In such case, the provisions of Article 7 or Article 14 shall apply.
(7) Interest shall be deemed to arise in a State when the payer is that State itself, one of its provinces, or one of its political subdivisions, 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 Contracting State in which the permanent establishment or fixed base is situated.
(8) Where, by reason of a special relationship either between the payer and the beneficial owner of the interest or between both of them and some other person, the amount of 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 special relationship, the provisions of this Article shall apply 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 this Convention.