ARTICLE 11

Interest

(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 be taxed in the Contracting State in which it arises, and according to the law of that State; but if the recipient is the beneficial owner of the interest the tax so charged shall, provided that the interest is taxable in the other Contracting State, not exceed:

• (a) in the case of the Federal Republic of Germany, 10 per cent of the gross amount of the interest; and
• (b) in the case of Sri Lanka, 10 per cent of the gross amount of interest paid in respect of any debt-claim, bond, debenture or other security arising from money received from abroad after the coming into force of this Convention.

(3) Notwithstanding the provisions of paragraph (2):

• (a) Interest arising in the Federal Republic of Germany and paid to the Sri Lanka Government shall be exempt from German tax;
• (b) Interest arising in Sri Lanka and paid to the German Government, the Deutsche Bundesbank, the Kreditanstalt fur Wiederaufbau or the Deutsche Gesellschaft fur wirtschaftliche Zusammenarbeit (Entwicklungsgesellschaft) shall be exempt from Sri Lanka tax.

The competent authorities of the Contracting States shall determine by mutual agreement any other governmental institution to which this paragraph shall apply.

(4) Interest received by any banking institution which is a resident of one of the Contracting States shall be exempt from tax in the other Contracting State.

(5) Interest accruing to any company, partnership, or other body of persons resident in the Federal Republic of Germany from any loans in money, goods or services or in any other form, granted by that company, partnership or body of persons to the Government of the Democratic Socialist Republic of Sri Lanka or to a State Corporation, or to any institution of the Government of the Democratic Socialist Republic of Sri Lanka, or to any other institution to the capital of which the Government of the Democratic Socialist Republic of Sri Lanka has made any contribution, or to a credit agency or an undertaking in the Democratic Socialist Republic of Sri Lanka with the approval of the Government of the Democratic Socialist Republic of Sri Lanka, shall be exempt from Sri Lanka tax.

(6) The term "interest" as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State from which the income is derived.

(7) The provisions of paragraphs (1) to (5) 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, as the case may be, shall apply.

(8) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a Land, a political subdivision or a local authority thereof 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 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 Contracting State in which the permanent establishment is situated.

(9) 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.