(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):

• (a) interest arising in the Federal Republic of Germany and paid to the Government of the Republic of Latvia or to the Bank of Latvia shall be exempt from German tax;
• (b) interest arising in the Republic of Latvia and paid in consideration of a loan guaranteed by Hermes-Deckung or paid to the Government of the Federal Republic of Germany, the Deutsche Bundesbank, the Kreditanstalt fur Wiederaufbau or the Deutsche Investitions and Entwicklungsgesellschaft shall be exempt from Latvian tax;
• (c) interest arising in the Federal Republic of Germany and paid in consideration of a loan guaranteed by or paid to the state joint stock company "Latvian Export Credit" ("Latvijas Eksportkredits") or any organisation established in the Republic of Latvia after the date of signature of this Agreement and which is of a similar nature as any of the bodies referred to in sub-paragraph (b) (the competent authorities of the Contracting States shall by mutual agreement determine whether such organisations are of a similar nature) shall be exempt from German tax;
• (d) interest arising in a Contracting State shall be taxable only in the other Contracting State if:
  • (a) the recipient is a resident of that other State, and
  • (b) such recipient is an enterprise of that other State and is the beneficial owner of the interest, and
  • (c) the interest is paid with respect to indebtedness arising on the sale on credit, by that enterprise, of any merchandise or industrial, commercial or scientific equipment to an enterprise of the first-mentioned State, except where the sale or indebtedness is between related persons.

(4) The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and in the case of the Federal Republic of Germany 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 purpose of this Article.

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

(6) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a land, a political subdivision, 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.

(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 Agreement.