(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
- (a) 10 per cent of the gross amount of such interest if it is paid on any loan of whatever kind granted by a bank. In the case of interest arising in Portugal, the provision of this sub-paragraph shall only apply if the operation for which the loan is given is considered to be of an economic or social interest for the country by the Portuguese Government, which condition is always considered to be fulfilled if it is comprised in development plans approved by this Government.
- (b) 15 per cent of the gross amount of such interest in all other cases.
The competent authorities of the Contracting State shall by mutual agreement settle the mode of application of this limitation.
(3) Notwithstanding the provisions of paragraph (2), interest arising in the Federal Republic of Germany and paid to the Banco de Portugal shall be exempt from German tax and interest arising in Portugal and paid to the Deutsche Bundesbank shall be exempt from Portuguese tax.
The competent authorities may by mutual agreement extend the provisions of this paragraph to interest paid to other similar institutions.
(4) 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 other debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises.
(5) 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 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, interest may be taxed in that other State and according to its taxation law.
(6) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, 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 Convention.