(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 15 percent of the gross amount of the interest.
(3) Notwithstanding the provisions of paragraph (2), interest to which a resident of Islamic Republic of Iran is beneficially entitled shall be exempt from tax if the loan or other in respect of which the interest is paid is an approved loan as defined in section 2 (1) of the Income Tax Act 1967 of Malaysia.
(4) Notwithstanding the provisions of paragraphs (2) and (3), the Government of a Contracting State shall be exempt from tax in the other Contracting State in respect of interest derived by the Government from that other State.
(5) For the purposes of paragraph (4), the term "Government":
- (a) in the case of Malaysia means the Government of Malaysia and shall include:
- (i) the governments of the states;
- (ii) the local authorities;
- (iii) the statutory bodies;
- (iv) Bank Negara Malaysia; and
- (v) such institutions, the capital of which is wholly owned by the Government of Malaysia or the governments of the states or the local authorities or the statutory bodies thereof, as may be agreed upon from time to time between the competent authorities of the Contracting States;
- (b) in the case of Iran, means the Government of the Islamic Republic of Iran and shall include:
- (i) ministries, government institutions;
- (ii) municipalities;
- (iii) legal foundations;
- (iv) central bank and other banks wholly owned by the Government;
- (v) governmental corporations; and
- (vi) some other institutions, the capital of which is wholly owned by the Government of the Islamic Republic of Iran as may be agreed upon from time to time between the competent authorities of the Contracting States.
(6) 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. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.
(7) 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, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such a case, the provisions of Article 7 shall apply.
(8) 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 statutory body 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 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 a 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.