Article 11: Interest

Learning Objectives: You should

  • understand what the term interest refers to

  • feel comfortable explaining the consequences of interest payments between parties with a special relationship

  • know how to describe the concept of beneficial ownership

Key Concepts

  • Passive Investment

  • Interest

  • Rate of withholding

  • Geographic source

  • Payments to political bodies and beneficial ownership

  • Payments between parties with a special relationship

  • Case studies

United Nations Model Double Taxation Convention between Developed and Developing Countries (2017 Update)

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 also be taxed in the Contracting State in which it arises and according to 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 ___ per cent (the percentage is to be established through bilateral negotiations) of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

  3. 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 attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article.

  4. 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 (a) such permanent establishment or fixed base, or with (b) business activities referred to in (c) of paragraph 1 of article 7. In such cases the provisions of article 7 or article 14, as the case may be, shall apply.

  5. Interest shall be deemed to arise in a Contracting State when the payer is 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.

  6. 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.

OECD Model Convention on Income and on Capital (2017 Update)

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, interest arising in a Contracting State may also be taxed in that State according to 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 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

  3. 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 attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.

  4. 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 and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

  5. Interest shall be deemed to arise in a Contracting State when the payer is 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.

  6. 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.

Article 11 Bibliography

Avery Jones, John F. “Tax Treaty Problems Relating to Source” (1998) 3 Brit Tax Rev 222.

B.J. Arnold, "OECD - Restrictions on Interest Deductions and Tax Treaties" (2019) 73:4 Bulletin for International Taxation https://www.ibfd.org/IBFD-Products/Journal-Articles/Bulletin-for-International-Taxation/collections/bit/html/bit_2019_04_o2_2.html

Blàhovà, Renàta. “Slovak Regional Court on a Dutch Holding Without Sufficient Substance” in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2013 (Vienna: Linde, 2014) 41 <https://www.ibfd.org/IBFD-Products/Tax-Treaty-Case-Law-Around-Globe-2013>

Brown, Catherine. “Symposium: Beneficial Ownership and the Income Tax Act” (2003) 51:1 Can Tax J 402, online: <https://perma.cc/C4G7-LYH8>

C. Burnett, "OECD - Interest Deductibility: Implementation of Action 4 of the OECD/G20 Base Erosion and Profit Shifting Project and the Future of Transfer Pricing of Intra-Group Finance" (2019) 73:6/7 Bulletin for International Taxation https://www.ibfd.org/IBFD-Products/Journal-Articles/Bulletin-for-International-Taxation/collections/bit/html/bit_2019_06_o2_3.html

Danon, Robert. “Interest (Article 11 OECD Model Convention)”in Michael Lang et al, eds, Source Versus Residence: Problems Arising from the Allocation of Taxing Rights in Tax Treaty Law and Possible Alternatives (Austin: Wolters Kluwer Law & Business, 2008) 81 <https://perma.cc/7ULS-F8LC>

Eduardo Brandt, BEPS Aftermath: Mechanisms to Curtail Treaty Shopping and Abuse (2019) Tax Notes International <https://perma.cc/883W-FT7C>

Fraser, Ross & JDB Oliver, “Treaty Shopping and Beneficial Ownership” (2006) Brit Tax Rev 422.

Graetz, Michael J. “A Multilateral Solution for the Income Tax Treatment of Interest Expenses” (2008) 62:486 Bull Intl Tax’n 486, online:<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259847>

Krishna, Vern. “Treaty Shopping and the Concept of Beneficial Ownership in Double Tax Treaties” (2009) 19:11 Can Curr Tax 129, online: <https://perma.cc/NW3M-ZTK8>

Li, Jinyan, "Beneficial Ownership in Tax Treaties: Judicial Interpretation and the Case for Clarity" (2012). Comparative Research in Law & Political Economy. Research Paper No. 4/2012: <https://perma.cc/J9EC-GMAJ>

Litwińczuk, Hannah. “Poland: Judgment of the Supreme Administrative Court of 24 July 2012 (II FSK 2487/11)”in Michael Lang et al, eds, Tax Treaty Case Law Around the Globe 2013 (Vienna: Linde, 2014) 229 <https://www.ibfd.org/IBFD-Products/Tax-Treaty-Case-Law-Around-Globe-2013>

Lopes Dias VS, Gaspar. “The Concept of Debt-Claim as the Key Distinguishing Factor Between Dividend and Interest Income in the OECD Model” (2015) 17:2 Intl Bull Fiscal Doc, online: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2571212>

Michael N. Kandev, "Treaty Shopping after Prevost Car: What Does the Future Hold? <https://perma.cc/WST2-6TYF>

McGowan, Michael. “Indofood Court Expands Interpretation of Beneficial Ownership” (2006) 42:13 Tax Notes Intl 1091, online: <https://perma.cc/L8XB-7L8Q>

O’Shea, Tom. “Truck Center: A Lesson in Source vs. Residence Obligations in the EU” (2009) Tax Notes Intl 593, online: <https://perma.cc/X7RF-NDYK>

Oliver, JDB et al. “Beneficial Ownership and the OECD Model” (2001) Brit Tax Rev. 27 <https://perma.cc/3B5S-EB86>

Ruf, M and Schindler D (2015) “Debt Shifting and Thin-Capitalisation Rules” Nordic Tax Journal, 17, online: https://perma.cc/3466-Q4KM

Félix Alberto. Limitation on Benefits Clauses in Double Taxation Conventions (The Hague: Kluwer Law International, 2006) <https://perma.cc/CC8Y-CJNS>

Article 11 Cases

Associates Corp of North America v R, [1980] CTC 80 (FCTD).

Conseil d’Etat (Supreme Administrative Court), 215124, 27 July 2001, Droit Fiscal, 2001, 46, 1063 (France) <https://perma.cc/9FHV-PH7T>

Corte Suprema di Cassazione (Supreme Court), 5927, 21 April 2001 (Italy).

Curragh Inc v The Queen, [1995] 1 CTC 2163 (TCC).

Deutsche Asia Pacific Finance Inc v Federal Commissioner of Taxation, 22 October 2008, [2008] FCA 1570 (Australia) <https://perma.cc/5SV5-58JZ>

Gadsen v MNR, [1983] CTC 2132 (TRB).

Canada v. General Electric Capital Canada Inc., 2010 FCA 344 (CanLII) <https://perma.cc/2WS6-YC57>

Morgan Pacific Corporation v Commissioner of Internal Revenue, 28 August 1995, 70 TCM (CCH) 540 (United States).

R v Canadian Pacific Ltd, [1976] CTC 221 (FCTD).

Supreme Administrative Court, 24 July 2012, No II FSK 2487/11 (Poland) <https://perma.cc/U2QP-LDQ5>

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