(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 Contract-
ing 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
5 per cent of the gross amount of the interest.
(3) Notwithstanding the provisions of paragraph 2,
a) interest arising in Germany in respect of a loan, debt-claim
or credit guaranteed or insured by an institution for insurance
or financing of international trade transactions which is wholly
“Bank of Israel” shall be exempt from German tax;
owned by Israel or paid to the Government of Israel or the
b) interest arising in Israel and paid in consideration of a loan
guaranteed by Germany in respect of export or foreign direct
investment or paid to the Government of Germany, the
Deutsche Bundesbank, the Kreditanstalt für Wiederaufbau or
the DEG – Deutsche Investitions- und Entwicklungs -
gesellschaft mbH shall be exempt from Israeli tax;
c) interest arising in a Contracting State and paid to a resident
of the other Contracting State on corporate bonds traded on
a Stock Exchange in the first-mentioned State and which
were issued by a company which is a resident of that first-
mentioned State shall be exempt from tax in the first-men-
tioned State;
d) interest arising in a Contracting State and paid to a pension
fund which is a resident of the other Contracting State shall
be exempt from tax in the first-mentioned State.
(4) The term “interest” as used in this Article means income
from debt-claims of every kind, whether or not secured by mort-
gage 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. This term shall not include elements of payments
additional to the sales price arising from the sale on credit of any
and penalty charges for late payment. Furthermore, the term “in-
merchandise or industrial, commercial or scientific equipment
terest” does not include income dealt with in Article 10.
(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 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.
(6) 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 Con-
tracting State or not, has in a Contracting State a permanent es-
tablishment 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 establish-
ment 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.