(1) Interest arising in a Contracting State and paid to a resi-
dent of the other Contracting State may be taxed in that other
State.
(2) However, such interest may also be taxed in the Con-
tracting 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 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 these limitations.
(3) Notwithstanding the provisions of paragraph 2, the Gov-
ernment 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.
(4) For the purposes of paragraph 3, the term “Government”:
a) in the case of Malaysia means the Government of Malaysia
and shall include:
aa) the governments of the states;
bb) the Bank Negara Malaysia;
cc) the local authorities;
dd) the statutory bodies; and
ee) the Export-Import Bank of Malaysia Berhad (EXIM
Bank);
b) in the case of the Federal Republic of Germany means the
Government of the Federal Republic of Germany and shall
include:
aa) the Länder;
bb) the political subdivisions or the local authorities; and
cc) the “Deutsche Bundesbank” (German Federal Bank),
the “Kreditanstalt für Wiederaufbau” (Credit Bank for
Reconstruction), and the “Deutsche Finanzierungsge-
sellschaft für Beteiligungen in Entwicklungsländern”.
(5) 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 pre-
miums and prizes attaching to such securities, bonds or deben-
tures. Penalty charges for late payment shall not be regarded as
interest for the purpose of this Article.
(6) The provisions of paragraphs 1, 2 and 3 shall not apply if
the beneficial owner of the interest, being a resident of a Con-
tracting State, carries on business in the other Contracting
State in which the interest arises, through a permanent estab-
lishment situated therein, or performs in that other State inde-
pendent 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 a
fixed base. In such case the provisions of Article 7 or Article 14,
as the case may be, shall apply.
(7) 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
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 sit-
uated.
(8) 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.