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- (1) Interest arising in one of the territories and paid to a resident of the other territory may be taxed in that other territory.
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- (2) However, interest arising in one of the territories may also be taxed in that territory according to the laws of that territory, but if the beneficial owner of the interest is a resident of the other territory, the tax so charged shall not exceed:
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- (a) 5 per cent of the gross amount of the interest in the case of interest arising in one of the territories and paid on any loan of whatever kind granted by a bank which is a resident of the other territory; and
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- (b) 10 per cent of the gross amount of the interest in all other cases.
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- (3) Notwithstanding the provisions of paragraph (2) of this Article, a resident of a territory may elect, after the end of the taxable period, to be taxed on its interest income after allowable deductions at the appropriate statutory rate that applies in the other territory.
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- (4) Notwithstanding the provisions of paragraphs (1), (2) and (3) of this Article, interest arising in one of the territories shall be exempt from tax in that territory if it is paid:
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- (a) to the Government of the other territory, a political subdivision, a local authority or the Central Bank thereof;
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- (b) by the Government of that territory, a political subdivision, a local authority or the Central Bank thereof;
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- (c) to a pension scheme which is a resident of the other territory;
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- (d) to a resident of the United Kingdom on corporate bonds traded on a Stock Exchange in Israel which were issued by a company which is a resident of Israel, if all the conditions in Article 9(15d) of the Israeli Income Tax Ordinance, as it stood on 1 January 2017, are met;
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- (e) to a resident of Israel on corporate bonds traded on a Stock Exchange in the United Kingdom which were issued by a company which is a resident of the United Kingdom, if all the conditions in section 117 of the Taxation of Chargeable Gains Act 1992, as it stood on 1 January 2017, are met.
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- (5) 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. The term shall not include any amounts falling within Article VI.
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- (6) The provisions of paragraphs (1), (2) and (3) of this Article shall not apply if the beneficial owner of the interest, being a resident of a territory, carries on business in the other territory 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 III shall apply.
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- (7) Interest shall be deemed to arise in one of the territories when the payer is a resident of that territory. Where, however, the person paying the interest, whether he is a resident of one of the territories or not, has in one of the territories 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 territory in which the permanent establishment is situated.
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- (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 paid exceeds, for whatever reason, 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 Party, due regard being had to the other provisions of this Convention.