Tax Treaty Series

ITQ T-

003

July 5, 2019

Question

XCO is a resident of country A. XCO has a PE in country B. XCO borrows money from YCO, another resident of country A. XCO borrows the money for the purposes of its PE in country B, and the interest on that borrowing is borne by that PE. YCO does not have a PE in country B. YCO is the beneficial owner of the interest. The country A / country B double tax treaty is identical to the OECD model treaty. Is country B permitted (by the country A / country B treaty) to impose tax on the interest paid to YCO by XCO?

Answer

Yes, with a limit of 10% on the gross amount of interest: Art. 11(2).

The phrase, "interest arising in [country B]", is defined in Art. 11(5). In the first sentence, the interest arises in country A. However, under the second sentence, the interest arises in country B. The second sentence "trumps" the first, as shown by the introductory words, "Where, however", in the second sentence.

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