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HMRC internal manual

Double Taxation Relief Manual

From
HM Revenue & Customs
Updated
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DT: Sri Lanka: double taxation agreement, Article 11: Interest

(1) Interest arising in a Contracting State which is derived and beneficially owned by a resident of the other Contracting State may be taxed in that other State.
(2) However, subject to the provisions of paragraphs (3), (4), (5) and (6) of this Article, such interest may also be taxed in the Contracting State in which it arises, and according to the law of that State; but, where the interest is paid in respect of a debt-claim which was first created after the date of signature of this Convention the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

(3) Notwithstanding the provisions of Article 7, interest arising in Sri Lanka which is derived and beneficially owned by a resident of the United Kingdom shall be exempt from Sri Lanka tax if it is paid in respect of a loan made, guaranteed or insured, or any other debt-claim or credit guaranteed or insured, by the United Kingdom Export Credits Guarantee Department.
(4) Interest derived from Sri Lanka by the Government of the United Kingdom either directly or through an agency of that Government shall be exempt from Sri Lanka tax.
(5) Interest accruing to any company, partnership, or other body of persons which is a resident of the United Kingdom from any loan granted by that company, partnership or body of persons to the Government of Sri Lanka or to a State Corporation. or to any Government institution, or to any other institution to the capital of which the Government of Sri Lanka has made any contribution, or to a credit agency or an undertaking in Sri Lanka with the approval of the Government of Sri Lanka, shall be exempt from Sri Lanka tax.
(6) Interest derived and beneficially owned by a banking or financial institution of a Contracting State from a resident of the other Contracting State shall be exempt from tax in that other State.
(7) The term `interest` as used in this Article means income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and other debtclaims of every kind as well as all other income assimilated to income from money lent by the taxation law of the State in which the income arises.
(8) The provisions of paragraphs (1) and (2) of this Article shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, has in the other Contracting State in which the interest arises a permanent establishment and the debt-claim from which the interest arises is effectively connected with a business carried on through that permanent establishment. In such a case, the provisions of Article 7 shall apply.
(9) Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority or 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 that permanent establishment, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment is situated.
(10) ) Where, owing to a special relationship between the payer and the person deriving the interest 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 paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention.

(11) ) The provisions of this Article shall not apply if the loan or other indebtedness in respect of which the interest paid was created or assigned mainly for the purpose of taking advantage of this Article and not for bona fide commercial reasons.