ARTICLE 11

Interest

This Article limits the tax which may be imposed by either Contracting State on interest derived and beneficially owned by a resident of the other Contracting State. There is no corresponding provision in the 1953 Convention.

Paragraph 1 states that such interest may be taxed in the State of residence of the beneficial owner. This provision, which comes from the OECD Model, confirms the provision of paragraph 3 of Article 1 (Personal Scope) that each Contracting State reserves the right to tax its residents.

Paragraph 2 provides that such interest may also be taxed by the State in which it has its source, but the tax is limited to 10 percent of the gross amount of the interest. Australia's statutory rate of tax on interest paid to nonresidents is generally 10 percent.

Paragraph 3 provides that, when interest beneficially owned by a resident of one Contracting State is attributable to a permanent establishment or fixed base which that resident maintains in the other State, that interest is not taxable in accordance with this Article but in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services).

Paragraph 4 states that the provisions of this Article shall not apply to interest payments between related persons in excess of the amount which would have been agreed upon at arm’s length. Such excess amount shall be taxed according to the laws of each Contracting State, with regard also to the other provisions of this Convention.

Paragraph 5 defines interest as income assimilated to income from money lent under the tax law of the Contracting State where the income arises.

Paragraph 6 provides that a Contracting State may not tax interest paid by a resident of the other State, with three exceptions:

(1) to the extent that the interest has its source in that State; (2) to the extent that the beneficial owner of the interest is a resident of that State; or (3) to the extent that the interest is attributable to a permanent establishment or fixed base of the owner in that State.

Under these rules the United States may tax interest paid by an Australian company if the interest has its source in the United States in accordance with paragraph 7 of this Article, and in accordance with the Internal Revenue Code. Where such interest is beneficially owned by a resident of Australia, the U.S. tax will be reduced to 10 percent, in accordance with paragraph 2 of this Article. The United States may also tax interest received by U.S. citizens, pursuant to paragraph 3 of Article 1 (Personal Scope).

Paragraph 7 defines the source of interest. Interest has its source in a Contracting State if paid by that State, a political subdivision or local authority thereof, or a person who is a resident of that State for purposes of its tax, including a corporation which under the respective internal laws is a resident of both States. (Thus, interest paid by such a dual resident company may be eligible for the reduced rate provided in paragraph 2, although interest beneficially owned by such a company is not.) An exception to this general rule, which looks to the payer of the interest, provides that when the indebtedness is incurred in connection with and the interest is borne (deducted in computing taxable income) by a permanent establishment or fixed base which the payer has in a Contracting State, the interest has its source in that State.

The Convention does not provide for exemption at a source of interest derived and beneficially owned by the Government of the other State or by a government instrumentality. Under Australian law, such interest, e.g., interest derived by the U.S. Government or the ExportImport Bank, is currently exempt from tax in Australia. Similarly, under U.S. law (I.R.C. section 892) interest derived by the Australian government would generally be exempt from U.S. tax.