Sri Lanka - Interest

Article 11. Interest

1.  Interest arising in one of the States and paid to a resident of the other State may be taxed in that other State. 

2.  However, such interest may also be taxed in the State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. 

3.  Notwithstanding the provisions of paragraph (2) interest arising in one of the States and paid to the Government of the other State, a political subdivision or local authority thereof or any agency or instrumentality (including a financial institution) controlled by that other State, political subdivision or local authority, shall be exempt from tax in the first-mentioned State. 

4.  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, including premiums and prizes attaching to such securities, bonds or debentures. However, this term does not include income dealt with in Article 10. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article. 

5.  The provisions of paragraphs (1) and (2) shall not apply if the beneficial owner of the interest, being a resident of one of the States, carries on business in the other State in which the interest arises, through a permanent establishment situated therein, or performs in that other State independent 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 fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply. 

6.  Interest shall be deemed to arise in one of the States when the gayer 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 one of the States or not, has in one of the States 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 situated. 

7.  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 State, due regard being had to the other provisions of this Convention. 

Protocol:

III. With reference to Article 11 and Article 23

a  Notwithstanding the provisions of paragraph (2) of Article 11 the tax charged on interest arising in one of the States and derived and beneficially owned by a bank or other financial institution, which is a resident of the other State, shall not exceed 5 per cent of the gross amount of the interest. If, however, after a period of three years after the entry into force of the Convention, under any convention for the avoidance of double taxation concluded between Sri Lanka and a third State being a member of the European Communities (other than the United Kingdom of Great Britain and Northern Ireland) the tax on such interest in Sri Lanka is levied at a rate, which is lower than 5 per cent, then, as from that date, the same rate shall apply under the present Convention. 

b  (i) The provisions of paragraph (3) of Article 23 shall apply accordingly to interest meant in paragraph (a). (ii) Where, by reason of special incentive measures designed to promote economic development in Sri Lanka, the Sri Lanka tax actually levied on interest meant in paragraph (a) above is lower than the tax Sri Lanka may levy according to that paragraph, then, for the purpose of paragraph (3) of Article 23, the tax paid in Sri Lanka on such interest shall be deemed to have been paid at the rate of tax Sri Lanka may levy according to paragraph (a). 

IV. With reference to Articles 10, 11 and 12

Where tax has been levied in excess of the amount of tax chargeable under the provisions of Articles 10, 11 and 12, applications for the restitution of the excess amount of tax have to be lodged with the competent authority of the State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied.