(1) Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
(2) However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest and is subject to tax in that other State in respect thereof, the tax so charged shall not exceed 10 per cent. of the gross amount of the interest.
(3) 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 interest shall not include any item which is treated as a dividend under the provisions of Article 10 of this Agreement.
(4) 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, carries on business in the other Contracting 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 15 of this Agreement, as the case may be, shall apply.
(5) Interest shall be deemed to arise in a Contracting State where the payer is that State itself, a statutory body thereof, 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 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.
(6) 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 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 of interest. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.
(7) The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.
(8) Notwithstanding the provisions of paragraph (2) of this Article, interest arising in a Contracting State shall be exempt from tax in that State if:
(a)it is derived and beneficially owned by the Government of the other Contracting State, a statutory body thereof, or a political subdivision or a local authority thereof, or the central bank of that other State, or by any agency or instrumentality of, or any financial institution wholly owned by, that Government; or
(b)it is paid in respect of a loan made, guaranteed or insured, or any other debt-claim or credit guaranteed or insured by the Government of the other Contracting State, a statutory body thereof, or a political subdivision or a local authority of, or the central bank of that other State, or any agency or instrumentality of, or any financial institution wholly owned by, that Government.
(9) For the purposes of paragraph (8) of this Article, the terms “central bank”, “agency”, “instrumentality” and “financial institution wholly owned by that Government” mean:
(a)in the case of the United Kingdom:
(i)the Bank of England;
(ii)the United Kingdom Export Credits Guarantee Department;
(iii)the Commonwealth Development Corporation; and
(iv)such other agencies or instrumentalities of, and such other financial institutions wholly owned by, the Government of the United Kingdom as may be agreed from time to time between the competent authorities of the Contracting States;
(b)in the case of Malaysia:
(i)the Bank Negara Malaysia;
(ii)the Export-Import Bank of Malaysia; and
(iii)such other agencies or instrumentalities of, and such other financial institutions wholly owned by, the Government of Malaysia as may be agreed from time to time between the competent authorities of the Contracting States.