Article 7 of the OECD Model, explained by paragraphs 18 and 19 of the Commentary, makes it clear that, in general, an establishment cannot pay ‘interest’ to its own head office. This is because
Although in principle a formula based on apportionment of debt
charges might be justified on the argument above, it was found
difficult to apply in practice and the current Commentary precludes
deductions for internal debt and receivables except in the case of
a financial business, where payment of interest is of central
importance. This rule is reflected at ICTA88/SCHA1/PARA5. The
definition of financial business is at sub-paragraph 5(3):
essentially banking, deposit taking and futures dealing.
OECD Model Article 11 deals with interest paid by a person resident in one State to a resident of another, and Article 7(7) makes Article 7, the Business Profits Article, subject to other Articles. However, GIM10235 explains that Article 7 nevertheless applies where the debt claim in respect of which the interest is paid is effectively connected with a business carried on in the permanent establishment.
Some individual treaties, for example UK/Australia, may contain different rules that lead to the same conclusion.