GIM10190 - Non-resident insurers: the scope of UK taxing rights: accounting periods beginning before 1 January 2003: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: treatment of interest

It should be noted that, so far as interest, and possibly other income, is concerned, it may not be Article 7 that is relevant. Most modern DTAs have a provision like Article 7(7) of the OECD Model: -

‘Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.’

Model Article 11 deals with interest paid by a person in one State to a resident of another. Such interest is usually exempt from tax or subject to a limited rate such as 10% in the source state, unless a provision such as Article 11(4) applies-

‘The provisions of paragraphs 1 and 2 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 and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.’’

The 2000 OECD Commentary on this paragraph says that interest is taxable in the source state as part of the profits of the permanent establishment if it is paid in respect of debt-claims forming part of the assets of the permanent establishment or otherwise effectively connected with the permanent establishment. Note that it is debt-claims that have to be effectively connected, not the interest.

Interest should be regarded as effectively connected with a permanent establishment if it would, apart from Article 7(7), be regarded as part of the business profits which Article 7 permits the UK to tax. In other words the two provisions should be regarded as co-extensive.

Article 11 normally (the 1976 US and the Norwegian treaties being exceptions) only applies to interest arising in the source state (the state where the permanent establishment is situated). Third country source interest will not escape the business profits Article if the interest Article covers only interest which arises in the State where the permanent establishment is situated.

Some older treaties have a different way of arriving at the same result. In the UK/Australia DTA, the “industrial and commercial profits“ Article 5(7) says:

‘The term “industrial or commercial profits” means income derived by an enterprise from the conduct of a trade or business, including income derived by an enterprise from the furnishing of services of employees or other personnel, but it does not include

…interest, royalties (as defined in Articles 8, 9, and 10) or rents other than dividends, interest, royalties or rents effectively connected with a trade or business carried on through a permanent establishment which an enterprise of one of the territories has in the other territory...’’