ARTICLE 11

Interest

This Article concerns the taxation by a Contracting State of interest sourced in that State and derived and beneficially owned by a resident of the other Contracting State.

Paragraph 1 provides that, in general, the Contracting State in which the interest arises may tax the interest, but the tax may not exceed 12.5 percent of the gross amount of the interest. The paragraph also provides an exception to the general rule. Pursuant to this exception, interest is exempt from tax by the Contracting State in which it has its source if it is derived and beneficially owned by a resident of the other Contracting State with respect to debt obligations guaranteed or insured by that other State or by a political subdivision, local authority or instrumentality thereof. It is understood that the Government of a Contracting State or any political subdivision, local authority or instrumentality of that State is to be treated as a resident of that State.

Paragraph 2 contains a definition of interest which is essentially the same as that found in the U.S. Model. No difference in meaning is intended by the use of the term "loan" in the Convention in place of the term ''debt-claim'' in the U.S. Model.

Paragraph 3 provides that interest attributable to a permanent establishment or regular base which the beneficial owner of the interest, being a resident of a Contracting State, maintains in the other Contracting State is taxable in accordance with the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal Services), as the case may be, rather than under this Article.

If an excessive amount of interest is paid by reason of a special relationship between the payer and beneficial owner of interest, or between both of them and a third person, then, pursuant to paragraph 5, the provisions of Article 12 shall only apply to the portion of the payment which would have been agreed upon in the absence of such special relationship. The excess amount may be taxed by each Contracting State, in accordance with its own law, including the Convention where applicable. In the case of the United States, the excess amount may, for example, be taxed as a dividend, in which case the provisions of Article 10 (Dividends) may apply.

Note that Article 11 does not contain a source rule for interest. Each country, therefore, applies its internal law rules to determine the source of an interest payment. The Article, therefore, does not preclude the application by the United States of tax on, for example, interest paid to a beneficial owner resident in Barbados by a company resident in Barbados or a third State if the requirements of the Code for the imposition of such tax are satisfied. The United States tax on such interest beneficially owned by a Barbadian resident is limited by paragraph 1 to 12.5 percent.

This Article is subject to the saving clause of paragraph 3 of Article 1 (General Scope). Therefore, interest derived by a U.S. citizen who is a resident of Barbados may be taxed by the United States without regard to this Article.