Interest taxation rules limit source taxation and provide exemptions while preserving permanent establishment connections.

The DTAA provides that interest arising in one Contracting State and paid to a resident of the other may be taxed in the recipient's State, but may also be taxed at source subject to a withholding cap when the beneficial owner is resident in the other State; exemptions apply for government and designated financial institutions. Interest is broadly defined as income from debt claims, excludes dividend treatment and late payment penalties, is sourced to the payer unless attributable to a permanent establishment or fixed base, and is limited by an arm's length rule where related party relationships inflate interest.

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