Interest withholding cap limits source-state taxation of cross-border interest paid to beneficial owners and provides exemptions.

Cross-border interest may be taxed in the recipient's State of residence and also in the source State, but where the recipient is the beneficial owner the source State's tax is limited by a withholding ceiling. Interest paid to the Government, its subdivisions, the Central Bank, and specified export-import institutions is exempt in the source State. The Article defines interest broadly as income from debt-claims and excludes penalty charges. Interest connected to a permanent establishment or fixed base is treated as arising in the State of that establishment, and amounts exceeding an arm's-length rate due to special relationships remain taxable under domestic law.

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