Taxation of Income from Cross-border Interest
“What is Interest?” I asked my students before commencing the discussion on Article 11 of the Model Tax Convention. One of my students got up and said, “Interest is a feeling or emotion that we all have towards your teaching.” Followed by a burst of celebration. Overwhelmed, while absorbing a new angle for the meaning of “Interest”, I felt proud that my students are as creative as their teacher. So, what is Interest? In simple words, Interest is a sum paid for the use of money. Let us understand the concept of Interest in the context of cross-border taxation with the help of an example. When an Indian Company borrows money by way of Loan from a person resident of Germany, the Indian Company will pay Interest at agreed rate to such Non-resident. Now, the question arises, which country gets the right to tax such Interest Income of the Non-resident? Fig. 1 Will the Interest be taxable in India, being a Source State? Or will it be taxable in Germany, being a Residenc...