New Delhi: The Swiss government has suspended the most favoured nation status (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland, potentially impacting Swiss investments in India and leading to higher taxes on Indian companies operating in the European nation.
According to a December 11 statement by the Swiss finance department, the move follows the Supreme Court of India last year ruling that the MFN clause doesn’t automatically trigger when a country joins the OECD if the Indian government signed a tax treaty with that country before it joined the organization.
India signed tax treaties with Colombia and Lithuania that provided tax rates on certain types of income that were lower than the rates it provided to OECD countries. The two countries later joined OECD.
Switzerland in 2021 interpreted that Colombia and Lithuania joining the OECD meant a 5 per cent rate for dividends would apply to the India-Switzerland tax treaty under the MFN clause, rather than 10 per cent as outlined in the agreement.
But post suspension of the MFN status, Switzerland will from January 1, 2025, levy a 10 per cent tax on dividends due to Indian tax residents who claim refunds for Swiss withholding tax and for Swiss tax residents who claim foreign tax credits.
In the statement, the Swiss Finance Department announced suspension of the application of the MFN clause of the protocol to the agreement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income.
Switzerland cited a 2023 ruling by Indian Supreme Court in a case relating to Vevey-headquartered Nestle for its decision to withdraw the MFN status.
This means that Switzerland will tax dividends that Indian entities will earn in that country at 10 per cent from January 1, 2025.
According to the statement, in 2021, the Delhi High Court in the Nestle case upheld the applicability of the residual tax rates after taking into account the MFN clause in the double taxation avoidance treaty. However, the Indian Supreme Court, in a decision dated October 19, 2023, reversed the lower court’s decision and concluded that, the applicability of MFN clause provided “was not directly applicable in the absence of ‘notification’ in accordance with Section 90 of the Income Tax Act”.
Commenting on the decision of Swiss authority decision, Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala, said the unilateral suspension of application of the MFN clause under its tax treaty with India, marks a significant shift in bilateral treaty dynamics.
“This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties in an evolving global landscape,” he said.
It also underscores the necessity of aligning treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity, and stability in international tax framework, Jhunjhunwala said.
AKM Global, Tax Partner, Amit Maheshwari, said that the main reason behind the decision to withdraw MFN is of reciprocity, which ensures that taxpayers in both countries are treated equally and fairly.
“Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10 per cent to 5 per cent, effective retroactively from July 5, 2018. However, the subsequent Supreme Court ruling in 2023 contradicted the same,” Maheshwari said.
Overall, he added that this could impact Swiss investments in India as dividends would be subject to higher withholding now and income accruing on or after January 1, 2025, may be taxed at the rates provided for in the original double taxation treaty between Switzerland and India, regardless of the MFN clause.
JSA Advocates & Solicitors Partner Kumarmanglam Vijay said this would especially impact Indian companies having ODI (overseas direct investment) structures with subsidiaries in Switzerland and will raise the Swiss withholding tax on dividends from 5 per cent to 10 per cent from January 1, 2025.
