The Swiss authorities have suspended the most favoured nation status (MFN) provision in the Double Taxation Avoidance Agreement (DTAA) with India, which could affect Swiss investments in India and raise taxes for Indian firms operating in Switzerland.
A December 11 statement from the Swiss finance department indicates this decision follows an Indian Supreme Court ruling from last year, which determined that the MFN clause does not automatically activate when a country joins the OECD if India had established a tax treaty before their OECD membership.
India established tax agreements with Colombia and Lithuania offering lower tax rates on specific income types compared to OECD nations. Both countries subsequently joined the OECD.
In 2021, Switzerland interpreted that when Colombia and Lithuania joined the OECD, a 5 per cent dividend rate would apply to the India-Switzerland tax treaty under the MFN clause, instead of the agreement’s stated 10 per cent.
Following the MFN status suspension, from January 1, 2025, Switzerland will impose a 10 per cent tax on dividends for Indian tax residents seeking Swiss withholding tax refunds and Swiss tax residents claiming foreign tax credits.
The Swiss finance department officially announced the suspension of the MFN clause protocol between Switzerland and India regarding double taxation avoidance on income taxes.
The Swiss authorities cited a 2023 Indian Supreme Court ruling in a case involving Vevey-based Nestle as the basis for withdrawing the MFN status.
This decision means Swiss authorities will levy a 10 per cent tax on dividends earned by Indian entities in Switzerland from January 1, 2025.
The statement notes that whilst the Delhi High Court supported the applicability of residual tax rates considering the MFN clause in 2021, the Indian Supreme Court reversed this on October 19, 2023, concluding that the MFN clause was not directly applicable without proper notification under Section 90 of the Income Tax Act.
Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala commented that this unilateral suspension represents a significant change in bilateral treaty dynamics.
He added that Indian entities in Switzerland may face increased tax obligations, highlighting the challenges of managing international tax treaties in today’s global context.
Jhunjhunwala emphasised the importance of treaty partners agreeing on interpretation and application of tax treaty clauses for predictability and stability.
AKM Global Tax Partner, Amit Maheshwari, explained that reciprocity drove the MFN withdrawal decision, aiming for equal treatment of taxpayers in both nations.
Maheshwari noted that Swiss authorities had previously announced a reduction in dividend tax rates from 10 to 5 per cent, retroactive from July 5, 2018, but the 2023 Supreme Court ruling contradicted this position.
He concluded that this could affect Swiss investments in India through higher dividend withholding, and from January 1, 2025, taxation may revert to original treaty rates, disregarding the MFN clause.
JSA Advocates & Solicitors Partner Kumarmanglam Vijay indicated this would particularly affect Indian companies with ODI structures involving Swiss subsidiaries, increasing Swiss dividend withholding tax from 5 to 10 per cent from January 1, 2025.