Switzerland revokes most favored nation status for India: Here's why
What's the story
Switzerland has suspended the application of the most favored nation (MFN) clause with India, under their Double Tax Avoidance Agreement (DTAA) from January 1, 2025. The Swiss Federal Department of Finance (DFF) announced the decision after it perceived a lack of reciprocity from India on the interpretation of the MFN clause. Earlier, Switzerland had lowered the withholding tax on Indian entities in its territory from 10% to 5% under the treaty.
Statement
Take a look at the official statement
In a statement, the Swiss Federal Department of Finance (DFF) said, "In the absence of reciprocity, it, therefore, waives its unilateral application with effect from January 1, 2025." "Accordingly, income accruing on or after January 1, 2025 may be taxed in the source state at the rates provided for in the DTC IN-CH (India-Switzerland Direct Tax Convention), regardless of the application of para 5 of the Protocol to the DTC IN-CH."
Tax tension
Background of the tax dispute
The tax dispute arises from a protocol signed between India and Switzerland in August 2010. The protocol said if India capped its taxation at source on certain incomes with any Organisation for Economic Co-operation and Development (OECD) member country at a lower rate than that provided in their DTC, the same rate would apply between Switzerland and India. This came into play when Lithuania and Colombia joined OECD, after signing DTCs with India at a 5% withholding tax rate.
Refund
Swiss tax refund for Indian residents and Nestle's case
In August 2021, Swiss authorities had confirmed that Indian tax residents could claim a refund of withholding tax for dividends, due from Swiss sources after the dates mentioned previously. However, last year, India's Supreme Court reversed a Delhi High Court ruling favoring Nestle's claim for a withholding tax refund. The court noted that the MFN clause was not directly applicable without "notification" under Section 90 of India's Income Tax Act.
Tax hike
Switzerland's response to India's Supreme Court judgment
After the SC judgment, Swiss authorities have rescinded their unilateral withholding tax reduction in the absence of reciprocity. Akhilesh Ranjan, an adviser with PwC and former member of India's Central Board of Direct Taxes (CBDT), said Switzerland will now tax dividends paid to Indian holding companies at 10% instead of 5%. He added Indian companies operating in Switzerland will still benefit from DTAA on other income items.
Business impact
Impact on Swiss companies with subsidiaries in India
For Swiss companies with subsidiaries in India, there's no change since dividends paid to Switzerland have always been taxed at 10% in India. As such, this move isn't expected to impact European Free Trade Association (EFTA) investments into India. The suspension of the MFN clause is a major development in the tax relations between Switzerland and India, marking a departure from previous agreements.