Retaliating against a 2023 Supreme Court ruling related to Nestle, Switzerland has withdrawn the most-favoured-nation clause to India under the double tax avoidance agreement, a move that will hit Indian companies invested in the European nation.
“For dividends due from and including Jan 1, 2025, the residual tax rate in the source State is limited to 10%,” the Swiss federal department of finance said in a statement issued Wednesday. Earlier they had to pay 5% tax.
India and Switzerland had originally signed the agreement in 1994 and the protocols were amended in 2000 and 2010. Subsequently, 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 member nations. Three years ago, Switzerland interpreted that Colombia and Lithuania joining the OECD meant a 5% rate for dividends would apply under the DTAA to India, too, under the MFN clause.
More nations may follow Switzerland, say experts
Supreme Court last year ruled that the MFN clause doesn’t automatically trigger when a country joins the OECD if the Indian govt signed a tax treaty with that country before it joined the organisation.
“On the basis of the Indian SC ruling, the Swiss competent authority acknowledges that its interpretation of para 5 of the protocol to the IN-CH (India-Switzerland) DTA is not shared by the Indian side. In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025,” the Swiss govt said on Wednesday
Indian companies face a higher liability due to the decision. “With the reversion to a 10% residual rate starting Jan 1, 2025, these firms face higher tax liabilities, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions,” said Ajay Srivastava of GTRI.
Experts also said that more countries could follow suit. “Essentially, Switzerland is of the view that it is not receiving the same treatment that India grants to other countries with more favourable tax treaties. Further, the main reason behind this is of reciprocity, which ensures that taxpayers in both countries are treated equally and fairly. This seems to have been disregarded after the said ruling since Swiss authorities announced in Aug 2021 that based on the most-favoured-nation clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10% to 5%, effective retroactively from July 5, 2018. However, the subsequent ruling in 2023 contradicted the same,” said Amit Maheshwari, tax partner, AKM Global.
