Lagatar24 Desk
New Delhi: The Swiss government has withdrawn the ‘Most Favoured Nation’ (MFN) status accorded to India under the Double Taxation Avoidance Agreement (DTAA), effective January 1, 2025. This move will lead to higher taxes on dividend income for Indian entities and may impact Swiss investments in India.
Key Developments
1.Tax Rate Adjustment:
The tax rate on dividends earned by Indian tax residents in Switzerland will increase from the current 5% to 10%. Similarly, Swiss tax residents claiming foreign tax credits in India will face the same rate.
2.Supreme Court Ruling as Trigger:
The decision stems from the Indian Supreme Court’s 2023 ruling in the Nestle case, which invalidated the automatic application of the MFN clause in India’s tax treaties without explicit notification.
3.MFN Clause Interpretation:
In 2021, Swiss authorities reduced the dividend tax rate from 10% to 5% under the MFN clause, citing India’s agreements with Colombia and Lithuania. However, the Indian Supreme Court later ruled that such reductions required explicit notification under Section 90 of the Income Tax Act.
4.Impact on Indian Investments:
Indian entities with subsidiaries in Switzerland, particularly those under Overseas Direct Investment (ODI) structures, will face increased tax liabilities on dividends.
Expert Reactions
•Sandeep Jhunjhunwala, Nangia Andersen:
The suspension signals a shift in treaty dynamics and increases tax complexities for Indian entities operating in Switzerland.
•Amit Maheshwari, AKM Global:
Reciprocity is a key factor in this decision, ensuring equitable treatment of taxpayers in both nations. The withdrawal of MFN may deter Swiss investments in India due to higher withholding tax rates.
•Kumarmanglam Vijay, JSA Advocates & Solicitors:
The higher dividend tax will directly impact Indian companies with Swiss subsidiaries, doubling their tax burden on dividends from 5% to 10%.
Implications
1.Higher Tax Burden:
Indian companies operating in Switzerland will see a rise in tax liabilities, potentially affecting profitability and investment decisions.
2.Investment Dynamics:
The increased withholding tax could dissuade Swiss investors from engaging with Indian markets, impacting bilateral trade and investment relations.
3.Need for Treaty Alignment:
Experts emphasize the importance of aligning treaty partners on tax interpretations to ensure fairness and stability in international tax frameworks.
