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New Delhi: Switzerland has decided to suspend a special tax benefit called the “most favoured nation” (MFN) status that India had under their Double Taxation Avoidance Agreement (DTAA). This move, effective from January 1, 2025, could lead to higher taxes for Indian companies working in Switzerland and Swiss firms operating in India.
Why Did This Happen?
The issue began because of a disagreement over tax rates on dividends. Switzerland wanted to reduce the tax rate on certain earnings to 5% under the MFN clause after Colombia and Lithuania joined the Organisation for Economic Co-operation and Development (OECD). India, however, argued that the clause wasn’t automatically applicable and required a formal government notification.
In October 2023, the Indian Supreme Court ruled that the MFN clause in India’s tax treaties does not apply unless explicitly notified by the government. This ruling led Switzerland to withdraw the MFN benefit for India.
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”.
What Will Change?
Indian companies earning dividends in Switzerland will now be taxed at 10%, instead of the earlier 5%. Swiss companies investing in India will also face higher taxes. This change is expected to make business more expensive for Indian firms with subsidiaries in Switzerland.
Speaking to news agency PTI, tax expert Sandeep Jhunjhunwala believe this decision will increase the financial burden on businesses. Jhunjhunwala said that the suspension of the MFN clause shows how complicated international tax treaties can be. Another expert, Amit Maheshwari, pointed out that the move is based on fairness, ensuring both countries treat each other’s taxpayers equally.
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.
Impact on Businesses
This change could affect Swiss investments in India, as companies may now have to pay higher withholding taxes. Indian companies with overseas investments in Switzerland, especially those with subsidiaries, will also face increased costs.
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