Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Swiss authorities have suspended the Most Favoured Nation (MFN) clause in their Double Taxation Avoidance Agreement (DTAA) with India, potentially impacting Swiss investments in India and increasing tax obligations for Indian businesses operating in Switzerland.

This decision, effective January 1, 2025, was outlined in a December 11 statement by the Swiss finance department. It follows an October 2023 ruling by India’s Supreme Court, which clarified that the MFN clause does not automatically apply when a country joins the OECD if India’s tax treaty with that country was established before their OECD membership. The ruling arose from a case involving Nestlé, based in Vevey, Switzerland.

India has tax agreements with Colombia and Lithuania that offer lower tax rates on certain income types compared to those with OECD nations. When these countries joined the OECD, Switzerland had interpreted the MFN clause to mean that the India-Switzerland treaty’s 10% dividend tax rate should drop to 5%. However, the Supreme Court ruled that MFN benefits require explicit notification under Section 90 of the Indian Income Tax Act and are not automatic. This overturned a 2021 Delhi High Court decision that supported applying the reduced rate.

As a result, from January 2025, dividends earned by Indian entities in Switzerland will be taxed at 10%—the rate stipulated in the original treaty—affecting Indian tax residents seeking Swiss withholding tax refunds and Swiss residents claiming foreign tax credits.

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Tax experts highlighted the implications of this move. Sandeep Jhunjhunwala of Nangia Andersen described the suspension as a significant shift in treaty dynamics, adding that it poses challenges for international tax treaty management. Amit Maheshwari of AKM Global noted that reciprocity influenced Switzerland’s decision, ensuring equal treatment of taxpayers from both nations. Previously, Switzerland had proposed retroactive reductions in dividend tax rates to 5% from July 5, 2018, but the Supreme Court’s ruling invalidated this approach.

Kumarmanglam Vijay of JSA Advocates & Solicitors stated that Indian companies with Swiss subsidiaries may face increased withholding tax rates on dividends, rising from 5% to 10%. This change could raise costs for Indian businesses with overseas direct investments (ODIs) in Switzerland.

The development underscores the need for clarity and mutual agreement between treaty partners to maintain predictability and stability in international tax arrangements.

Switzerland Suspends ‘Most Favoured Nation’ Status for India: Implications for Indian Entities’ Tax Liabilities

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Switzerland has decided to suspend the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, effective January 1, 2025. This decision is set to increase tax obligations on dividend income for Indian entities operating in Switzerland.

The move follows an October 2023 Indian Supreme Court ruling concerning the MFN clause in a tax treaty case involving Swiss multinational Nestlé. The court clarified that the MFN provision under the DTAA does not automatically apply unless explicitly notified under the Income Tax Act of 1961.

Acknowledging the Supreme Court’s stance and the resulting differing interpretations of the treaty, Swiss authorities announced the suspension of the MFN clause due to the absence of reciprocity. They confirmed that this change would not affect income earned between 2018 and 2024.

Tax experts anticipate significant implications for Indian companies, particularly those with overseas direct investment (ODI) structures involving Swiss subsidiaries. Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, noted that dividend withholding tax for these entities would rise from 5% to 10% starting in 2025.

The suspension could also affect investment flows exceeding $100 billion under the European Free Trade Agreement (EFTA) with India.

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen, highlighted that this decision reflects a broader shift in international tax treaty dynamics. He remarked that Switzerland’s approach underscores the growing emphasis on reciprocity and mutual agreement in treaty interpretations, as affirmed by India’s apex court in the Nestlé case.

This development signifies a pivotal moment in bilateral tax relations, emphasizing the need for clear and consistent treaty provisions to ensure stability and predictability for businesses.

Switzerland Revokes MFN Status for India Over Nestlé Case Ruling

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses The Swiss government has announced the suspension of the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, effective January 1, 2025. This move is expected to increase tax liabilities for Indian companies operating in Switzerland and could also impact Swiss investments in India.

The decision follows a 2023 Indian Supreme Court ruling in a case involving Nestlé, headquartered in Vevey, Switzerland. The court determined that the MFN clause does not automatically apply when a country joins the OECD unless the provision is specifically notified under India’s Income Tax Act.

Previously, India had signed tax treaties with Colombia and Lithuania that offered lower tax rates on certain income types compared to agreements with OECD countries. After these countries joined the OECD, Switzerland interpreted in 2021 that the MFN clause reduced the India-Switzerland treaty’s dividend tax rate from 10% to 5%. However, the Indian Supreme Court overturned this interpretation, ruling that the clause’s application requires explicit notification.

With the MFN suspension, dividends paid to Indian entities in Switzerland will now be taxed at the original rate of 10%, effective January 2025. This will affect Indian residents seeking Swiss withholding tax refunds and Swiss residents claiming foreign tax credits.

Tax experts have highlighted the potential impact of this decision. Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, described the move as a significant shift in bilateral treaty dynamics, increasing tax liabilities for Indian entities and underscoring the challenges of navigating international tax treaties.

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Amit Maheshwari, Tax Partner at AKM Global, noted that reciprocity was the key factor driving the decision, ensuring equitable treatment for taxpayers in both countries. He explained that while Swiss authorities had announced in 2021 that the dividend tax rate would be reduced to 5% retroactively from July 2018 under the MFN clause, the Supreme Court’s 2023 ruling invalidated this adjustment.

Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, added that the decision would particularly affect Indian companies with overseas direct investment (ODI) structures involving Swiss subsidiaries. These entities will now face a higher withholding tax on dividends, increasing from 5% to 10%.

Overall, this development highlights the complexities of international tax agreements and the need for clarity and alignment between treaty partners to ensure predictability and stability in cross-border taxation.

Switzerland Suspends MFN Clause in Tax Treaty with India, Effective 2025

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Starting January 1, 2025, Switzerland will suspend the application of the Most Favoured Nation (MFN) clause in its Double Tax Avoidance Agreement (DTAA) with India. This change is expected to increase tax liabilities for companies operating between the two countries.

The decision follows an October 2023 Indian Supreme Court ruling that stated the MFN clause in tax treaties does not automatically apply unless specifically notified under the Income Tax Act, 1961. The ruling, which involved Nestlé SA and several other companies like Concentrix, Optum Global, and Steria, overturned an earlier Delhi High Court judgment from April 2021.

The MFN clause typically allows entities from treaty nations to benefit from reduced tax rates on specific incomes, such as dividends, interest, royalties, and technical service fees. However, with the suspension, dividend income and other earnings accruing from January 2025 onwards will be taxed as per the original terms of the India-Switzerland DTAA, without applying the reduced rates under the MFN provision.

Swiss authorities acknowledged that India does not share the same interpretation of the MFN clause and cited a lack of reciprocity as the reason for the suspension. Income earned between 2018 and 2024 will remain unaffected.

Impact on Businesses and Investments

Switzerland Pulls Plug on India Tax Deal: Big Blow for Businesses Tax experts have noted that the move could lead to higher tax outflows for Indian firms operating in Switzerland, as well as for Swiss firms in India. Amit Maheshwari, Tax Partner at AKM Global, explained that Swiss investments in India could also be affected, as dividends will now face higher withholding taxes.

Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, highlighted that the suspension underscores the growing emphasis on mutual agreement and reciprocity in interpreting treaty provisions. He also pointed out that the complexities of international tax treaties are becoming more pronounced in the current global landscape.

The Swiss government’s decision is seen as a direct response to the Indian Supreme Court’s Nestlé ruling, which concluded that the MFN clause requires explicit notification from the Indian government for reduced tax rates to apply. According to Maheshwari, Switzerland views this as unequal treatment compared to other nations with more favorable tax agreements with India.

This development marks a significant shift in the bilateral treaty relationship between the two countries and underscores the importance of aligned interpretations to ensure fairness and stability in cross-border taxation.