Switzerland has withdrawn the most favourite nation (MFN) status granted to India following an adverse court ruling against Nestlé for the avoidance of double taxation concerning taxes on income. This move will result in adverse tax implications for Indian companies operating in the European nation.
In a statement, Switzerland's federal department of finance (DFF) says, "On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para 5 of the Protocol to India (IN)- Confoederatio Helvetica (CH- Swiss Confederation) double taxation agreements (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. Accordingly, income accruing on or after 1 January 2025 may be taxed in the source state at the rates provided for in the DTA IN-CH, regardless of the application of para. 5 of the Protocol to the DTA IN-CH."
"As a result, the claim for refund of Swiss withholding tax by Indian tax residents and the claim for credit of foreign taxes by Swiss tax residents under the Federal Ordinance on the crediting of foreign taxes deducted at source (see also Ordinance 1 of the federal department of finance ordinance on the crediting of foreign taxes deducted at source) remain guaranteed, under the conditions provided for in treaty law and domestic law, at the following rates: For dividends due from and including 1 January 2025, the residual tax rate in the source state is limited to 10%," the Swiss authority says.
In 2021, the Delhi High Court (HC), hearing a case brought by a taxpayer resident in Switzerland, upheld the application of the residual tax rates after taking into account the most favoured nation—MFN—clause.
However, the Supreme Court (SC), in a decision dated 19 October 2023, reversed the HC's decision. The SC held that the benefit of a lower tax rate or a restricted scope agreed by India in a subsequent tax treaty cannot be directly imported to another treaty by way of an MFN clause unless India separately notifies the same.
According to Switzerland, the SC concluded that, on the one hand, applying the MFN clause in the DTC IN-CH was not directly applicable in the absence of 'notification' under Section 90 of the Indian Income Tax (I-T) Act. "On the other hand, the use of the indicative present tense in para 5 of the protocol to the DTC IN-CH (third state which is a member of the Organisation for Economic Co-operation and Development- OECD) had to be interpreted as being limited to the member states of the OECD at the time the protocol was signed."
"It thus follows from the SC's findings that the subsequent accessions of Colombia and Lithuania to the OECD are, according to the Indian side, without effect on the application of the most favoured nation clause in DTC IN-CH," the DFF says.
On 2 November 1994, India and Switzerland concluded the agreement for the avoidance of double taxation with respect to taxes on income (DTC IN-CH). It was revised by the amending protocols on 16 February 2000 and 30 August 2010.
In the statement published on 13 August 2021, the Swiss competent authority indicated that, on the basis of the most favoured nation clause between Switzerland and India, Colombia's accession to the OECD had had the effect, retroactively to and including 28 April 2020, of replacing the residual tax rate in the source State for dividends from 10% to 5% (dividends from qualifying participations and so-called portfolio dividends) in the context of relations between India and Switzerland.
"In addition, the statement of 13 August 2021 specified that, in the event that reciprocity regarding the interpretation of the most-favoured-nation clause was not guaranteed by the Indian competent authority, the Swiss competent authority would reserve the right to reverse the unilateral application of the most favoured nation clause and to readjust the treaty rates applicable to income accruing from 1 January 2023. It has decided not to change this interpretation in respect of income falling due in 2023 and 2024," the Swiss authority says.
"The position adopted by the Swiss competent authority in its statement of 13 August 2021 remains applicable for income accruing during the 2018-2024 tax years," DFF added.
