Starting January 1, 2025 Switzerland has suspended the application of the most favoured nation clause of the protocol to its Double Tax Avoidance Agreement (DTAA) with India, which is expected to increase tax liabilities of firms.
The decision follows an October 2023 ruling by India’s Supreme Court that held that the most favoured nation (MFN) clause under the double taxation avoidance agreement does not get automatically triggered until notified under the Income Tax Act, 1961. The ruling came by a Division Bench of the Supreme Court that disposed off 11 petitions clubbed with that of Nestle SA including those of Concentrix and Optum Global and Steria and set aside an April 2021 ruling of the Delhi High Court.
The MFN clause in the DTAA enables entities of the treaty nations to get a lower rate of tax at source and typically applies to specific types of incomes such as dividends, interest, royalties, or fees for technical services.
“On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para. 5 of the Protocol to the IN-CH 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,” said a recent statement by Swiss authorities.
“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,” it further said. However, income accruing during the 2018-2024 tax years will not be impacted by this change.
Tax experts note that this suspension could lead to increased tax outgoes for Indian firms working in Switzerland as well as for Swiss firms in India.
“Overall, this could impact Swiss investments in India as dividends would be subject to higher withholding now and income accruing on or after January 1, 2025, may be taxed at the rates provided for in the original double taxation treaty between Switzerland and India, regardless of the most favoured nation clause,” said Amit Maheshwari, Tax Partner, AKM Global.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen noted that effective January 1, 2025, the beginning of tax year in Switzerland, this suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties in an evolving global landscape.
“Switzerland’s decision to suspend the unilateral application of the MFN clause under its tax treaty with India, marks a significant shift in bilateral treaty dynamics. Grounded in the Indian Apex Court’s Nestle ruling, which rejected the automatic applicability of MFN clause, this move underscores the growing emphasis on reciprocity and mutual agreement in the interpretation of treaty provisions,” he further said.
Maheshwari also noted that Switzerland has announced this in direct response to the Nestle ruling pronounced by the Indian apex court in 2023 where the court held that MFN application is not automatic and it requires a separate notification from India to grant lower tax rates under the MFN clause. “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,” he said.