The tax liability of several Indian companies, which have operations in Switzerland, including bellwether IT and pharma firms, may rise with the central European country announcing a decision to increase the withholding tax on dividends their Swiss arms pay to Indian parents under the ‘source rule’, from 5% to 10%, effective January 2025.
Switzerland cited a 2023 ruling by the Supreme Court in Nestle India case for the move. The SC ruled that the bilateral double taxation avoidance agreement (DTAA) between the countries doesn’t automatically entitle it to a lower withholding tax in India for dividends transferred to the Swiss parents, unless a notification to this effect is issued by the Indian tax authorities.
Citing this ruling, Switzerland has now withdrawn the most favoured nation (MFN) status to India in regard to dividend taxation, which means absence of non-discriminatory reciprocal treatment. Currently, subsidiaries of Swiss firms in India pay 10% withholding tax on dividends paid to parents.
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Dr Reddys Laboratories, Infosys, Wipro, Tech Mahindra, HCC, HCL are among Indian companies with business presence in Switzerland and are likely to be impacted by the Swiss move, according to industry sources.
“This suspension (of MFN treatment) may lead to increased tax liabilities for Indian entities, highlighting the complexities of navigating international tax treaties in an evolving global landscape,” said Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen.
At present, the MFN clause in the DTAA enables Indian subsidiaries in Switzerland to pay a lower rate of withholding tax to Swiss authorities on certain types of incomes, namely dividends, interest, royalties, or fees for technical services.
The India-Switzerland DTAA was last amended in 2010. The Swiss authorities feel that their interpretation of the treaty ‘is not shared’ by the Indian counterparts. “In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025,” a statement by Switzerland’s Federal Department of Finance said.
In 2021, Swiss authorities had issued a statement that Indian firms receiving dividends from Swiss sources will pay a lower withholding tax of 5%, effective retroactively from July 5, 2018. This was announced as a consequence of the accession of Lithuania and Colombia in the Organisation for Economic Cooperation and Development (OECD), where a lower tax rate was applicable.
The India-Switzerland DTAA provides for lowering the withholding tax rate for certain items of income, if both countries enter into DTAAs with other OECD countries, where a reduced tax rate is applied for such items of income. Due to the MFN status, the Indian companies were getting credits, effective July 2018, for the 5% extra tax paid earlier from Swiss authorities. With the latest move, no such credit will be available to them from 2025.
Amit Maheshwari, tax partner, AKM Global said: “Switzerland has announced this (suspension of MFN) in direct response to the Nestle ruling pronounced in 2023. 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.”
Rahul Charkha, Partner at Economic Laws Practice, said that with the 2023 ruling, India has confirmed that as long as it does not notify an approach, no benefit can be passed on to foreign taxpayers. “While Switzerland is the first country to suspend the applicability of the MFN clause, other MFN jurisdictions may soon follow,” he added.
The Supreme Court had, in 2023, ruled that the beneficial provisions of the MFN clause in the tax treaty can be availed only if it is legislatively embodied in law, through a separate statute/notification. It ruled that a notification under Section 90(1) of the IT Act is ‘necessary and a mandatory’ condition for an authority to give effect to a tax treaty, or any protocol changing its terms that has the effect of altering the existing provisions of law.
Considering that the India-Swiss tax treaty also provides for a credit of Swiss taxes in India, there may not be a major impact on account of this change, said Parul Jain, head of international tax at Nishith Desai Associates.
“However, an Indian company can also claim a deduction of dividend received from a foreign company to the extent that it has distributed dividends to its shareholders,” she said.