Switzerland has suspended the unilateral application of Most Favoured Nation (MFN) clause with India under Double Tax Avoidance Agreement (DTAA), consequently Indian companies in Europe may face higher tax.
In the DTAA between India and Switzerland, Switzerland had reduced the withholding tax on Indian entities operating in that country to 5 per cent from 10 per cent earlier.
This decision follows a ruling by the Indian Supreme Court last year, which determined that the DTAA cannot be enforced unless it is notified under the Income-Tax Act. As a result, Swiss companies such as Nestlé face higher taxes on dividends.
The Supreme Court ruling effectively overturned a Delhi High Court order that had ensured companies and individuals were not subject to double taxation while working in or for foreign entities.
“In the absence of reciprocity, it, therefore, waives its unilateral application with effect from January 1, 2025. Accordingly, income accruing on or after January 1, 2025 may be taxed in the source state at the rates provided for in the DTC IN-CH (India-Switzerland Direct Tax Convention), regardless of the application of para 5 of the Protocol to the DTC IN-CH,” the Swiss Federal Department of Finance (DFF) said in a statement.
Indian companies operating in Switzerland will continue to enjoy the DTAA benefits on other items.
Switzerland will now tax profits given to Indian holding corporations at a rate of 10% rather than 5%. The situation has not changed for Swiss corporations with subsidiaries in India because dividends paid to Switzerland have always been subject to 10% local taxation. The Swiss action is unlikely to affect EFTA (European Free Trade Association) investments in India for the same reason.
