Switzerland To Tax Dividends Of Indian Entities At 10% Starting January 1

From January 1, dividends of Indian entities will be taxed at 10% in Switzerland as the country has suspended the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India.

In a statement on December 11, the Swiss finance department clarified that the decision aligns with a ruling by the Supreme Court of India. The ruling stated that the MFN clause does not apply if a country joins the Organisation for Economic Cooperation and Development (OECD) after India signs a treaty with that country.

Background on MFN and Tax Rates

India had signed tax treaties with Colombia and Lithuania, offering lower tax rates for certain income types than those provided to OECD member states. When Colombia and Lithuania later became OECD members, Switzerland interpreted the MFN clause as applying a reduced 5% rate for dividends under its treaty with India, rather than the 10% outlined in the agreement.

However, in October 2023, the Supreme Court of India reversed a lower court’s decision, concluding that the MFN clause could not be directly applied without a formal notification under Section 90 of the Income Tax Act. The case involved Nestlé, a Swiss multinational headquartered in Vevey.

India’s Response and Potential Renegotiation

The Ministry of External Affairs (MEA) acknowledged that the DTAA with Switzerland might require renegotiation in light of India’s trade pact with the European Free Trade Association (EFTA).

“My understanding is that because of EFTA, the double taxation treaty that we have; it’s going to be renegotiated. That is one aspect of it,” said MEA spokesperson Randhir Jaiswal.

India-EFTA Free Trade Agreement

In March, India and the EFTA member states—Switzerland, Norway, Iceland, and Liechtenstein—finalized a free trade agreement. Under this deal, the four European nations aim to invest $100 billion in India over the next 15 years.

The suspension of the MFN clause in the DTAA introduces a higher tax rate on dividends, potentially impacting Swiss investments in Indian entities and prompting discussions around the treaty’s future provisions.