Switzerland: The Swiss change in policy paradigm among bilateral treaty partners is dramatic and will create a cataclysmic effect on any Indian company doing business in Switzerland or from Switzerland in India.
India has moved unilaterally after the Supreme Court of India in the Nestle case. It has withdrawn ‘Most Favoured Nation’ or MFN status to India under the Double Taxation Avoidance Agreement or the DTAA treaty.
This structural change by Switzerland may be called a revolution in the bilateral treaty framework and it will hit big on the Indian companies doing business in Switzerland as well as on the Swiss investors eyeing India.
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The official statement of the Swiss finance department on December 11 did not hesitate to list the Supreme Court of India as one of the sources of information to which it referred to in its decision to withdraw the status of MFN from India, pointing to its last decision made in 2023.
The Supreme Court, in its order, had held that the MFN clause between two nations does not operate when a country becomes a member of the OECD particularly if the Indian government already had tax treaty with the country joining the OECD grouping.
The Organisation for Economic Co-operation and Development or the OECD was founded in 1961 and has its office in Paris. It describes itself as a forum and knowledge platform for data, research, and innovation in public policy to create stronger, fairer, cleaner societies and improve policies for improved lives.
The League cooperates with policy makers, stakeholders and citizens in making, setting and implementing research-based international standards and seeking for practical solutions to current social, economic and environmental issues.
A HISTORY TO THE CASE
It had entered into tax treaties with Lithuania and Colombia where tax on some types of income was less than the rates offered to OECD countries. Both countries later joined the OECed.
The MFN clause under the OECD means that the one country therefore commits itself to its treaty partner regarding providing it with a ‘more favourable’ tax status.
Switzerland assumed that once Colombia and Lithuania were part of OECD, the rate of 5 per cent for dividends would set under the ranging from the India-Switzerland tax treaty through the MFN clause, not to mention the 10 per cent stated in the treaty.
But for the Supreme Court it was otherwise because the MFN clause between two nations is not applicable as and when a country becomes member of the OECD, for prior tax treaty is always a bar, unless and until MFN clause is mentioned in the ‘notification’ in Section 90 of the Income Tax Act.
What This Meant For The Nestle Case
As the statement by the finance department of Switzerland, in the case dealt in the Delhi High Court in 2021; the court supported the residual tax rates taking into consideration the MFN clause in the double taxation avoidance agreement. This was in line with the way Switzerland had sought to interpret it.
But again, on the October 19, 2023 Supreme Court Order, overturned high court decision which declared that the MFN clause was not automatically triggered. The decision by the top court was that the MFN clause “was not directly applicable in absence of notification in accordance with Section 90 of Income Tax Act” which ruled what was against Swiss and impacted Nestle indirectly.
SWITZERLAND’S RESPONSE
Switzerland has now responded by unilaterally denying India MFN status and directly blaming the “Indian Supreme Court” for it.
This means that from January 1, 2025, Switzerland will apply 10 % instead of the current 5 % of the following cases: dividends paid to Indian tax residents and entities claiming refunds for Swiss withholding tax; Swiss tax residents claiming foreign tax credits.
The Swiss Finance Department made a statement in which it said “Temporary ban on the use of the MFN clause of the protocol related to the treaty between the Swiss Confederation and the Republic of India for the elimination of double taxation with regard to income taxes.”
It cited the statement from the “2023 ruling by Indian Supreme Court” in a case involving Nestle over its decision to deny the MFN status.
WHAT EXPERTS SAY
While some perceive the shifting of Switzerland as a signal they are repaying the Supreme Court ruling, others view this as being a reciprocity more than anything else.
Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala described the move as unilateral and said “This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, which goes on to show how the762 global tax treaties are getting woven in a very fluid global environment.”
‘It also highlights the need to have treaty partners agree on the meaning and application of the tax treaty provisions to enhance stability, certainty and fairness in the international tax regime,’ Mr Jhunjhunwala told Press Trust of India.
Amit Maheshwari, Partner, AKM Global Tax said “The main reason stated for exiting MFN is based on reciprocity for the fairest deal possible for taxpayers in both the affected countries.”
In August 2021, Swiss authorities said that following the MFN clause in the agreement between Switzerland and India, the tax rate for dividends from qualifying shareholdings would be cut from 10 per cent to 5 per cent as of July 5, 2018. But the passage of the Supreme Court order in 2023 went against it,” Mr Maheshwari said to PTI.
He also said “This could affect Swiss investments in India as dividends would be subject to higher withholding now and income arising on or after January 1, 2025, may be taxed as per the rate mentioned as under the double taxation avoidance treaty between Switzerland and India barring the MFN clause.”
The new law would be particularly inconvenient for Indian companies with ODI structures involving subsidiaries in Switzerland and increase the Swiss withholding tax on dividends from 5% to 10% as from January 1, 2025, JSA Advocates & Solicitors Partner Kumarmanglam Vijay said.
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