Switzerland Withdraws Tax Clause: Impact on India
In a significant move, Switzerland has announced the withdrawal of the most-favoured-nation (MFN) clause from its double tax avoidance agreement (DTAA) with India. This decision comes in response to a 2023 ruling by the Supreme Court of India concerning Nestle. The change will have substantial implications for Indian companies operating in Switzerland, as it alters the tax landscape for dividends. The Swiss federal department of finance stated that, starting January 1, 2025, the tax rate on dividends will increase from 5% to 10%. This article explores the background of this decision, its implications for Indian businesses, and the potential for similar actions by other countries.
Background of the Tax Agreement
The double tax avoidance agreement between India and Switzerland was originally signed in 1994. Over the years, it has undergone several amendments, with significant changes made in 2000 and 2010. The agreement aimed to prevent double taxation of income earned by residents of both countries. However, recent developments have complicated this relationship.
In 2020, India signed tax treaties with Colombia and Lithuania, which offered lower tax rates on certain types of income compared to those provided to OECD member nations. Switzerland interpreted these treaties as grounds to apply a 5% tax rate on dividends to India under the MFN clause. However, the Indian Supreme Court ruled in 2023 that the MFN clause does not automatically apply when a country joins the OECD, particularly if India had signed a tax treaty with that country prior to its membership. This ruling prompted Switzerland to reassess its position and ultimately led to the withdrawal of the MFN clause.
Implications for Indian Companies
The Swiss government’s decision to revert to a 10% tax rate on dividends starting January 1, 2025, poses significant challenges for Indian companies with investments in Switzerland. Ajay Srivastava, a tax expert at GTRI, highlighted that this change will increase tax liabilities for these firms, making them less competitive compared to businesses from countries that still benefit from MFN provisions.
The higher tax rate could deter future investments from Indian companies in Switzerland, as the cost of doing business will rise. This situation may lead to a reevaluation of investment strategies, with companies seeking more favorable tax environments elsewhere. The increased tax burden could also impact profitability and, consequently, the ability to reinvest in growth opportunities.
Potential for Other Countries to Follow Suit
Experts suggest that Switzerland’s decision may set a precedent for other countries to reconsider their tax treaties with India. The principle of reciprocity is central to tax agreements, ensuring that taxpayers in both countries are treated equally. The Swiss government expressed concerns that it was not receiving the same treatment as other nations with more favorable tax treaties.
Amit Maheshwari, a tax partner at AKM Global, noted that the Swiss authorities had previously reduced the tax rate on dividends from 10% to 5% based on the MFN clause. However, the recent Supreme Court ruling contradicted this interpretation, leading to Switzerland’s withdrawal of the MFN clause. This situation raises concerns that other countries may also reassess their agreements with India, potentially leading to higher tax rates for Indian companies operating abroad.
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