Swiss MFN suspension may raise tax on India Inc dividend

Tax liability doubles following rollback of beneficial tax rate on income from India

The Swiss Federal Department of Finance’s move to suspend the Most Favoured Nation (MFN) clause with India is likely to impact domestic companies and residents operating in the mountainous European country.

 

According to legal experts, income or dividends received by them could now be taxed at 10 per cent, as the concessional rate of 5 per cent can no longer be availed.

 

"The recent developments may impact the tax on dividends received by Indian companies from their investments in Swiss subsidiaries. The Indian Supreme Court's ruling in October 2023 had already precluded Swiss investors from availing of the lower 5 per cent tax rate under the MFN clause without a formal notification from the Indian government,” said Suresh Swamy, Partner, Price Waterhouse & Co.

 

“With the Swiss Federal Department of Finance suspending the application of the MFN clause from 2025, dividends accruing to Indian residents from Swiss investments will now be taxed at a higher rate of 10 per cent,” Swamy said.

 

He said Indian companies operating in Switzerland are largely in the information technology and life sciences.

 

Not just Switzerland but tax liabilities for Indian entities operating elsewhere might also go up as other countries too might revise the Double Tax Avoidance Agreement (DTAA) agreements with India, said tax experts.

 

“This could mean a dent in the tax revenue of the Indian government as Switzerland will tax more. For instance, if a company had to pay 20 per cent tax, they could claim 5 per cent benefit as Switzerland withheld 5 per cent. The other 15 per cent went to the Indian counterpart. However, now the Indian side will be able to keep only 10 per cent," explained another tax consultant.

 

“There may be a potential issue of double taxation. This may lead to increased tax liabilities for Indian entities. However, such an announcement would not affect the income accruing during the 2018-2024 tax years,” said Rajarshi Dasgupta, Executive Director - Tax, Aquilaw.

 

Already, foreign portfolio investors (FPIs) domiciled in Switzerland have started paying a higher dividend tax of 10 per cent instead of 5 per cent on their India income starting last year. 

 

Experts said capital flows emanating from Switzerland could have been impacted due to this.

 

“Higher withholding tax rates on dividends will diminish the net post-tax returns for investors. For FPIs, who typically operate on tight yield margins, such an increase in tax incidence could substantially impact the attractiveness of Indian equities compared to other emerging markets or jurisdictions offering more favourable tax arrangements,” said Sindhuja Kashyap, Partner, King Stubb & Kasiva, Advocates and Attorneys.

 

Although Switzerland is not among the top 10 FPI jurisdictions when it comes to assets held and India flows, as many as 90 FPIs are registered in the country. UBS, which recently took another Swiss banking major Credit Suisse under its fold, is among the main FPIs operating out of the country.

 

India and Switzerland signed the Direct Tax Convention in 1994, which was later amended in 2000 and 2010, and under which the original tax rate on dividends was 10 per cent.

 

Under the protocol signed between the two countries in 2010, if India limited taxation on dividends or interest to a lower rate to a third country which is a member of the Organisation for Economic Cooperation and Development (OECD), then the same rate would be applicable between Switzerland and India.

 

India later signed DTAA with Lithuania and Columbia, offering a 5 per cent tax rate on dividends. Both the countries joined OECD in 2018 and 2020, respectively, which led to an interpretation that Swiss entities were also eligible for the beneficial tax.

 

“To provide certainty to taxpayers, it is crucial for countries to engage in discussions and reach an agreement on the enabling mechanisms for the benefits mentioned in treaties. This shall ensure fair and predictable application of tax rates on cross-border investments," added Swamy.

   

Switzerland has withdrawn beneficial tax rate of 5 per cent following the Supreme Court's ruling on DTAA

  - Suspension effective from January 1, 2025

  - Last year, the apex court reversed a decision by the Delhi High Court which had allowed relaxation of MFN clause

  - Legal players say announcement would not affect income accruing during 2018-2024 tax years

  - Experts say Indian companies operating in Switzerland will still be able to avail of other benefits provided under the India-Switzerland DTAA

  - A total of 90 FPIs domiciled in Switzerland registered in India