Nestle tax ruling fallout: Switzerland suspends MFN status to India

India signed DTCs with Lithuania and Colombia in 2011, under which it provided a withholding tax of 5 per cent to both countries

Switzerland has suspended the unilateral application of the most favoured nation (MFN) clause with India under the Double Tax Avoidance Agreement (DTAA). Under this treaty, Switzerland had reduced the withholding tax on Indian entities operating in that country to 5 per cent from 10 per cent earlier.

 

"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.

 

According to the protocol signed between India and Switzerland on August 30, 2010, if New Delhi, under any agreement with a third country that is a member of the OECD (Organisation for Economic Co-operation and Development), limits its taxation at source on dividends, interest, royalties, or fees for technical services to a rate lower than the rate provided for in India-Switzerland DTC on the said items of income, the same rate shall also apply between Switzerland and India from the date on which it comes into force. India signed DTC with Lithuania and Colombia in 2011, under which it provided withholding tax of 5 per cent to both the countries. Subsequently, Lithuania and Colombia joined OECD in July 2018 and April 2020, respectively, thus making both Switzerland and India eligible to extend 5 per cent withholding tax to each other under the MFN clause.

 

In August 2021, the Swiss authorities confirmed that Indian tax residents receiving dividends from Swiss sources could, for dividends falling due on or after July 2018 and April 2020, subject to the conditions set out in the DTC, claim the benefit of the above-mentioned treaty and claim a refund of the withholding tax. 

 

The same statement said in the event that reciprocity regarding the interpretation of the MFN clause was not guaranteed by the Indian competent authority, the Swiss competent authority would reserve the right to reverse the unilateral application of the MFN clause and to readjust the treaty rates applicable to income accruing from January 1, 2023.

 

In 2023, the Supreme Court, however, reversed a Delhi High Court judgment, which favoured Nestle in a case where the Swiss company sought refund of withholding tax. The top court observed that application of the MFN clause provided for in the DTC was not directly applicable in the absence of "notification" in accordance with Section 90 of the Income Tax Act.

 

Following the Supreme Court judgment, Swiss authorities have now withdrawn the unilateral reduction of withholding tax, citing absence of reciprocity.

 

According to Akhilesh Ranjan, adviser with PwC and former member of Central Board of Direct Taxes (CBDT), Switzerland will now tax dividends paid to Indian holding companies at the rate of 10 per cent and not 5 per cent. “Indian companies operating in Switzerland will continue to avail the DTAA benefits on other items. For Swiss companies having subsidiaries in India, there is no change in the position as dividends paid to Switzerland have always been taxable at 10 per cent here. For the same reason, the Swiss move is not likely to impact EFTA (European Free Trade Association) investments into India,” he added.