Switzerland Imposes 10% Tax on Indian Dividends After Suspending 'Most Favoured Nation' Status

Dividends paid by Indian entities will be subject to a 10% tax in Switzerland starting January 1, as the European country has suspended the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India.

In a statement issued on December 11, the Swiss finance department explained that the decision follows a ruling by the Supreme Court of India last year.

The court determined that the MFN clause does not automatically apply when a country joins the Organisation for Economic Cooperation and Development (OECD) after signing a treaty with India.

India has tax agreements with countries such as Colombia and Lithuania, which provide lower tax rates on certain types of income than those applicable to OECD nations. Both Colombia and Lithuania later joined the OECD.

In 2021, Switzerland interpreted that the MFN clause meant a 5% dividend tax rate would apply to its treaty with India, based on Colombia and Lithuania's OECD membership, rather than the 10% rate specified in the original agreement.

However, in October 2023, the Supreme Court of India overturned a lower court ruling, concluding that the MFN clause could not be automatically enforced without a formal 'notification' under Section 90 of the Income Tax Act. The case in question involved Nestlé, the Swiss multinational headquartered in Vevey.

India's Response

The Ministry of External Affairs (MEA) has indicated that the double taxation treaty with Switzerland may need to be renegotiated in light of India's trade agreement with the European Free Trade Association (EFTA) member states.

MEA spokesperson Randhir Jaiswal commented, "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."

India signed a free trade agreement with the EFTA nations of Norway, Switzerland, Iceland, and Liechtenstein in March. Under this agreement, the four European nations are expected to invest $100 billion in India over the next 15 years.

(With PTI inputs)