Switzerland suspends ‘Most Favoured Nation’ standing to India over Nestle verdict
The federal government of Switzerland has suspended essentially the most favoured nation (MFN) standing clause within the Double Taxation Avoidance Settlement (DTAA) between India and Switzerland, doubtlessly impacting Swiss investments in India and resulting in increased taxes on Indian firms working within the European nation.
In line with an announcement made on December 11 (Wednesday) by the Swiss finance division, the transfer follows the Supreme Courtroom of India final yr (2023) ruling that the MFN clause doesn’t robotically set off when a rustic joins the Organisation for Financial Co-operation and Improvement (OECD) if the Indian authorities signed a tax treaty with that nation earlier than it joined the organisation.
Delhi HC in Nestle case upheld applicability of residual tax charges
In line with the assertion, in 2021, the Delhi Excessive Courtroom within the Nestle case upheld the applicability of the residual tax charges after making an allowance for the MFN clause within the double taxation avoidance treaty. Nonetheless, the Supreme Courtroom, in a choice dated October 19, 2023, reversed the decrease courtroom’s determination and concluded that, the applicability of MFN clause supplied was circuitously relevant within the absence of ‘notification’ in accordance with Part 90 of the Revenue Tax Act.
India signed tax treaties with Colombia and Lithuania that supplied tax charges on sure sorts of revenue that have been decrease than the charges it supplied to OECD nations. The 2 nations later joined OECD.
Switzerland in 2021 interpreted that Colombia and Lithuania becoming a member of the OECD meant a 5 per cent fee for dividends would apply to the India-Switzerland tax treaty below the MFN clause, slightly than 10 per cent as outlined within the settlement.
Dividend revenue to face increased tax from January 1, 2025
However publish suspension of the MFN standing, Switzerland will from January 1, 2025, levy a ten per cent tax on dividends as a result of Indian tax residents who declare refunds for Swiss withholding tax and for Swiss tax residents who declare international tax credit.
Within the assertion, the Swiss Finance Division introduced the suspension of the applying of the MFN clause of the protocol to the settlement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on revenue.
Sandeep Jhunjhunwala on Switzerland revoking India’s MFN standing
Commenting on the choice of Swiss authority determination, Nangia Andersen M&A Tax Companion Sandeep Jhunjhunwala, mentioned the unilateral suspension of software of the MFN clause below its tax treaty with India, marks a big shift in bilateral treaty dynamics.
“This suspension could result in elevated tax liabilities for Indian entities working in Switzerland, highlighting the complexities of navigating worldwide tax treaties in an evolving world panorama,” he mentioned.
It additionally underscores the need of aligning treaty companions on the interpretation and software of tax treaty clauses to make sure predictability, fairness, and stability in worldwide tax framework, Jhunjhunwala mentioned.
Amit Maheshwari on Switzerland revoking India’s MFN standing
AKM International, Tax Companion, Amit Maheshwari, mentioned that the principle purpose behind the choice to withdraw MFN is of reciprocity, which ensures that taxpayers in each nations are handled equally and pretty.
“Swiss authorities introduced in August 2021 that based mostly on the MFN clause between Switzerland and India, the tax fee on dividends from qualifying shareholdings can be diminished from 10 per cent to five per cent, efficient retroactively from July 5, 2018. Nonetheless, the following Supreme Courtroom ruling in 2023 contradicted the identical,” Maheshwari mentioned.
Total, he added that this might influence Swiss investments in India as dividends can be topic to increased withholding now and revenue accruing on or after January 1, 2025, could also be taxed on the charges supplied for within the authentic double taxation treaty between Switzerland and India, whatever the MFN clause.
JSA Advocates and Solicitors Companion Kumarmanglam Vijay mentioned this could particularly influence Indian firms having ODI (abroad direct funding) buildings with subsidiaries in Switzerland and can increase the Swiss withholding tax on dividends from 5 per cent to 10 per cent from January 1, 2025.
