Switzerland and India entered into a Double Taxation Avoidance Agreement (DTAA) on 2 November 1994, with subsequent amendments through protocols on 16 February 2000, and 30 August 2010. Notably, the amending protocol of 30 August 2010 introduced a
Most Favoured Nation (MFN) Clause, which ensures that any reduction in tax rates on dividends, interest, royalties, or fees for technical services under any later treaty entered between India and an OECD member state would also apply retroactively to the India-Switzerland DTAA.
Subsequently, India concluded two new DTAAs with other countries that include reduced dividend tax rates:
- DTAA with Lithuania (26 July 2011): Offers a reduced dividend withholding tax rate of 5% on dividends paid to a company owning at least 10% of the capital of the paying company. Lithuania joined the OECD on 5 July 2018.
- DTAA with Colombia (13 May 2011): Provides a 5% general tax rate on dividends. Colombia became an OECD member on 28 April 2020.
In light of the above, on 13 August 2021, the Swiss competent authorities recognized the application of the MFN clause (i.e., a lower rate of tax for dividends) following Lithuania's and Colombia's OECD membership. This meant that Indian Corporations/Tax residents having a presence in Switzerland could claim reduced withholding tax on dividends as per the clarification issued.
Pursuant to the above, the Central Board of Direct Taxes (CBDT) issued Circular No 3/2022 dated 3 February 2022 on the application of the MFN clause in certain tax treaties. Amongst others, the circular clarified the following important aspects:
- The subsequent treaty is between India and a state that is a member of the OECD at the time of signing the treaty. This meant that the test of being a member of the OECD needed to be applied at the time of signing of the Tax Treaty.
- India has to issue a notification permitting the invocation of the MFN clause for the application of beneficial treatment as provided in the subsequent Treaty.
Further, in October 2023, the Indian Supreme Court ruled that the MFN clause did not apply retroactively in the case of Nestle SA, as it required formal "notification" under Section 90 of the Income Tax Act, 1961 (ITA). This decision effectively negated the retroactive tax relief claimed by Swiss residents under the MFN clause. Thus, while Switzerland granted a retroactive 5% residual tax rate for Indian firms starting from July 2018, the Indian authorities did not extend reciprocity and applied a higher tax rate of 10% on dividend payments.
Accordingly, on 11 December, the Swiss finance department issued a statement highlighting that Swiss tax authorities have waived the unilateral application of the MFN clause from
1 January 2025, aligning the tax rates on dividends between India and Switzerland with those stated in the original DTAA. The impact is summarised below:
- For tax years 2018-2024, Indian tax residents are eligible for a lower withholding tax rate of 5% in Switzerland, applying the MFN clause.
- From 1 January 2025 onwards, India tax residents cannot apply the reduced withholding tax rates on dividends in Switzerland and shall suffer a withholding tax of 10%.
