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The Swiss government's decision to suspend the most-favored-nation (MFN) status within its double taxation avoidance agreement (DTAA) with India marks a significant development in bilateral economic relations. This move, directly resulting from a 2023 Indian Supreme Court ruling concerning the interpretation of the MFN clause, will have considerable implications for Swiss investments in India and for Indian companies operating in Switzerland. The core of the disagreement lies in the interpretation of the MFN clause, which aims to ensure equal treatment among treaty partners. Switzerland argued that upon Colombia and Lithuania's accession to the OECD, the lower dividend tax rates offered by India to these countries should automatically apply to Switzerland under the MFN clause. The Indian Supreme Court, however, disagreed, asserting that such automatic application requires explicit notification under Section 90 of the Income Tax Act. This discrepancy in legal interpretation forms the foundation of the Swiss government's action.
The immediate consequence of this suspension is the reinstatement of the original 10% tax rate on dividends for Indian entities operating in Switzerland. Previously, following Switzerland's unilateral reduction of its dividend tax rates, a 5% rate was effectively applied based on the Swiss interpretation of the MFN clause. However, this lower rate will be revoked from January 1, 2025, impacting Indian companies with Swiss subsidiaries and potentially deterring future Swiss investment in India. The increased tax burden for Indian companies, as highlighted by tax experts such as Sandeep Jhunjhunwala of Nangia Andersen, will undoubtedly necessitate a reassessment of investment strategies and tax planning. The challenge underscores the complexities of navigating international tax treaties and the need for consistent interpretations between signatory nations to foster predictability and stability in cross-border transactions.
The Swiss action is not merely a technical adjustment to a tax treaty; it reflects a broader concern about the reciprocal application of tax benefits. Amit Maheshwari of AKM Global Tax Partner aptly summarizes the situation as a response to a lack of reciprocity, aiming for equitable treatment of taxpayers in both countries. The Supreme Court's ruling effectively contradicted Switzerland's prior understanding and action, which had reduced its dividend tax rate retroactively to 2018. This unilateral suspension highlights the potential for significant disruptions in international tax relations when interpretations of treaties diverge. Furthermore, Kumarmanglam Vijay of JSA Advocates & Solicitors points to the specific impact on Indian companies utilizing overseas direct investment (ODI) structures with Swiss subsidiaries. These companies will now face a 5 percentage point increase in Swiss withholding tax, adding to the already complex landscape of international taxation.
The long-term ramifications of this decision remain to be seen. It could potentially lead to renegotiation of the DTAA, further legal challenges, or a broader shift in the investment strategies of both Swiss and Indian companies. The episode serves as a crucial reminder of the importance of clear and unambiguous language in international tax agreements, as well as the need for effective communication and collaborative interpretation to prevent such disputes. The lack of consensus on the MFN clause's application highlights the necessity for greater clarity and harmonization in international tax law. Going forward, both Switzerland and India will likely need to consider the implications of this decision on their bilateral economic relationship and find ways to restore confidence and predictability in cross-border investments.
Source: Switzerland suspends most favoured nation status to India, cites Nestle verdict