Switzerland- India relations
This is a collection of articles archived for the excellence of their content. |
The Nestle case, 2021, 2023: a backgrounder
Dec 15, 2024: The Times of India
Background : The IndiaSwitzerland Tax Treaty
The Double Taxation Avoidance Agreement (DTA) between India and Switzerland, signed on November 2, 1994, was created to eliminate the risk of double taxation on cross-border income and promote investment between the two nations. The treaty was amended in 2000 and 2010, with the latter amendment including a Most Favoured Nation (MFN) clause.
The MFN clause ensures that if either country grants a lower tax rate to a third country that is an OECD member, the same lower rate automatically applies to the other country. For example, if India agrees to a 5% tax rate with another OECD country, Switzerland should benefit from the same rate.
Key Issue: Diverging Interpretations Of MFN Clause
The dispute arose from differing interpretations of the MFN clause:
Switzerland’s View: The MFN clause should apply automatically to countries that join the OECD after 1994. Based on this, Switzerland unilaterally reduced the tax rate on dividends for Indian firms from 10% to 5%, citing treaties India signed with Lithuania and Colombia, which became OECD members in 2018 and 2020, respectively. India’s View: The MFN clause applies only to countries that were OECD members in 1994, when the treaty was signed. India also argued that MFN benefits are not automatic and require explicit notification under Section 90 of India’s Income Tax Act.
Nestle’s Role: Landmark Case
Nestle, a Swiss multinational, became the central player in this dispute when it challenged India’s interpretation of the MFN clause.
Delhi High Court Ruling (2021): The court ruled in favour of Nestlé, allowing the 5% tax rate on dividends, citing the MFN clause as applicable due to Lithuania and Colombia’s treaties with India. Supreme Court Ruling (October 2023): India’s tax authorities appealed the case, leading to a landmark ruling by the Supreme Court of India, which:
Rejected the automatic application of the MFN clause, stating that it required explicit notification.
Limited the scope of the MFN clause to countries that were OECD members in 1994, excluding Lithuania and Colombia. The Supreme Court overturned the lower court’s ruling, dealing a significant blow to Nestle and other Swiss companies operating in India.
Switzerland’s Response
Following the Supreme Court ruling, Switzerland deemed India’s stance a lack of reciprocity and announced it would suspend the MFN clause in its treaty with India.
Effective January 1, 2025, Swiss firms operating in India and Indian firms operating in Switzerland will no longer benefit from the reduced 5% tax rate on dividends.
The tax rate will revert to the original 10% residual rate, increasing the tax burden on cross-border investments.
Implications For Businesses
For Indian Firms in Switzerland: Indian businesses, particularly in sectors like IT, pharmaceuticals, and financial services, will face higher tax liabilities, reducing their competitiveness.
For Swiss Firms in India: Companies like Nestle will need to factor in the higher tax rate when calculating their returns on Indian investments. Claims for refunds or credits under treaty provisions will become more complex. TNN
Double Taxation Avoidance Agreement
Switzerland suspends MFN clause
Ravi Dutta Mishra, Aanchal Magazine, Dec 15, 2024: The Indian Express
Nestlé judgment fallout: Switzerland suspends Most-Favoured-Nation clause in tax avoidance pact with India, could impact $100 billion investment plan
The Swiss move poses risk to the $100 billion investment commitment in India over a 15-year period by the four-nation European Free Trade Association signed in March this year.
In what could potentially impact Swiss investments in India and higher taxes on Indian companies operating in Switzerland starting January 1, 2025, Bern has suspended the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) that India and Switzerland entered originally in 1994 and amended in 2010, a statement released by the Swiss government dated December 11 showed.
This decision follows a ruling by the Indian Supreme Court last year, which determined that the DTAA cannot be enforced unless it is notified under the Income Tax Act. As a result, Swiss companies such as Nestlé face higher taxes on dividends. The Supreme Court ruling effectively overturned a Delhi High Court order that had ensured companies and individuals were not subject to double taxation while working in or for foreign entities.
Tax experts said that the move by the Swiss could “impact investments” in India as dividends would be subject to “higher withholding tax”. Notably, India and four-nation European Free Trade Association (EFTA), an intergovernmental grouping of Iceland, Liechtenstein, Norway and Switzerland signed a free trade agreement where the EFTA countries committed investment worth $100 billion investment in India over a 15-year.
However, the Swiss embassy said that there is no direct impact on the EFTA-India TEPA.
“In particular this week’s decision does not negatively affect investment from Switzerland to India. The question of the interpretation by Switzerland and India of the most-favoured-nation clause concerns the residual tax rate applicable to dividends based on the double taxation agreement paid by a company of one contracting state to a resident of the other contracting state. However, the change in this residual rate has no impact on the validity of the double taxation agreement as such, or on any other treaties under international law concluded between Switzerland (independently or under the EFTA framework) and India,” the embassy said in response to a query.
The Swiss authorities said that the suspension was enforced due to a lack of “reciprocity” in the DTAA by the Indian government. They added that for dividends due on or after January 1, 2025, the residual tax rate in the source state would be limited to 10 per cent.
“Based on the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of paragraph 5 of the Protocol to the IN-CH DTA is not shared by the Indian side. In the absence of reciprocity, it therefore waives its unilateral application with effect from January 1, 2025. Accordingly, income accruing on or after this date may be taxed in the source state at the rates provided in the DTA IN-CH, regardless of paragraph 5 of the Protocol,” the Swiss government statement said.
Amit Maheshwari, Tax Partner, AKM Global said that Switzerland has announced this in direct response to the Nestle ruling pronounced by the Indian apex court in 2023 where the court held that MFN application is not automatic and it requires a separate notification from India to grant lower tax rates under the MFN clause.
He said that Switzerland is of the view that it is not receiving the same treatment that India grants to other countries with more favourable tax treaties and the main reason behind this is reciprocity, which ensures that taxpayers in both countries are treated equally and fairly.
Switzerland’s investment flows in India amounted to $9.95 billion between 2000 and 2023 according to the Ministry of Commerce and Industry and the International Monetary Fund (IMF) says that Swiss investments stocks in India amounted to $35 billion in 2021.
Over 330 Swiss companies including Nestle, ABB, Novartis, Roche UBS and Credit Suisse have invested in India, with a presence in various sectors such as machinery, electrical and metal (MEM), pharmaceutical, finance, construction, sustainable technologies and cleantech industry, as well as Information and Communications Technology services.
Moreover, nearly 140 Indian companies, including TCS, Infosys, HCL Tech, Wipro, Dr Reddy’s Labs and Eureka Forbes, have investments in an estimated 180 entities in Switzerland. These companies are mostly active in the sectors of technology (32 per cent) and life sciences (21 per cent). According to the IMF, Switzerland is the 8th largest recipient of Indian FDIs stocks, amounting to $3.7 billion.
“This seems to have been disregarded after the said ruling since Swiss authorities announced in August 2021 that based on the most favoured nation clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10 per cent to 5 per cent, effective retroactively from July 5, 2018. However, the subsequent ruling in 2023 contradicted the same. The fallout of this is that more countries may follow Switzerland after this,” Maheshwari said.
He said that this could impact Swiss investments in India as dividends would be subject to higher withholding now and income accruing on or after January 1, 2025, may be taxed at the rates provided for in the original double taxation treaty between Switzerland and India, regardless of the most favoured nation clause.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, said Switzerland’s decision to suspend the unilateral application of the MFN clause under its tax treaty with India marks a significant shift in bilateral treaty dynamics. He said that the move, grounded in the Indian Supreme Court’s Nestlé ruling rejecting the automatic applicability of the MFN clause, highlights the growing emphasis on reciprocity and mutual agreement in interpreting treaty provisions.
“Effective 1 January 2025, the beginning of the tax year in Switzerland, this suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties in an evolving global landscape. Beyond its immediate fiscal impact, this development reflects broader trends in international taxation, with countries like India increasingly asserting stricter interpretations of treaty provisions to protect domestic tax revenues. It further underscores the necessity of aligning treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity, and stability in the international tax framework,” Jhunjhunwala added.
Sameer Gupta, National Tax Leader, EY India said that following the Supreme Court of India’s ruling on the necessity of notification for the MFN clause to be effective under the India-Switzerland tax treaty, Switzerland has adopted a similar position and suspended the application of the MFN clause under the treaty. “This means the MFN clause will only take effect once both countries issue notifications, in line with the Indian Supreme Court’s decision. The Court had previously clarified that the MFN clause’s implementation depends on such notification… Once India provides the required notification, Switzerland can reactivate the treaty provision, allowing taxpayers to benefit from the advantages offered by the MFN clause,” Gupta said.
The Supreme Court ruling had said that a country could claim benefits under a DTAA from the date of its treaty agreement and not from a later date when another country gained from entering a new treaty.
The case addressed bilateral treaty issues, including whether a country could invoke the MFN clause when the third country in the DTAA was not an Organisation for Economic Co-operation and Development (OECD) member at the time of signing, and whether the MFN clause could automatically apply or required a notification to take effect.
Nestlé SA, Concentrix Services Netherlands, and other multinational companies had argued that since the Netherlands, Switzerland, and France are members of the OECD, the beneficial 5 per cent withholding tax rate in treaties with Slovenia, Lithuania, and Colombia should apply to them as well.
