Tuesday, 17 December 2024

Switzerland revokes unilateral MFN benefit under India-Switzerland Tax Treaty w.e.f. 1 January 2025

 This Tax Alert summarizes a recent Statement issued by Switzerland Competent Authority[1] (Swiss CA) on 11 December 2024 (2024 Statement) withdrawing Switzerland’s unilateral application through earlier Statement published on 13 August 2021 (2021 Statement) of Most Favored Nation (MFN) Clause in India- Switzerland (I-S) Double Taxation Avoidance Agreement (DTAA or Treaty) w.e.f. 1 January 2025.


The 2024 Statement acknowledges the interpretation given by the Supreme Court (SC) of India in the case of Nestle SA [2], wherein the SC held that the benefit of MFN Clause is not applicable in absence of a notification granting such benefit in accordance with the provisions of the Indian Tax Law (ITL). Further, the SC held that the term ‘third State which is a member of the OECD’ is to be interpreted as being limited to the member states of the Organisation for Economic Co-operation and Development (OECD) at the time when such treaties were entered into with India. Hence, the 2024 Statement acknowledges that the interpretation of MFN clause by Swiss CA through its 2021 Statement is not shared by India. Accordingly, in terms of the right reserved in 2021 Statement to reverse the unilateral interpretation if there is no reciprocity by the Indian CA, the 2024 Statement waives its unilateral application prospectively from 1 January 2025.

Further, the 2024 Statement clarifies the effect of such withdrawal w.e.f. 1 January 2025 on Indian and Swiss tax residents deriving dividend income from Switzerland and India respectively. Indian residents deriving dividend income from Switzerland, on or after 1 January 2025, shall be taxed @10% on such income without giving effect to the MFN clause. However, benefit of lower tax rate of 5% on such incomes as per MFN clause may continue to apply for dividend income earned during the tax years from 2018 to 2024.

Correspondingly, Swiss residents deriving dividend income from India w.e.f. 1 January 2025 shall get higher foreign tax credit up to 10% instead of 5%.

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Switzerland revokes unilateral MFN benefit under India-Switzerland Tax Treaty w.e.f. 1 January 2025

  This Tax Alert summarizes a recent Statement issued by Switzerland Competent Authority [1] (Swiss CA) on 11 December 2024 (2024 Statement...