Background
Switzerland has effectively repealed its application of the so-called most-favored-nation clause (MFN clause) in article 11 of the amendment protocol of 30 August 2010, to the DTAA between Switzerland and India.
In principle, dividend distributions are subject to a 35% Swiss withholding tax. If certain conditions are met, the Swiss withholding tax can be fully or partially reclaimed or a rate reduction can be applied via the notification procedure under the respective double taxation avoidance agreement.
According to the DTAA between Switzerland and India, a simplified residual (non-reclaimable) tax rate of 10% applies to dividend distributions. Given India had meanwhile entered into further double taxation avoidance agreements with a residual tax rate of 5%, under the mutually agreed MFN clause, the Swiss Federal Tax Administration had applied a residual tax rate of 5% to dividend distributions by a Swiss company to its Indian parent since 2018. Due to a deviating interpretation of the MFN clause by the Supreme Court of India in a ruling of 19 October 2023, however, dividend distributions by Indian companies to their Swiss parents are still subject to a 10% withholding tax. In honoring this ruling, Switzerland will also apply the residual tax rate of 10% again from 1 January 2025, onwards.
Impact
This results in a effective increase of the tax burden on distributions by Swiss companies to their Indian parents as dividends are exempted from corporate income tax on the level of the receiving entity (participation exemption), and the withholding tax is the only tax levied on such distributions.
However, the residual tax rate of 5% will continue to apply to dividend distributions by Swiss companies to their Indian parents from 2018 to the end of 2024.
No impact on Trade and Economic Partnership Agreement (TEPA)
Given EFTA (with Switzerland in the negotiation lead) and India after 16 years of negotiations successfully concluded a free trade agreement by signing the Trade and Economic Partnership Agreement (TEPA) on 10 March 2024, the question briefly arose whether this development under the DTAA could have any impact on the TEPA, in particular its investment chapter, expected to enter into force in autumn 2025. The simple answer, acknowledged by both countries, is no – most importantly because it does not affect the taxation of dividend distributions by Indian companies to their Swiss parents (India continues to levy 10% withholding tax). The Government of India may, however, reconsider its position on the MFN clause as interpreted by the Supreme Court of India.
Action required
Swiss companies with an Indian parent may still benefit from the lower 5% withholding tax rate until the end of this year. To make use of the current 5% withholding tax rate and to secure a tax saving of 5%, as an immediate measure, an interim dividend may still be resolved due by 31 December 2024 at the latest.
