Background
Under the double tax treaty (DTT) between India and Switzerland, dividends of all participations had hitherto been subject to a 10% residual withholding tax rate. In 2010, the protocol of the Swiss-Indian DTT was amended to include a so-called most favored nation (MFN) clause. This clause stipulates that if, after signing the amended protocol, India agrees with a third state that is an OECD-member to a lower withholding tax rate than the one provided for in the Swiss-Indian DTT, the same lower rate will also apply between Switzerland and India from the date on which the agreement with such third state enters into force.
Since then, India has entered into two new double tax treaties with Lithuania and Colombia under which it granted a lower withholding tax rate of 5% with respect to dividends. The competent Swiss authority clarified the applicability of the MFN clause on dividends in a recent statement as follows:
- Dividends from qualified participations — where the beneficial owner is a company that directly holds 10% or more of the dividend-paying company — benefit from a 5% withholding tax rate retroactively from 5 July 2018 (Lithuania's accession to the OECD).
- Dividends from portfolio participations benefit from a 5% withholding tax rate retroactively from 28 April 2020 (Colombia's accession to the OECD).
The competent Indian authority has not issued a corresponding statement so far. However, in two recent cases the Delhi High Court confirmed the application of the 5% withholding tax rate for dividends paid under the Swiss-Indian DTT (and the Dutch-Indian DTT) based on the MFN clause. Both cases concerned multinationals whereby the respective dividend was paid by an Indian subsidiary to its Swiss/Dutch parent (see Decision of 4 June 2021 concerning Nestle S.A. vs. Indian Income Tax Office, W.P.(C) 3243/2021; with regard to the Dutch-Indian DTT, see Decision of 22 April 2021 concerning Concentrix Netherlands B.V. and Optum Global Solutions International B.V. vs. Indian Income Tax Office, W.P.(C) 9051/2020).
Next steps
Swiss tax residents that have received dividends from Indian companies since 5 July 2018 (qualified participations) or 28 April 2020 (portfolio participations) are entitled to claim the additional tax withheld from the Indian Income Tax Department. For Swiss-based individuals, the foreign tax credit pursuant to Art. 2 of the Federal Ordinance on the crediting of foreign taxes deducted at source will be 5% instead of 10% for dividends accrued after 1 January 2021.
Indian tax residents that have received dividends from Swiss companies since 5 July 2018 (qualified participations) or 28 April 2020 (portfolio participations) are entitled to claim an (additional) refund of the Swiss withholding tax pursuant to the established procedures. Claims concerning the fiscal year 2018 must be filed no later than 31 December 2021.
We are happy to review your group structure from a bilateral tax perspective and to assist with the filing of your refund claim. Our Global India Practice Group has 50+ years of experience and more than 300 lawyers around the world who address all our clients' inbound and outbound India-related business requirements. We have also been named "International Law Firm of the Year" for the second time at the Asian Legal Business India Law Awards 2021 and we are regularly featured in the India Business Law Journal's list of Top Foreign Law Firms.
