Switzerland has announced withdrawal from an important clause of the double taxation avoidance agreement (DTAA) with India. India is currently considered a Most Favored Nation (MFN) under a clause in the DTAA agreement. Switzerland has decided to suspend the clause, which will come into effect on January 1, 2025.
According to reports in daily newspapers The Hindu and Indian Express, Switzerland’s move could affect Swiss investment and taxes on Indian companies operating in the country. The result is that Indian companies’ dividend income may be subject to a higher tax burden. It is expected that the tax deduction at source for Indian companies operating in Switzerland may increase from 5% to 10%.
The Double taxation Avoidance Agreement (DTAA) was announced in 1994 between Switzerland and India. The agreement was later amended in 2010. Many Indian individuals and organizations operate in Switzerland. This agreement was made so that these individuals and organizations do not have to pay taxes in both countries for the earned income.
A treaty determines which country has the primary right to tax certain income, such as business profits, dividends, and interest, through a rule. Switzerland had decided to suspend India’s Most Favored Nation (MFN) status in the DTAA agreement in January.
The Indian media reports that Switzerland took this action in response to a Supreme Court of India ruling from October of last year. In that judgment of the Supreme Court of India, it was said that DTAA cannot be implemented unless it is notified under the Income Tax Act. As a result, some Swiss companies operating in India, such as food company Nestlé, have to pay higher rates of tax on dividends.
In March 2024, Iceland, Liechtenstein, Norway, and Switzerland signed a free trade agreement (EFTA) between these four European countries. As a result of the agreement, the countries promised to invest $100 billion in India over the next 15 years. However, this possible investment is at risk due to Switzerland’s recent action.
