The tax liability of several Indian companies, which have operations in Switzerland, including bellwether IT and pharma firms, may rise with the central European country announcing a decision to increase the withholding tax on dividends their Swiss arms pay to Indian parents under the ‘source rule’, from 5% to 10%, effective January 2025.
Switzerland cited a 2023 ruling by the Supreme Court in Nestle India case for the move. The SC ruled that the bilateral double taxation avoidance agreement (DTAA) between the countries doesn’t automatically entitle it to a lower withholding tax in India for dividends transferred to the Swiss parents, unless a notification to this effect is issued by the Indian tax authorities.
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Citing this ruling, Switzerland has now withdrawn the most favoured nation (MFN) status to India in regard to dividend taxation, which means absence of non-discriminatory reciprocal treatment. Currently, subsidiaries of Swiss firms in India pay 10% withholding tax on dividends paid to parents.
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Dr Reddys Laboratories, Infosys, Wipro, Tech Mahindra, HCC, HCL are among Indian companies with business presence in Switzerland and are likely to be impacted by the Swiss move, according to industry sources.
“This suspension (of MFN treatment) may lead to increased tax liabilities for Indian entities, highlighting the complexities of navigating international tax treaties in an evolving global landscape,” said Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen.
At present, the MFN clause in the DTAA enables Indian subsidiaries in Switzerland to pay a lower rate of withholding tax to Swiss authorities on certain types of incomes, namely dividends, interest, royalties, or fees for technical services.
The India-Switzerland DTAA was last amended in 2010. The Swiss authorities feel that their interpretation of the treaty ‘is not shared’ by the Indian counterparts. “In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025,” a statement by Switzerland’s Federal Department of Finance said.
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