Switzerland has suspended the most favoured nation clause under its Double Tax Avoidance Agreement with India, CNBC-TV18 reported on Friday.
The decision will allow income such as dividends and royalties to be taxed in the source country at rates specified in the agreement.
The authorities in Switzerland reportedly took the decision citing the ruling of the Indian Supreme Court in October 2023, which said that the most favoured nation clause in the agreement does not apply automatically unless it had been formally notified under the 1961 Income Tax Act.
The suspension, which will take effect on January 1, 2025, will be enforced because of a lack of “reciprocity” in the Double Tax Avoidance Agreement from the Indian government, the Swiss authorities were quoted as saying by CNBC-TV18.
Consequently, the withholding tax on dividends paid by Indian companies to its Swiss parent companies, or the other way round, will increase to 10% after the financial year 2024-’25, CNBC-TV18 reported.
The Supreme Court’s ruling in October 2023 dismissed a claim by Swiss food and drink processing company Nestlé, among other companies, for a lower 5% withholding tax.
The top court had overturned a Delhi High Court ruling that held that companies and individuals were not subject to double taxation while working in or for foreign entities, according to The Indian Express.
The newspaper quoted tax experts as saying on Friday that the decision by Swiss authorities could hurt investments in India because dividends would be subject to a higher withholding tax.
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