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The recent Supreme Court judgment on ‘double taxation avoidance agreements’ in the Nestle case, coupled with the decision of the Swiss finance department to withdraw the most favoured nation status for India, is expected to have a significant impact on past investments made by Indian companies in Switzerland. This move by the Swiss authorities could potentially set a precedent for other countries to follow suit, which could have a broader ramification on cross-border investments.
The Supreme Court judgment, which ruled that the most favoured nation (MFN) clause under the India-Switzerland Double Taxation Avoidance Agreement (DTAA) does not get automatically triggered until notified under the Income Tax Act, 1961, will result in higher taxes for Swiss companies operating in India. This means that these companies will now have to pay higher taxes on dividends paid to their parent companies in Switzerland.
On the other hand, the withholding tax on dividends paid by subsidiaries of Indian companies in Switzerland will also increase from 5% to 10%. This will have a direct impact on Indian parent companies, as they will have to explore obtaining higher foreign tax credits in India against such dividend income. Additionally, the cost of repatriating profits from Switzerland to India will also increase for Indian parent companies.
The India-Switzerland DTAA was signed in 1994 and revised in 2000 and 2010. However, the recent Supreme Court judgment has brought to light the issue of the MFN clause, which has been interpreted differently by the two countries. While Switzerland believed that the clause would automatically apply to India, the Supreme Court has ruled otherwise. This has led to the Swiss authorities withdrawing the MFN status for India, which will have a significant impact on Indian holding companies.
Experts believe that this move by Switzerland could set a precedent for other European countries to follow suit. However, each country’s tax treaties with India are based on bilateral negotiations, and any changes would depend on specific reciprocity concerns or policy shifts. Some of the large Swiss companies in India, such as ABB, Nestle, Novartis, Roche, UBS, and Credit Suisse, will now have to re-evaluate their tax strategies and potentially face higher tax costs.
In conclusion, the recent developments in the India-Switzerland DTAA and the withdrawal of the MFN status by the Swiss authorities will have a significant impact on cross-border investments between the two countries. This could potentially lead to other countries taking similar measures in the future, which could have a broader ramification on past investments made by Indian companies in these countries.