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Switzerland’s decision to suspend the most favoured nation (MFN) clause with India for dividend income has caused concern among Indian investors and businesses. This decision, which will come into effect from January 1, 2025, means that dividend income will be taxed at a higher rate of 10% instead of the current 5% for Indians in Switzerland.
The move by Switzerland comes after a recent ruling by the Supreme Court of India, which rejected the interpretation of the MFN clause in India’s Double Taxation Avoidance Agreement (DTAA) with Switzerland, Netherlands and France. This ruling has led to the suspension of the MFN clause for dividend income, while other forms of income such as royalty and interest remain unaffected.
Experts believe that while this decision may have a negative impact on Indian investors and businesses, it could have been worse. The fact that the MFN clause has only been suspended for dividend income and not other forms of income is seen as a relief. However, there will still be an impact on cash flows and potential losses for Indian businesses and residents with financial interests in Switzerland.
The MFN clause is a provision in international treaties that requires a country to extend any beneficial treatment given to one country to all other countries with which it has signed the clause. In this case, it means that if India signs a beneficial treaty with a country, it must extend the same treatment to other countries with which it has signed the MFN clause.
Switzerland’s decision to suspend the MFN clause for dividend income is a result of the lack of reciprocity from India’s competent authority in interpreting the clause. This has led to the Swiss government reserving the right to reverse the unilateral application of the MFN clause and readjust the tax rates applicable to income accruing from January 1, 2023.
The impact of this decision will be felt by Indian companies and residents engaged in cross-border transactions with Switzerland. The higher tax rate of 10% will lead to additional tax costs and compliance challenges for these entities. It is important for them to assess the impact and take necessary steps to minimize the negative effects.
In conclusion, while the suspension of the MFN clause for dividend income is a setback for Indian investors and businesses, it could have been worse. The decision by Switzerland to only suspend the clause for dividend income and not other forms of income is seen as a relief. However, it is important for Indian entities to carefully evaluate the impact and take necessary measures to mitigate any potential losses.