Subsequently, India concluded the following two new DTAAs with the now OECD member states, both of which offered lower withholding tax rates on dividends:

1. Agreement of 26 July 2011 between the government of the Republic of India and the government of the Republic of Lithuania for the avoidance of double taxation with respect to taxes on income and on capital and the prevention of fiscal evasion (DTC IN-LT). Lithuania became a member of OECD w.e.f. July 05, 2018; and
2. Agreement of 13 May 2011 between the government of the Republic of India and the Republic of Colombia for the avoidance of double taxation with respect to taxes on income and the prevention of fiscal evasion (DTC IN-CO). Colombia became a member of OECD w.e.f. April 28, 2020.

Following the accession of Lithuania and Colombia to the OECD (July 05, 2018, and April 28, 2020, respectively), the Swiss Competent Authority issued a publication dated August 13, 2021, confirming the retroactive reduction of withholding tax rate on dividends from qualifying shareholdings from 10% to 5% with effective from July 05, 2018. The Swiss Competent Authority also confirmed that Indian tax residents could claim this reduced rate and request a refund for dividends due after these dates.

However, it reserved the right to reverse this unilateral application of the Most-Favoured-Nation principle and to readjust the treaty rates applicable to income accruing from January 1, 2023, if the Indian Tax Authority does not ensure similar treatment. However, such interpretation is further extended with respect to income falling due in 2023 and 2024.

The Indian Supreme Court 1  , on October 19, 2023, overturned the Delhi High Court 2  decision reducing residual tax rates under the MFN clause and concluded that:

1. The MFN clause in the DTC IN-CH (Switzerland) was not directly applicable without specific “notification” issued under Section 90 of the Indian Income Tax Act; and
2. The indicative present tense reference to “member states of the OECD” in the protocol was limited to member states that were OECD members at the time of the protocol’s signing, excluding subsequent accessions by Lithuania and Colombia.

1. Supreme Court of India: Assessing Officer Circle (International Taxation) vs Nestle SA [Civil Appeal No 1420 of 2023]
2. Delhi High Court: Nestle SA vs. Assessing Officer [W.P.(C) 3243/2021]

Acknowledging the Indian Supreme Court’s ruling and the lack of reciprocity on the protocol by the Indian side, the Swiss competent authority announced the withdrawal of its unilateral application of the MFN clause, effective from January 01, 2025. Accordingly, income accruing on or after this date may be taxed in the source state at the residual rates stipulated in the original India – Switzerland DTAA regardless of the application of the protocol.

The Swiss Competent Authority confirmed that its August 13, 2021 interpretation still applies to income accruing during 2018-2024 tax years. Indian tax residents can claim Swiss withholding tax refunds, and Swiss tax residents can claim foreign tax credits, subject to relevant treaty and domestic legal provisions.

KNAV Comments:

• While the Swiss competent authority’s decision provides clarity moving forward, companies and taxpayers must remain vigilant about evolving jurisprudence and procedural requirements to optimize cross-border tax positions.
• The Swiss Competent Authority’s decision would result in non-applicability of the lower rate of withholding tax of 5% applicable on dividend income to the India Tax Resident with effect from January 01, 2025, and onwards and such dividend income would be taxable now at 10% as per the India-Switzerland DTAA. It is to be noted that although the withholding of tax rate has increased from 5% to 10% w.e.f. January 2025, the foreign tax credit would still be available to tax residents of Switzerland under the India – Switzerland DTAA.
• The Swiss Competent Authority has also clarified that the interpretation of the publication would apply to income due in 2023 and 2024 and accordingly, until December 2024, the reduced rate of 5% maybe applicable.
• This issue has a wider ramification and other countries may also follow the same approach and it may affect proposed Foreign trade agreement between EU and India.
• Indian tax residents who selected the MFN clause in 2018 and 2024 may face inquiries from the Income Tax authorities in the near future, as assessments related to the MFN clause could be reopened.

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