Repatriation of profit from Swiss to become a costlier affair

The 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 wider ramification on past investments made by Indian companies in Switzerland.

Prashant Bhojwani, Partner, Corporate Tax, Tax & Regulatory Services, BDO India, said that given India is not providing reciprocal tax benefits under the MFN clause, other countries, such as France and the Netherlands could consider taking similar measures in the future.

He said such actions have a broader ramification on cross-border investments, as past investments would have already factored the concessions on potential tax costs on dividend payouts.

Higher taxation

Some of the large Swiss companies in India include ABB, Nestle, Novartis, Roche, UBS and Credit Suisse. The recent Supreme Court judgment would result in these companies paying higher taxes on dividends paid to their parent companies in Switzerland.

On the other hand, withholding tax on dividends paid by subsidiaries of Indian companies in Switzerland will rise to 10 per cent from 5 per cent. Accordingly, the Indian parent companies would explore obtaining higher foreign tax credits in India against such dividend income.

The cost of repatriating profits from Switzerland to India would increase for Indian parent companies.

Rajarshi Dasgupta, Executive Director-Tax, AQUILAW said that the India-Switzerland Double Taxation Avoidance Agreement was signed in 1994 and revised in 2000 and 2010.

Subsequently, India signed tax treaties with Colombia and Lithuania that provided tax rates on certain types of income that were lower than the rates it provided to OECD member nations. Three years ago, Switzerland interpreted that Colombia and Lithuania joining the OECD, a 5 per cent rate for dividends would also apply under the DTAA to India, too, under the MFN clause. However, the Supreme Court in the Nestle SA case held that the MFN clause under the DTAA does not get automatically triggered until notified under the Income Tax Act, 1961, he added.

Shiju PV, Senior Partner, IndiaLaw LLP, said the withdrawal of Swiss authorities’ MFN status will impact Indian holding companies, as the dividends paid to them will now be taxed at 10 per cent from January, in Switzerland.

Tax treaty

Jidesh Kumar, Managing Partner, King Stubb & Kasiva, Advocates and Attorneys said that while Switzerland’s move could set a precedent, there is no immediate indication that other European countries will follow suit.

Each country’s tax treaties with India are based on bilateral negotiations and changes would depend on specific reciprocity concerns or policy shifts, he said.