Double tax convention between Switzerland and the Republic of India (“DTC IN-CH”): Application of the most favored nation clause of the protocol amending

• Switzerland

01-09-2021

Switzerland and India have amended the double tax convention of 2 November 1994 by two amending protocols dated 16 February 2000 and 30 August 2010. The latter protocol contains a so-called most favored nation clause. This clause stipulates that if, after the signing of the amending protocol, India agrees on a tax at source on dividends, interest, royalties or fees for technical services with a third State (member of the OECD), at a rate lower than the rate provided for in the DTC IN-CH on the said items of income, the same preferential rate agreed in favor of that third state shall also apply between Switzerland and India, as from the date on which such agreement with the third State enters into force.

In the meantime, India has concluded new DTCs, e.g. with Lithuania and Colombia (both currently OECD member states), in which it agreed a 5% rate with respect to tax withheld at source on dividend payments. Based on the above-mentioned most favored nation clause, the withholding tax on dividend payments for companies eligible for benefits under DTC IN-CH should be lowered from 10% to 5%.

As stated above, the lower rate applies retroactively at the date the new DTC(s) setting out more preferential rates enter(s) into force. In the case of Lithuania and Colombia, however, the decisive date is that of their entry into the OECD (5 July 2018 for Lithuania and 28 April 2020 for Colombia).

Consequently, under the provisions of the latest amendment of the DTC IN-CH, Indian tax residents receiving dividends from Swiss sources as of 5 July 2018 or 28 April 2020  can claim, subject to the conditions laid down in DTC IN-CH, a refund of the (excessive additional) withholding tax in accordance with the established procedures. It is important to notice that the time bar set out in Article 32 of the Federal Act on Withholding Tax applies.

Therefore, any request for refund which refers to fiscal year 2018 (as of 5 July 2018, being the entry date of the republic of Lithuania into the OECD) has to be submitted to the Swiss Federal Tax Administration by 31 December 2021 at the latest.

For Swiss tax residents receiving dividends from Indian sources, the foreign tax credit under Article 2 of the Federal Ordinance on the crediting of foreign taxes deducted at source amounts to 5% instead of 10% for dividends accrued as of 1 January 2021 (see Ordinance 1 of the Federal Department of Finance on foreign tax credit).

Finally, in case the reciprocity in the interpretation of the most favored nation clause should not be granted by the Indian competent  authorities, the Swiss competent  authorities may reverse this interpretation and accordingly readjust the treaty rates as of 1 January 2023.

If you have any questions, please contact our Swiss Tax team.

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