The changes may also have some implications for India-based employees of companies headquartered in Switzerland, freelancers working for Swiss companies, and people settled in India but earning a pension from Switzerland.
Mint breaks down the impact of development.
Investors and employees with stock options
Switzerland’s suspension of MFN status for India will mainly impact the taxation of cross-border dividends.
“Previously, dividends from Swiss-listed companies were taxed at 5% under the MFN clause. With its withdrawal, dividends will now be subject to the standard rate of 10% (under the India-Switzerland DTAA),” said Ajay R. Vaswani, Founder, ARAS AND COMPANY Chartered Accountants.
In fact, from January 1, a higher withholding tax of 10% will apply to Indian investors with direct investments in Swiss equities, mutual funds or exchange traded funds (ETFs).
This includes Indian employees working for Swiss multinationals who have been granted stock options, restricted stock units (RSUs) or other stock options by a Swiss-based parent company.
However, the 10% withholding tax will only apply when the ESOPs produce dividend income and not when the ESOPs are sold.
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“If the employee receives dividends from the shares of Swiss MNCs (directly or through ESOPs), the payout is subject to 10% withholding tax. If the employee sells the ESOPs, any gains will be taxed in India as capital gains (not as dividends) and are not subject to Swiss withholding tax,” Vaswani said.
Foreign Tax Credit (FTC) under DTAA can still be claimed later in India. Through the FTC, investors can claim the tax paid in Switzerland to offset their tax liability in India when filing tax returns.
“To this extent, the development will not have a major impact on resident Indian investors where they can claim full credit of taxes withheld in Switzerland i.e. 10% from 2025,” said Janhavi Pandit, a Mumbai-based charter company. accountant.
Dividend income earned on foreign shares is taxed at the rate of tax in India. Therefore, only investors subject to a tax cap of less than 10% will be affected.
Indian companies present in Switzerland may also face business losses in some situation, Pandit said.
“When an India-based company offers dividend from (the) Swiss company as business income (since its main activity is investing or foreign investment, it is said that these are strategic investments) and there is a financing cost against investment in those shares, which is claimed as deductible, this can lead to business losses (subject to other components in the calculation). In such a situation, foreign tax credit may not be allowed,” Pandit said, adding that this is a specific situation that may require deeper analysis in most such cases.
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Freelancers and retirees
The suspension of MFN status will not affect India-based freelancers working for Swiss companies and those earning pension from Swiss sources as these are not classified as dividend income.
“If the freelancer only receives payments for services (salary, contract fees or consultancy fees), these payments are considered business income or salary income and not dividends,” Vaswani said. “If the Swiss company withholds tax on the freelancer’s income, this would be subject to Swiss domestic withholding tax rules, which are separate from the DTAA provisions on dividends. The freelancer may still have a claim against the FTC under Section 90.”
This also applies to retirees. However, Vaswani pointed out that if a pension benefit previously benefited from MFN-based reduced withholding tax, it could now be taxed at a higher rate under Swiss domestic law.
“India taxes global income, so even after pension is taxed in Switzerland, retirees have to declare it as income in India. (But) they can claim a foreign tax credit for the tax paid in Switzerland,” he said.
Pandit added that the changes will be applicable from 2025 onwards and therefore there will be no undue burden on investors due to taxes already deducted.
