Capital Gains Tax Between India and Switzerland Under DTAA

Capital Gains Tax Rate Between India and Switzerland

The India-Switzerland Double Taxation Avoidance Agreement (DTAA), originally signed on November 2, 1994, and effective from October 7, 1995, with subsequent amendments in 2001 and 2011, contains a capital gains article that is notably different from most of India's modern treaties. Article 13 governs the taxation of capital gains between the two countries, and its residual clause in Article 13(5) provides that gains from the alienation of property not covered by the specific paragraphs are taxable only in the state of residence of the alienator.

This residual clause is significant because it means that certain capital gains — particularly from the sale of shares that are not shares in property-rich companies — may be taxable only in the state of residence. For a Swiss resident selling shares of an Indian company, this could mean taxation only in Switzerland (where private investors enjoy zero capital gains tax). However, this interpretation has been the subject of considerable debate and judicial scrutiny in India, and India's domestic law provisions on capital gains taxation — including the indirect transfer rules introduced in 2012 — create complex interactions with the treaty.

The DTAA follows the OECD Model convention, which typically allocates broader taxing rights to the residence state on capital gains compared to the UN Model used in many of India's treaties with developing nations. This OECD-model approach, combined with Switzerland's favourable domestic capital gains regime, makes the India-Switzerland capital gains corridor one of the most analysed in international tax practice.

Treaty Rate vs Domestic Rate: Detailed Comparison

Like most DTAAs, the capital gains article does not prescribe specific withholding rates. Instead, it allocates taxing rights between India and Switzerland for different categories of capital gains.

India's Domestic Capital Gains Tax Rates

Under India's Income Tax Act, 1961, the capital gains tax rates for non-residents are:

• Short-term capital gains (listed securities): 20% under Section 111A (holding period under 12 months)
• Long-term capital gains (listed securities): 12.5% under Section 112A on gains exceeding INR 1.25 lakh (holding period 12 months or more), without indexation
• Short-term capital gains (unlisted shares): 30% (slab rate for non-residents)
• Long-term capital gains (unlisted shares): 12.5% under Section 112 without indexation, or 20% with indexation
• Immovable property: 20% with indexation (long-term) or slab rates (short-term)

Switzerland's Capital Gains Position

Switzerland does not levy capital gains tax on private investors selling listed securities. Gains from the sale of shares held as part of private wealth management are tax-exempt, provided the investor is not classified as a professional securities trader. The Swiss tax authorities classify someone as a private investor if they: hold securities for at least six months, keep annual transaction volume below five times their portfolio value, do not rely on investment returns for more than 50% of gross income, and do not use borrowed funds for investments. Corporate investors and professional traders in Switzerland are subject to regular income/profits tax on capital gains.

Treaty Allocation Summary

Who Qualifies for the Reduced Rate

To benefit from the capital gains provisions — particularly the favourable residual clause in Article 13(5) — the following conditions must be met:

Tax Residency in Switzerland

The person must be a tax resident of Switzerland under Swiss domestic law and the treaty's tie-breaker provisions. A Tax Residency Certificate (TRC) issued by the relevant Swiss cantonal tax authority is mandatory under Section 90(4) of the Indian Income Tax Act.

Beneficial Ownership

While the capital gains article does not contain a separate beneficial ownership test, the overall treaty framework and anti-avoidance measures require that the person claiming treaty benefits is the genuine economic owner of the asset being disposed of, not a mere nominee or conduit.

Private Investor Classification in Switzerland

To benefit from Switzerland's zero capital gains tax on the Swiss side, the investor must qualify as a private investor under Swiss tax law. Professional securities traders are taxed on capital gains as ordinary income. The classification depends on holding periods, transaction frequency, reliance on investment income, and use of leverage.

MLI and Anti-Avoidance Compliance

Both India and Switzerland have signed the MLI. The Principal Purpose Test (PPT) applies to the treaty, denying benefits if one of the principal purposes of an arrangement is to obtain the treaty benefit. India's domestic GAAR (Sections 95-102) provides an additional layer of anti-avoidance scrutiny.

Capital Gains-Specific Treaty Provisions

Article 13(1): Immovable Property

Gains from the alienation of immovable property situated in India may be taxed in India. The definition includes agricultural land, buildings, livestock, and equipment used in agriculture and forestry. This is a standard situs-based provision that preserves India's full taxing right on Indian real estate disposals by Swiss residents.

Article 13(2): Movable Property of a Permanent Establishment

Gains from the alienation of movable property forming part of the business assets of a permanent establishment that a Swiss enterprise has in India may be taxed in India. This includes gains from the alienation of the PE itself. This provision ensures India can tax the disposal of business assets connected to an Indian PE, including goodwill and other intangible assets of the PE.

Article 13(3): Ships and Aircraft

Gains from the alienation of ships or aircraft operated in international traffic, or movable property pertaining to their operation, are taxable only in the contracting state of residence of the alienator. India cannot tax Swiss shipping or airline companies on gains from disposing of their international fleet.

Article 13(4): Property-Rich Companies

Gains from the alienation of shares of a company whose property consists principally of immovable property situated in India may be taxed in India. The word "principally" is generally interpreted as meaning more than 50% of the company's total asset value. This provision prevents indirect transfers of Indian real estate through share sales in property-rich holding companies.

Article 13(5): The Residual Clause — Key Provision

This is the most significant and debated provision. Under the original treaty text, gains from the alienation of any other property — including shares of Indian companies that are not property-rich — are taxable only in the contracting state of which the alienator is a resident. For a Swiss resident, this means such gains would be taxable only in Switzerland.

However, there is an important protocol provision: if Switzerland introduces a capital gains tax on the alienation of shares at a later stage, Article 13(5) will be replaced with a provision allowing both states to tax such gains. Since Switzerland has not introduced a general capital gains tax on shares, the original exclusive residence-state taxation remains in the treaty text.

Interaction with India's Domestic Law

India's domestic law provisions — particularly Section 9(1)(i) and the indirect transfer provisions — seek to tax capital gains arising from the transfer of shares in Indian companies by non-residents. The interplay between these domestic provisions and Article 13(5) has been a significant area of dispute. India's position is that its domestic law can override the treaty in certain circumstances, while taxpayers have argued that the treaty's exclusive residence-state taxation under Article 13(5) takes precedence under Section 90(2) of the Income Tax Act, which provides that treaty provisions prevail where they are more beneficial to the taxpayer.

Documentation Required

Swiss residents claiming treaty benefits on Indian capital gains must provide the following documentation:

Tax Residency Certificate (TRC)

A TRC issued by the relevant Swiss cantonal tax authority confirming tax residence in Switzerland for the relevant assessment year. This is mandatory under Section 90(4) of the Indian Income Tax Act.

Form 10F

The Swiss resident must file Form 10F electronically on India's Income Tax e-filing portal, declaring status, nationality, Swiss tax identification number, period of residential status, and Swiss address.

Permanent Account Number (PAN)

A Swiss resident earning capital gains in India must obtain a PAN from the Indian tax authorities for tax return filing and treaty benefit claims.

Indian Tax Return

Capital gains earned in India must be reported in the Indian income tax return (ITR-2 or ITR-3). Even if claiming exemption under Article 13(5), the income should be disclosed in the return with the treaty exemption claim.

Transfer Pricing Documentation

If the share transfer is between related parties (e.g., intra-group restructuring), transfer pricing documentation demonstrating arm's length valuation is essential to support the transaction value and avoid adjustments under Section 92.

Withholding Procedure for Indian Payers

When an Indian resident purchases shares from a Swiss resident, or when sale proceeds are remitted to Switzerland, the following procedures apply under Section 195:

TDS Obligations

The Indian buyer must deduct TDS on capital gains at applicable domestic rates unless the Swiss seller can demonstrate treaty exemption under Article 13(5). In practice, if the seller claims exclusive residence-state taxation under the residual clause, the buyer should obtain a nil withholding certificate or lower withholding certificate from the Indian tax officer under Section 197 before making the payment without deducting TDS.

Form 15CA and Form 15CB

For remittance of sale proceeds to Switzerland:

• Form 15CB: A Chartered Accountant certifies the nature of remittance, applicable treaty provisions, and TDS deducted or exempted via Form 15CB
• Form 15CA Part C: The remitter files Form 15CA online, referencing the 15CB acknowledgement number
• If a nil/lower withholding certificate under Section 197 is obtained, Form 15CA Part B may apply

Section 197 Certificate

Given the complexity of Article 13(5) claims, Swiss residents often apply for a lower or nil withholding certificate under Section 197 from the Indian tax officer. This certificate authorises the buyer to remit sale proceeds without deducting TDS (or at a reduced rate), based on the treaty exemption claim.

Common Disputes and Judicial Precedents

Article 13(5) Residual Clause Disputes

The most significant area of dispute involves the interpretation of Article 13(5). Swiss residents have argued that gains from selling shares of Indian companies (which are not property-rich) are taxable only in Switzerland under the residual clause. India's tax authorities have contested this, arguing that India's domestic law provisions (particularly the indirect transfer provisions) override or supplement the treaty. The ITAT has in several cases upheld the residual clause in favour of the taxpayer, holding that Article 13(5) provides exclusive residence-state taxation for gains not covered by paragraphs 1-4.

MFN Clause and Capital Gains

The India-Switzerland DTAA protocol contained a Most Favoured Nation (MFN) clause that Switzerland applied unilaterally to reduce rates to match lower rates India offered to other OECD countries. Following the Indian Supreme Court's ruling in the Nestle SA case (October 2023), which held that MFN benefits require explicit notification under Indian law, Switzerland suspended its unilateral MFN application effective January 1, 2025. While the MFN clause primarily affected dividend rates (from 5% back to 10%), its suspension signals a broader shift in the treaty relationship that may influence how capital gains disputes are resolved.

Indirect Transfer Cases

Following the Vodafone case and the introduction of Section 9(1)(i) Explanation 5, India has asserted the right to tax indirect transfers — gains from transferring shares in a foreign entity that derives substantial value from Indian assets. When the foreign entity is Swiss, Article 13(5) creates a potential conflict with India's domestic indirect transfer provisions. The resolution depends on whether the treaty or domestic law prevails, and this remains an evolving area of jurisprudence.

Protocol Provision on Future Swiss CGT

The treaty protocol provides that if Switzerland introduces a capital gains tax on share alienations in the future, Article 13(5) will be replaced with a provision allowing source-state taxation. Since Switzerland has not introduced such a tax (and its longstanding policy of exempting private investors from CGT makes this unlikely in the near term), the current exclusive residence-state taxation under Article 13(5) continues to apply.

Practical Examples and Calculations

Example 1: Swiss Private Investor Selling Listed Indian Shares

A Swiss private investor (not a professional trader) holds shares in an Indian listed company for 18 months and sells them for a gain of INR 50,00,000.

• Article 13(5) claim: Gains taxable only in Switzerland (residence state)
• Swiss domestic tax: NIL (private investor exempt from capital gains tax)
• Indian domestic rate (if applied): 12.5% under Section 112A = INR 6,09,375 on gains exceeding INR 1.25 lakh
• If Article 13(5) upheld: Total tax = NIL
• If India contests and applies domestic law: Total tax = INR 6,09,375 (plus surcharge/cess)
• Practical approach: Apply for Section 197 nil withholding certificate citing Article 13(5)

Example 2: Swiss Company Selling Unlisted Indian Subsidiary

A Swiss multinational sells its 100% stake in an unlisted Indian subsidiary for a gain of INR 100,00,00,000 (INR 100 crore). Shares held for 5 years.

• Article 13(5) claim: Gains taxable only in Switzerland
• Indian domestic rate (if applied): 12.5% without indexation = INR 12,50,00,000
• Swiss corporate tax (if applied): Subject to participation relief — gains from qualifying participations (10%+ or CHF 1M+ value) are substantially tax-exempt in Switzerland
• If Article 13(5) upheld: Minimal or zero tax in Switzerland due to participation relief
• High likelihood of Indian scrutiny: Large-value transactions are routinely examined by Indian tax authorities

Example 3: Property-Rich Company Transfer

A Swiss entity holds shares in an Indian company whose assets are 65% immovable property in India. It sells these shares for a gain of INR 20,00,00,000.

• Article 13(4) applies: Property consists principally of Indian immovable property
• India's taxing right: Fully preserved — the residual clause in Article 13(5) does not apply
• Tax rate: India's domestic capital gains rates apply (10% or 20% depending on classification)
• Swiss credit: Indian tax paid is creditable against Swiss tax liability

Example 4: Indirect Transfer Dispute

A Swiss company transfers shares in a Singapore entity that holds 100% of an Indian subsidiary. The Indian subsidiary constitutes 80% of the Singapore entity's value.

• India's position: Indirect transfer taxable under Section 9(1)(i) Explanation 5
• Taxpayer's argument: Article 13(5) of the India-Switzerland DTAA provides exclusive Swiss taxation since the shares being transferred are of a non-Indian company
• Key issue: Whether Article 13(4) reaches through to the underlying Indian immovable property, or whether the literal treaty text applies
• Practical risk: Significant litigation risk — both positions have support in judicial precedents

For dividend rate provisions affected by the MFN suspension, see dividend tax rate between India and Switzerland. For interest provisions, see interest tax rate India-Switzerland. For a comprehensive rate summary, visit India to Switzerland withholding tax rates. The complete treaty analysis is available at India-Switzerland DTAA complete guide. For DTAA benefits for Swiss companies investing in India, see our DTAA benefits guide. Businesses structuring India operations from Switzerland should explore our tax advisory services, transfer pricing advisory, and FEMA compliance support. See also how to register a company in India from Switzerland.

Frequently Asked Questions

Does the India-Switzerland DTAA exempt capital gains on shares?

Under Article 13(5), gains from the alienation of shares (other than property-rich companies under Article 13(4)) are taxable only in the state of residence. For a Swiss resident, this means gains would be taxable only in Switzerland, where private investors generally pay zero capital gains tax. However, India may contest this interpretation under its domestic indirect transfer provisions.

Does Switzerland tax capital gains on Indian shares?

For private investors, Switzerland does not levy capital gains tax on the sale of listed securities. Corporate investors may qualify for participation relief on qualifying holdings (10%+ stake or CHF 1M+ value), substantially reducing or eliminating Swiss tax on gains from Indian subsidiary disposals.

How did the MFN clause suspension affect capital gains?

The MFN clause suspension effective January 1, 2025, primarily affected dividend rates (reverting from 5% to 10%). The capital gains provisions in Article 13 were not directly affected by the MFN clause. However, the suspension signals a broader deterioration in the bilateral tax relationship that may influence how Indian authorities approach Article 13(5) claims.

What is the protocol provision about future Swiss capital gains tax?

The treaty protocol states that if Switzerland introduces a capital gains tax on share alienations, Article 13(5) will be replaced with a provision allowing source-state taxation. Since Switzerland has not introduced such a tax, the current exclusive residence-state taxation continues to apply.

What documentation is needed to claim Article 13(5) exemption?

A Tax Residency Certificate from the Swiss cantonal tax authority, Form 10F filed electronically, a PAN, and an Indian tax return disclosing the gain with the treaty exemption claim. For large transactions, a Section 197 nil withholding certificate from the Indian tax officer is strongly recommended.

Can India invoke GAAR on a capital gains transaction?

Yes. India's GAAR under Sections 95-102 can override treaty benefits for impermissible avoidance arrangements. If the arrangement lacks commercial substance or its main purpose is obtaining a tax benefit, GAAR can deny the Article 13(5) exemption and apply domestic capital gains tax rates.

How are indirect transfers treated under the treaty?

India's domestic indirect transfer provisions under Section 9(1)(i) can potentially conflict with Article 13(5) for transactions involving shares in non-Indian entities that derive value from Indian assets. The resolution depends on whether treaty or domestic law prevails — an evolving area with ongoing litigation.