Royalty Tax Rate Between India and Switzerland Under DTAA

Royalty Tax Rate Between India and Switzerland

The India-Switzerland Double Taxation Avoidance Agreement (DTAA), signed on 2 November 1994, in force from 29 December 1994 and effective in India for fiscal years beginning 1 April 1995 (amended by protocols notified in 2001 and 2011), provides a concessional withholding tax rate of 10% on royalty income under Article 12(2). This is significantly lower than India's domestic withholding tax rate of 20% (plus applicable surcharge and 4% health and education cess) under section 207(2) (Table, Sl. Nos. 1 and 2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) read with section 393(2) (Table, Sl. No. 17; section 195 of the Income-tax Act, 1961). See the full India-Switzerland DTAA withholding tax rates for dividends, interest, and fees for technical services. Notably, fees for technical services are taxed the same way under Article 12, sharing the same 10% rate as royalties.

The India-Switzerland DTAA is particularly noteworthy because of the Most Favoured Nation (MFN) clause controversy. The treaty's Protocol contained an MFN clause that would have allowed Swiss residents to claim lower royalty rates if India granted more favourable terms to other OECD member states. However, the Supreme Court of India's ruling of 19 October 2023 in Assessing Officer v. Nestle SA settled that the clause is not self-operative: it takes effect only through a notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961), and no such notification has been issued for this treaty. The Indian withholding rate on royalties and fees for technical services has therefore always been the treaty's own 10%; no lower MFN-based rate has ever been available on the Indian side. Switzerland's withdrawal of its unilateral MFN practice with effect from 1 January 2025 is a separate, Swiss-side change — it raised Swiss withholding on Swiss-source dividends paid to Indian residents back to 10% and does not alter Indian tax on royalties.

Unlike the India-USA and India-Singapore DTAAs, the India-Switzerland DTAA does not contain a "make available" clause for FTS. This means the 10% rate applies to both royalties and fees for technical services under the same Article 12(2) without the additional make-available qualification.

Treaty Rate vs Domestic Rate: Detailed Comparison

Article 12 of the India-Switzerland DTAA establishes a uniform rate for royalties payable to Swiss residents.

10% Rate for All Royalties (Article 12(2))

Under Article 12(2), royalties paid by an Indian resident to a Swiss resident (who is the beneficial owner) are taxed at a maximum rate of 10% of the gross amount. This rate applies uniformly to all categories of royalties, including:

• Copyright of literary, artistic, or scientific works (including films and broadcasting)
• Patents and patent applications
• Trademarks, designs, and models
• Secret formulas and processes
• Industrial, commercial, or scientific know-how and experience
• Software licensing fees (where classified as royalties)

The 10% treaty rate represents a saving of at least 10 percentage points compared to the domestic rate of 20% (plus surcharge and cess, making the effective domestic rate approximately 20.8% to 21.84% depending on the foreign-company surcharge slab of 2% or 5%).

MFN Clause History and Current Status

Paragraph 5 of the Protocol, in its 2010 form, provides that if India later agrees with a third OECD member state to limit its taxation of dividends, interest, royalties or fees for technical services to a lower rate or a narrower scope, the same treatment applies under this treaty. Swiss claimants argued this operated automatically, so that rates in India's later treaties flowed through without any further formality. That argument is what the Supreme Court rejected.

The Supreme Court's 2023 ruling resolved this by holding that:

• The MFN clause is not self-operative and requires a separate notification under section 159(1) of the Income-tax Act, 2025
• No such notification was issued by the Indian government for this treaty
• Therefore the treaty's own rate of 10% applies, and no lower MFN-based rate is or ever was available

Switzerland then withdrew its unilateral MFN statement with effect from 1 January 2025. That withdrawal governs Swiss withholding on Swiss-source income paid to Indian residents — most visibly dividends, which returned to 10%. For an Indian company paying royalties to a Swiss licensor nothing changed: the rate was 10% before and remains 10%.

Relief Method (Article 23(2)(b))

Switzerland's general method under Article 23(2)(a) is exemption with progression, but royalties do not use it. Dividends, interest, royalties and fees for technical services that India may tax under Articles 10, 11 and 12 fall under Article 23(2)(b), under which Switzerland allows relief upon request and may choose between: (i) a credit against Swiss tax for the Indian tax, capped at the Swiss tax attributable to that income; (ii) a lump-sum reduction of Swiss tax; or (iii) a partial exemption of the income, consisting at minimum of deducting the Indian tax from the gross amount. The relief must be claimed by the Swiss recipient — it is not automatic.

Who Qualifies for the Reduced Rate

Qualifying for the 10% royalty rate under the India-Switzerland DTAA involves several conditions:

Beneficial Ownership Requirement

The Swiss recipient must be the beneficial owner of the royalty income under Article 12(2). This means the recipient must have the right to use, enjoy, and dispose of the royalty income without being a mere agent, nominee, or conduit. Swiss holding companies or IP management entities must demonstrate genuine beneficial ownership and not merely act as intermediaries.

Tax Residency in Switzerland

The recipient must be a tax resident of Switzerland under Article 4 of the treaty. For companies, this typically requires being incorporated under Swiss law or having the place of effective management in Switzerland. For individuals, this requires domicile, residence, or habitual abode in Switzerland.

No PE Attribution

Under Article 12(6), if the Swiss recipient carries on business in India through a permanent establishment (or performs independent personal services from a fixed base) and the contract in respect of which the royalties or FTS are paid is effectively connected with it, Article 12(1) and (2) do not apply. The income is then taxed as business profits under Article 7 — or under Article 14 for a fixed base — at India's rate for foreign companies, 35% since 1 April 2024, plus surcharge and cess, rather than at the reduced 10% rate.

Anti-Conduit Provision and GAAR (No MLI Principal Purpose Test)

India and Switzerland have each ratified the MLI, but the India-Switzerland DTAA is not a Covered Tax Agreement: Switzerland's definitive MLI position, filed on ratification, does not list India. The MLI Principal Purpose Test therefore does not apply to this treaty. Treaty benefits can still be denied under the anti-conduit provision added by the 2010 amending protocol, which covers Articles 10, 11, 12 and 22, and under India's domestic GAAR (Chapter XI, sections 178 to 184, of the Income-tax Act, 2025; sections 95 to 102 of the Income-tax Act, 1961). Structures where a Swiss entity is interposed primarily for treaty access without genuine business substance remain exposed under both.

Royalty-Specific Treaty Provisions

Definition of Royalties (Article 12(3))

Article 12(3) defines "royalties" as payments of any kind received as consideration for:

• The use of, or right to use, any copyright of literary, artistic, or scientific work (including cinematograph films, tapes, or other means for radio or television broadcasting)
• Any patent, trademark, design or model, plan, secret formula, or process
• The use of, or right to use, any industrial, commercial or scientific equipment — equipment hire is a royalty under this treaty
• Information concerning industrial, commercial, or scientific experience

The definition follows the familiar pattern but is wider than the current OECD Model in one respect: it expressly covers industrial, commercial or scientific equipment, so equipment-hire payments are royalties here rather than business profits. Unlike the India-USA DTAA, the India-Switzerland treaty does not price equipment royalties differently — the 10% rate applies uniformly to every category.

Source Country Taxation (Article 12(1))

Royalties arising in India and paid to a Swiss resident may be taxed in Switzerland (the state of residence). However, Article 12(2) preserves India's right to withhold tax at source at up to 10%. The Indian payer deducts TDS at the time of credit or payment.

Deemed Source Rule (Article 12(7))

Royalties and fees for technical services are deemed to arise in India when the payer is India itself, a political sub-division, a local authority or a resident of India. They are also deemed to arise in India where the payer — resident or not — has a permanent establishment or fixed base in India in connection with which the liability to pay was incurred and the payments are borne by that permanent establishment or fixed base. This source rule determines when Indian withholding obligations are triggered.

Service PE and the Protocol Election for FTS

Where a Swiss enterprise furnishes technical services in India through employees or other personnel for more than 90 days in any twelve-month period, it can create a service permanent establishment under Article 5(2)(l), inserted by the 2000 amending protocol; the threshold falls to 30 days where the services are furnished to a related enterprise. That would ordinarily move the income into Article 7 and net-basis taxation. Paragraph 2 of the Protocol lets the enterprise elect instead to be taxed under Article 12(2) at 10% of the gross amount. Which route costs less depends on the margin attributable to the Indian activity: the 10% gross charge is favourable where attributable profits are high relative to receipts, and unfavourable for a low-margin Indian operation.

Documentation Required

To claim the reduced 10% DTAA rate on royalty payments to Swiss residents:

Tax Residency Certificate (TRC)

The Swiss recipient must provide a Tax Residency Certificate issued by the Swiss cantonal tax administration. This confirms Swiss tax residency and is a mandatory prerequisite under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961).

Form 41 (formerly Form 10F)

Form 41 must be filed electronically on India's income tax e-filing portal, providing the recipient's status (individual, company, etc.), Swiss tax identification number, and residential status details.

Self-Declaration and No-PE Certificate

A self-declaration confirming: (i) beneficial ownership of the royalty income; (ii) no permanent establishment in India; and (iii) that the royalty income is not effectively connected with any PE in India.

Royalty Agreement and Payment Documentation

The Indian payer must maintain the licensing or royalty agreement, invoices, proof of payment, and documentation of the intellectual property being licensed. The agreement should clearly describe the IP being licensed, the territory, the duration, and the royalty calculation basis.

Withholding Procedure for Indian Payers

Indian entities paying royalties to Swiss residents must follow specific withholding procedures:

Section 393(2) TDS Deduction

Under section 393(2) (Table, Sl. No. 17) of the Income-tax Act, 2025, the Indian payer must deduct TDS at 10% (the treaty rate) at the time of credit or payment, whichever is earlier. When applying the DTAA rate, surcharge and health and education cess are not added -- the 10% treaty rate is all-inclusive. Without a valid TRC, the domestic rate of 20% plus surcharge and cess applies.

Forms 145 and 146 (formerly Forms 15CA and 15CB)

For royalty remittances exceeding INR 5 lakh, Forms 145 and 146 compliance is mandatory. The Chartered Accountant issuing Form 146 must certify the applicable treaty rate (10%), confirm that treaty conditions are met, and cite Article 12 of the India-Switzerland DTAA.

Quarterly TDS Return (Form 144 (formerly Form 27Q))

The Indian payer must file quarterly TDS returns in Form 144, reflecting the 10% treaty rate and citing Article 12 of the India-Switzerland DTAA. TDS must be deposited with the government by the 7th of the month following deduction.

Lower Deduction Certificate (Section 395(1))

If the Swiss recipient believes its actual tax liability is lower than 10% (for example, due to losses or exemptions), it can apply for a lower deduction certificate under section 395(1) of the Income-tax Act, 2025 (section 197 of the Income-tax Act, 1961) to authorise a reduced withholding rate.

Common Disputes and Judicial Precedents

Assessing Officer v. Nestle SA (Supreme Court, 19 October 2023) -- MFN Clause

In this landmark ruling, the Supreme Court held that the MFN clause in the India-Switzerland DTAA Protocol is not self-operative. The taxpayer side had argued that where India's later treaties with OECD member states set lower rates or a narrower scope, Swiss residents benefit automatically under the MFN clause. The Court rejected this, holding that the MFN clause requires a separate notification by the Indian government under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961). This ruling has had a cascading impact on all Indian DTAAs with MFN clauses, including those with France, the Netherlands, and Sweden.

Switzerland's Suspension of MFN Clause (December 2024)

Following the Nestle ruling, the Swiss competent authority announced on 11 December 2024 the withdrawal, with effect from 1 January 2025, of its unilateral statement of 13 August 2021 that had applied MFN-based treatment. The practical effect is on the Swiss side: Swiss-source dividends paid to Indian residents revert to the treaty's 10%. It does not change Indian withholding on royalties or FTS paid to Swiss residents, which was 10% throughout — the Indian-side MFN claim failed on Nestle, not on the Swiss withdrawal.

Software Licensing as Royalty

Whether payments by an Indian subsidiary to a Swiss parent for software licences are royalties under Article 12 turns on the Supreme Court's 2021 decision in Engineering Analysis Centre of Excellence Pvt Ltd v. CIT. The Court held that consideration for the resale or use of shrink-wrapped or off-the-shelf software is not a royalty, because what passes is a licence to use a copy, not an interest in the copyright itself. Indian tribunals have applied the same reasoning to Swiss licensors: the analysis under Article 12(3) asks whether the payment is for the use of a copyright, not for a copy of the program.

Know-How vs Technical Services

Courts have distinguished between payments for know-how (which constitute royalties under Article 12) and payments for technical services (which constitute FTS under the same article). Know-how involves the transfer of intellectual property or proprietary knowledge, while technical services involve the application of expertise without IP transfer. This distinction affects the characterisation of mixed contracts involving both elements.

Transfer Pricing and Royalty Rates

In several cases, the transfer pricing implications of intercompany royalty payments between Indian subsidiaries and Swiss parent companies have been disputed. The tax authorities have challenged the arm's length nature of royalty rates, sometimes seeking to reduce the deductible royalty amount while simultaneously taxing the Swiss recipient at the treaty rate on the full contractual amount.

Practical Examples and Calculations

Example 1: Swiss Pharmaceutical Company Licensing Patent to Indian Subsidiary

A Swiss pharmaceutical company licenses a drug patent to its Indian subsidiary. The annual royalty payment is INR 10,00,00,000 (INR 10 crores).

• Domestic rate: 20% = INR 2,00,00,000 (plus the 2% foreign-company surcharge applicable at this income level and 4% cess, effective ~INR 2,12,16,000)
• DTAA rate (Article 12(2)): 10% = INR 1,00,00,000
• Tax saving under DTAA: INR 1,12,16,000 per year

The Swiss company provides a valid cantonal TRC, Form 41, and beneficial ownership declaration. Swiss tax relief is provided through partial exemption, offsetting the 10% Indian withholding tax against Swiss corporate tax.

Example 2: Swiss Watch Company Licensing Trademark to Indian Licensee

A Swiss luxury watch company licenses its trademark to an Indian distributor. The annual royalty is INR 3,00,00,000 (INR 3 crores).

• Domestic rate: 20% = INR 60,00,000 (plus the 2% foreign-company surcharge applicable at this income level and 4% cess, ~INR 63,64,800)
• DTAA rate (Article 12(2)): 10% = INR 30,00,000
• Tax saving under DTAA: INR 33,64,800

Example 3: Why an MFN Claim on Royalties Fails

A Swiss licensor asks its Indian payer to withhold at less than 10%, relying on paragraph 5 of the Protocol and a lower rate in one of India's later treaties with an OECD member state. The claim fails at the first step, and the payer should not act on it.

• The clause is conditional: paragraph 5 promises parity, but Assessing Officer v. Nestle SA (Supreme Court, 19 October 2023) holds it is not self-operative — a notification under section 159(1) is needed to bring it into effect.
• No such notification exists for the India-Switzerland treaty, so the MFN rate was never available on the Indian side in any year. This is not a change that took effect in 2025.
• Correct withholding: 10% of the gross royalty under Article 12(2), inclusive of surcharge and cess.
• Payer risk: withholding below 10% on an MFN theory exposes the Indian payer to short-deduction demands, interest under section 398(3)(a) of the Income-tax Act, 2025 (section 201(1A) of the Income-tax Act, 1961), and disallowance of the royalty under section 35(b)(ii) of the Income-tax Act, 2025 (section 40(a)(i) of the Income-tax Act, 1961).

Frequently Asked Questions

What is the royalty tax rate under the India-Switzerland DTAA?

The royalty withholding tax rate is 10% of the gross amount under Article 12(2), inclusive of surcharge and cess. It applies uniformly to every category of royalty, including patents, trademarks, copyrights, know-how and the hire of industrial, commercial or scientific equipment. The domestic fallback is 20% under section 207(2) of the Income-tax Act, 2025 (section 115A of the Income-tax Act, 1961) plus surcharge and cess.

Does the MFN clause reduce the 10% royalty rate?

No. In Assessing Officer v. Nestle SA (Supreme Court, 19 October 2023) the MFN clause in paragraph 5 of the Protocol was held not to be self-operative: it requires a notification under section 159(1) of the Income-tax Act, 2025 (section 90(1) of the Income-tax Act, 1961), and none has been issued for this treaty. No lower MFN-based rate has ever been available on the Indian side. Switzerland's withdrawal of its unilateral MFN practice from 1 January 2025 concerns Swiss withholding on Swiss-source income, notably dividends, and does not change Indian tax on royalties.

Does the India-Switzerland DTAA have a make-available clause?

No. Unlike the India-USA and India-Singapore DTAAs, the India-Switzerland DTAA has no make-available clause for fees for technical services, and after Nestle none can be imported through the MFN clause. Both royalties and FTS are taxed at 10% under Article 12(2) without any additional qualification test.

What documents does a Swiss company need to claim the reduced royalty rate?

A Swiss company needs: (1) a Tax Residency Certificate from the Swiss cantonal tax administration; (2) Form 41 filed on India's e-filing portal; (3) a self-declaration of beneficial ownership; and (4) a no-PE declaration confirming no permanent establishment in India.

Are software licensing fees considered royalties?

Following the Supreme Court's 2021 ruling, payments for off-the-shelf software licences are not royalties because only a user licence is granted. However, customised software development, source code transfers, or copyright assignments may still qualify as royalties under Article 12.

How does Switzerland provide double taxation relief?

Royalties fall under Article 23(2)(b), not the Article 23(2)(a) exemption-with-progression method. On request, Switzerland grants either a credit for the Indian tax against Swiss tax (capped at the Swiss tax on that income), a lump-sum reduction of Swiss tax, or a partial exemption consisting at minimum of deducting the Indian tax from the gross royalty. The relief must be claimed.

Can an Indian company apply the treaty rate without a TRC from the Swiss recipient?

No. A valid TRC from the Swiss cantonal tax administration is mandatory under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961). Without it, the Indian payer must deduct TDS at the domestic rate of 20% plus surcharge and cess.