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 and effective from 29 October 1995 (with subsequent amendments 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 115A read with Section 195 of the Income Tax Act, 1961.

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 October 2023 ruling in Nestle SA v. ACIT held that the MFN clause cannot be self-operative and requires a separate notification by the Indian government. Following this ruling, Switzerland suspended the MFN clause from 1 January 2025, meaning the original treaty rate of 10% now applies without any MFN-based reductions.

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 21.84% to 22.88% depending on the surcharge slab).

MFN Clause History and Current Status

The Protocol to the India-Switzerland DTAA contained an MFN clause providing that if India subsequently agreed to a lower rate on royalties or FTS with any OECD member country, Switzerland would automatically benefit from the same lower rate. India's DTAAs with certain OECD countries (such as the India-UK DTAA which provided 10% on royalties even before the general rate was established) led to disputes about whether the MFN clause automatically reduced Swiss withholding rates.

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 90(1) of the Income Tax Act
• No such notification was issued by the Indian government
• Therefore, the original treaty rate of 10% applies, not any lower rate based on MFN

In response, Switzerland suspended the MFN clause from 1 January 2025, meaning Swiss investors in India will not benefit from any MFN-based rate reductions, and the 10% treaty rate is the applicable rate.

Relief Method (Article 23)

Switzerland provides relief from double taxation through the exemption method with progression. Swiss residents earning royalty income from India can claim partial exemption of such royalties from Swiss tax, including at least a deduction of the Indian tax paid from the gross amount of the royalties. This means the 10% Indian withholding tax is effectively offset against Swiss tax liability.

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(4), if the Swiss recipient has a permanent establishment in India and the royalty-generating right or property is effectively connected with that PE, the income is taxed as business profits under Article 7 at India's corporate tax rate (35% for foreign companies), not at the reduced 10% rate.

MLI Principal Purpose Test (PPT)

Since both India and Switzerland have ratified the MLI, the Principal Purpose Test (PPT) applies. Treaty benefits will be denied if one of the principal purposes of an arrangement was to obtain the benefit of the 10% reduced rate. This targets structures where Swiss entities are interposed primarily for treaty access without genuine business substance.

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
• Information concerning industrial, commercial, or scientific experience

The definition is broadly consistent with the OECD Model Tax Convention. Notably, unlike the India-USA DTAA, the India-Switzerland treaty does not separately categorise equipment royalties at a different rate -- the 10% rate applies uniformly to all categories of royalties.

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(5))

Royalties are deemed to arise in India when the payer is a resident of India, or when the obligation to pay royalties is incurred in connection with a PE situated in India. This source rule determines when Indian withholding obligations are triggered.

Tax on Net Income vs Gross Income

Under the Protocol to the India-Switzerland DTAA, if the royalties are taxed on a net basis (deductions allowed) in the source state, the tax rate should not exceed 10% of the net amount. This provision is relevant where royalties are connected with a PE and are taxed under Article 7.

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 90(4) of the Indian Income Tax Act.

Form 10F

Form 10F 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 195 TDS Deduction

Under Section 195, 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.

Form 15CA and Form 15CB

For royalty remittances exceeding INR 5 lakh, Form 15CA/15CB compliance is mandatory. The Chartered Accountant issuing Form 15CB 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 27Q)

The Indian payer must file quarterly TDS returns in Form 27Q, 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 197)

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 197 to authorise a reduced withholding rate.

Common Disputes and Judicial Precedents

Nestle SA v. ACIT (Supreme Court, 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. Nestle SA had argued that since India's treaties with certain OECD countries provided lower royalty rates, Switzerland should automatically benefit from the same rates under the MFN clause. The Court rejected this, holding that the MFN clause requires a separate notification by the Indian government under Section 90(1) of the Income Tax Act. 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)

In response to the Nestle ruling, the Swiss Federal Council announced on 11 December 2024 that Switzerland would suspend the MFN clause from 1 January 2025. This means Swiss entities earning royalty income from India cannot claim rates lower than 10%, and the original treaty rate applies without any MFN adjustments. The suspension does not affect income accrued during the 2018-2024 tax years.

Software Licensing as Royalty

In Ciba Specialty Chemicals Holding Inc. (ITAT Mumbai, 2024), the tribunal examined whether payments by an Indian subsidiary to its Swiss parent for software licensing constituted royalties under Article 12. Following the Supreme Court's 2021 ruling in Engineering Analysis Centre of Excellence, the tribunal held that payments for off-the-shelf software licences are not royalties because only a user licence is granted, not rights in the copyright.

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 surcharge and cess, effective ~INR 2,18,40,000)
• DTAA rate (Article 12(2)): 10% = INR 1,00,00,000
• Tax saving under DTAA: INR 1,18,40,000 per year

The Swiss company provides a valid cantonal TRC, Form 10F, 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 surcharge and cess ~INR 65,52,000)
• DTAA rate (Article 12(2)): 10% = INR 30,00,000
• Tax saving under DTAA: INR 35,52,000

Example 3: Pre-2025 vs Post-2025 MFN Impact

Before the MFN suspension, a Swiss company may have argued for a rate lower than 10% based on India's treaties with other OECD countries. Post-January 2025, the rate is fixed at 10% regardless of rates in other treaties.

• Pre-2025 (MFN argument): Potentially lower rate based on India-Portugal or India-Slovenia DTAA (which had lower rates for certain income types)
• Post-2025 (MFN suspended): 10% fixed rate under Article 12(2)
• Supreme Court ruling: MFN was never automatically operative; separate notification required

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). This applies uniformly to all categories of royalties, including patents, trademarks, copyrights, and know-how. The rate is significantly lower than the domestic rate of 20% plus surcharge and cess.

How has the MFN clause suspension affected royalty taxation?

Switzerland suspended the MFN clause from 1 January 2025 following the Supreme Court's 2023 Nestle ruling. This means Swiss residents cannot claim royalty rates lower than 10% based on India's treaties with other OECD countries. The original 10% treaty rate now applies without MFN adjustments.

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

No. Unlike the India-USA and India-Singapore DTAAs, the India-Switzerland DTAA does not contain a make-available clause for fees for technical services. 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 10F 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?

Switzerland provides relief through partial exemption with progression. Swiss residents earning royalty income from India can claim a deduction of the Indian withholding tax (10%) from the gross royalty amount against Swiss tax liability, effectively preventing double taxation.

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 90(4) of the Income Tax Act. Without it, the Indian payer must deduct TDS at the domestic rate of 20% plus surcharge and cess.