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Protocol amending the agreement between Swiss confederation and the Republic of India for avoidance of Double Taxation: A critical analysis

In order, to unearth black money stashed away in Swiss banks, India was awaiting Switzerland’s ratification of the Double Taxation Avoidance Agreement (“DTAA”).The new provisions of the DTAA between India and Switzerland have now come into effect. The provisions apply to income arising in India after April 1, 2012 and in Switzerland after January 1, 2012. The Contracting State referred in the present agreement is India and Swiss Confederation.  The 14 Articles of the Protocol deal with various matters. Some of the noteworthy changes are as follows:

1. International Traffic to include transport via ship also:

The earlier definition under the Article 3 (i) of the DTAA referred to means of transport as ‘aircraft’ alone. Now the ambit has been increased and the word ‘ship’ has also been added. The business profits will not exclude the profits from the operation of ships; the change in definition is evident due to the change in the ambit of international traffic which now includes, ‘ship’ also as one of the means of transport. Further changes under Article 8 in addition to air transport also include shipping, which is inevitable. Similar changes are incorporated under Article 11 & 13.

2. Non-discrimination clause:

Article 24 of the India-Swiss of has incorporated the changes on the basis of agreement which is line with the USA. Therefore, the taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities. This provision shall not be construed as obliging a Contracting State to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

Further, it is clarified that the non-discrimination provision shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which a company of the other Contracting State has in the first mentioned State at a rate of tax which is higher than that imposed on the profits of a similar company of the first mentioned Contracting State, nor as being in conflict with the provisions of business profits. However, the difference in tax rate will not exceed 10 percentage points in any case.

3. Exchange of Information:

The provision regarding Exchange of Information exists in the major DTAA’s. The competent authorities of the States will exchange information for the purposes of carrying out provisions of the DTAA between India and Swiss and the domestic laws and compliances concerning the taxation. Further the exchange of information is not restricted to apply only to the residents of the Contracting State alone. Proper disclosure methods have also been provided. On a request for information from India, Switzerland will need to use its administration to obtain that information regardless of whether it requires this information under its own tax laws, as long as it does not violate its legal process. The information may be held by a bank, financial institution, nominee or person acting in an agency or a fiduciary capacity. But for the same, the India has to first exhaust its own laws to obtain the information. A host of procedures are provided in the under the protocol which are mandatory.

The amendment clarifies that exchange of information which is foreseeably relevant, the procedure has to been set out; in order to safe guard the genuine issues.

One of the impediments could be that the new provisions apply from January 1, 2011, i.e. four months after signing the Protocol.  This is viewed by many as leaving out existing offenders for new ones, who are naive enough to leave unaccounted money in Switzerland even after the Protocol is in public domain. 

4. Changes in ambit of Fiscal Domicile:

A new paragraph is added to the Agreement, which increases the scope of the term “resident of a Contracting State”; which includes a recognised pension fund or pension scheme in that Contracting State. These pension funds or pension scheme will be recognised and controlled according to the statutory provisions of that State, which is generally exempt from income tax in that state and which is operated principally to administer or provide pension or retirement benefits.

5. Conduit Agreement:

This provision is a anti abuse provision; its states that provision.  It states that benefits under Articles 10 (Dividends), Article 11 (interest), Article 12 (Royalty) and Article 22 (Other Income) would not be available where such sums are received under a "conduit arrangement”.

The term “Conduit Agreement” means a transaction or series of transactions which is structured in such a way that a resident of a Contracting State entitled to the benefits of the Agreement receives an item of income arising in the other Contracting State but that resident pays, directly or indirectly, all or substantially all of that income (at any time or in any form) to another person who is not a resident of either Contracting State and who, if it received the item of income directly from the other Contracting State in which the income arises, or otherwise, to benefits with respect to that item of income which are equivalent to, or more favorable  than, those available under this agreement to a resident of a Contracting State and the main purpose of such structuring is obtaining benefits under this Agreement. The DTAA provisions contain benefits like lower rates of tax or more restricted scope of taxation than the applicable domestic laws.  Such benefits are conditioned on the recipient being the "beneficial owner" of such income.


The Exchange of Information provisions appear to be steps in the right direction, though its rewards may not be visible immediately.  The battle against tax treaty abuse though may achieve more success in initial years where such arrangements presently exist between companies in India and Switzerland, though rewards may taper off over the years as tax payers rework their arrangements to address the new law.  It may therefore, require many such treaty renegotiations to make a real difference in both these areas, and to that end the Protocol appears to be a good start. The most important changes are the treaty abuse and the exchange of information provisions. The amendment is a good way to curb the black money transactions.

Published by

Vrinda Aghi
(Legal Associate)
Category Income Tax   Report

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