Switzerland Suspends ‘Most Favoured Nation’ Status to India

In a significant move, Switzerland has decided to suspend the application of the ‘Most Favoured Nation’ (MFN) clause in its tax treaty with India, a decision that could raise taxes on Indian companies operating in Switzerland. This decision follows a 2023 Indian Supreme Court ruling that altered the interpretation of the MFN clause, reversing a Delhi High Court decision favoring Nestlé. As a result, Switzerland will impose a 10% withholding tax on dividends paid to Indian companies starting January 1, 2025, instead of the previous 5%.

Background of the MFN Clause

The MFN clause, part of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland, was designed to offer lower tax rates on dividends between the two countries. Initially, Indian tax residents benefiting from Swiss dividends could avail of a reduced tax rate of 5%, a concession that followed the 2018 and 2020 OECD membership of Colombia and Lithuania, respectively, allowing India to offer similar benefits. However, Swiss authorities’ interpretation shifted when the Indian Supreme Court ruled that the MFN clause did not automatically apply when countries joined the OECD, particularly in the case of Nestlé.

Swiss Reaction to Indian Supreme Court Ruling

The Swiss Federal Department of Finance cited the Indian Supreme Court’s ruling on the Nestlé case, which held that the MFN clause was not automatically applicable without a notification from the Indian government. This ruling led to the suspension of the unilateral tax benefits under the MFN clause. From January 2025, dividends from Swiss sources to Indian entities will be taxed at 10%, as per the original India-Switzerland tax treaty terms.

Implications for Indian Companies and Swiss Investments

This suspension could increase tax liabilities for Indian companies operating in Switzerland, especially those with overseas direct investment (ODI) structures. Companies may face higher costs in the form of taxes on dividend income. However, this shift is unlikely to affect Swiss investments in India, as the tax rates for Swiss companies in India remain unchanged at 10%.

Expert Opinions and Market Reactions

Tax experts highlight that this move underscores the complexities of international tax treaties and the need for clear reciprocity between treaty partners. The decision to reverse the tax benefits could have a ripple effect on Swiss investments in India, though it remains to be seen how both countries navigate the evolving landscape of tax treaty applications.

Summary of the news