Switzerland Revokes India’s ‘Most Favoured Nation’ Status Over Supreme Court Ruling

In a significant development, Switzerland has revoked India’s ‘Most Favoured Nation’ (MFN) status under the Double Taxation Avoidance Agreement (DTAA). The decision comes in the wake of an Indian Supreme Court ruling in the Nestle case, which altered the interpretation of the MFN clause.

The Swiss Finance Department announced that the MFN status would be suspended starting January 1, 2025. The move impacts Indian entities operating in Switzerland and Swiss investors in India, introducing higher tax liabilities and changing the terms of their bilateral tax treaty.

Backdrop: Nestle Case and MFN Clause Interpretation

India’s tax agreements with Lithuania and Colombia initially offered lower tax rates compared to those with OECD nations. However, when Lithuania and Colombia joined the OECD, Switzerland assumed the MFN clause would reduce the tax rate on dividends in its treaty with India from 10% to 5%.

The Supreme Court of India, in a ruling dated October 19, 2023, clarified that the MFN clause between two countries does not apply automatically when a nation joins the OECD. Instead, it must be explicitly notified under Section 90 of the Income Tax Act. This judgment overturned a 2021 Delhi High Court decision that had supported Switzerland’s interpretation of the clause.

Impact on Bilateral Taxation

The Swiss Finance Department, citing the Supreme Court ruling, declared that dividends payable to Indian tax residents will now attract a 10% tax instead of 5%. Swiss tax residents claiming foreign tax credits will also face higher rates.

The move effectively nullifies the benefits previously provided under the MFN clause, reinstating the original rates specified in the bilateral tax treaty.

Industry Experts React

The decision has sparked mixed reactions. Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala described Switzerland’s action as unilateral, warning that it could increase tax liabilities for Indian entities and create complexities in navigating international tax treaties.

Amit Maheshwari, Tax Partner at AKM Global, emphasized reciprocity as the driving factor behind Switzerland’s decision. He noted that the withdrawal of MFN status would likely deter Swiss investments in India, as higher withholding taxes on dividends would now apply.

JSA Advocates & Solicitors Partner Kumarmanglam Vijay highlighted the impact on Indian companies with overseas direct investment (ODI) structures in Switzerland. He explained that Swiss withholding tax on dividends will double from 5% to 10% beginning January 2025.

A Shift in Bilateral Relations

The revocation of India’s MFN status marks a significant shift in the relationship between the two nations. It underscores the need for alignment and clarity in interpreting tax treaty clauses to maintain stability in global investment frameworks.

The incident also raises broader questions about how international treaties adapt to evolving legal interpretations and the economic ramifications of such changes.

Looking Ahead

With the new tax rates set to take effect in 2025, Indian businesses operating in Switzerland must reevaluate their strategies to mitigate the financial impact. At the same time, Swiss investors in India will need to adjust to higher withholding taxes, potentially affecting the volume of bilateral investments.

As both nations navigate this altered tax landscape, the focus will likely shift to renegotiating terms that can sustain mutual economic interests.

Buy now

Switzerland Revokes India’s ‘Most Favoured Nation’ Status Over Supreme Court Ruling

Must read

Trump Calls Tesla India Expansion ‘Very Unfair’

Elon Musk Gifts PM Modi Heatshield Tile from SpaceX’s Starship Test Flight

Trump’s Reciprocal Tariffs to Hit India Hard

Ranveer Allahbadia Moves Supreme Court Over Multiple FIRs