Switzerland has announced the revocation of India’s Most Favoured Nation (MFN) status under the Double Taxation Avoidance Agreement (DTAA), citing a 2023 ruling by the Supreme Court of India in the Nestle case. This significant decision, effective from January 1, 2025, is set to impact Indian companies operating in Switzerland and Swiss investments in India.
The conflict centers around the interpretation of the MFN clause in tax treaties. Under the OECD framework, the MFN clause ensures that treaty partners receive the most favorable tax terms granted by either party to any other country.
The Supreme Court ruled that the MFN clause does not apply automatically when a treaty partner joins the Organisation for Economic Co-operation and Development (OECD). It stated that unless explicitly notified under Section 90 of the Income Tax Act, the MFN clause cannot override the original terms of a tax treaty.
Switzerland assumed that when Colombia and Lithuania joined the OECD, India would lower its dividend tax rates from 10 percent to 5 percent under the MFN clause in their DTAA. The Supreme Court, however, ruled otherwise in October 2023, reversing a 2021 Delhi High Court ruling that had favored Switzerland’s interpretation.
Impact of Switzerland’s Retaliation
From 2025, Switzerland will impose a 10 percent tax on dividends payable to Indian tax residents and entities instead of the current 5 percent rate. This change also applies to Swiss tax residents claiming foreign tax credits in India.
In a statement, Switzerland’s Finance Department declared the “suspension of the application of the MFN clause” in response to India’s Supreme Court decision, marking a critical shift in bilateral taxation dynamics.
Key Takeaways
- Policy Misalignment: Switzerland’s move underscores the challenges of aligning treaty interpretations between countries, especially in a changing global tax landscape.
- Global Ramifications: This development highlights how judicial decisions can impact international economic relations and tax treaties.
- Increased Costs: The new tax rate will likely increase costs for Indian businesses in Switzerland and discourage bilateral investments.
As the January 1, 2025, deadline approaches, affected companies will need to reassess their tax strategies and investment structures to mitigate potential financial impacts. Indian policymakers may need to engage in diplomatic discussions with Switzerland to address the fallout and explore avenues for revisiting the treaty provisions.
