New Delhi: Switzerland has suspended the most favoured nation (MFN) status under its Double Taxation Avoidance Agreement (DTAA) with India, a move that could impact Swiss investments in India and increase the tax burden on Indian firms operating in Switzerland.
In a statement released on December 11, the Swiss finance department explained that this decision stems from a ruling by India’s Supreme Court in 2023. The ruling determined that the MFN clause does not automatically activate when a country joins the Organisation for Economic Co-operation and Development (OECD) if India had previously established a tax treaty before the country’s OECD membership.
As per a report by the Indian media outlet TOI, India had signed tax agreements with Colombia and Lithuania, offering lower tax rates for specific types of income compared to OECD nations. Both countries later became OECD members. In 2021, Switzerland argued that when Colombia and Lithuania joined the OECD, a 5% dividend tax rate should apply to the India-Switzerland tax treaty under the MFN clause, instead of the originally agreed-upon 10%.
The suspension of MFN status, which will take effect on January 1, 2025, means Switzerland will impose a 10% tax on dividends for Indian tax residents seeking Swiss withholding tax refunds and Swiss tax residents claiming foreign tax credits.
The Swiss finance department officially announced the suspension of the MFN clause, citing the 2023 Indian Supreme Court ruling related to Vevey-based Nestlé as the basis for the withdrawal. This ruling reversed the previous stance, which had supported the application of residual tax rates based on the MFN clause. On October 19, 2023, the Supreme Court concluded that the MFN clause is not automatically applicable without proper notification under Section 90 of the Indian Income Tax Act.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, remarked that the unilateral suspension signifies a major shift in the bilateral treaty dynamics. He noted that Indian companies operating in Switzerland may face increased tax obligations, highlighting the challenges of managing international tax treaties in today’s global landscape. Jhunjhunwala stressed that mutual understanding between treaty partners on the interpretation and application of tax clauses is crucial for maintaining predictability and stability.
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Amit Maheshwari, Tax Partner at AKM Global, explained that reciprocity was a driving factor behind the MFN withdrawal decision. This aims to ensure equal treatment of taxpayers in both countries. Maheshwari pointed out that Swiss authorities had previously announced a reduction in dividend tax rates from 10% to 5%, retroactive to July 5, 2018. However, the 2023 Supreme Court ruling contradicted this approach. As a result, Swiss investments in India could be impacted, as higher dividend withholding taxes are expected. Starting January 1, 2025, taxation may revert to original treaty rates, disregarding the MFN clause.
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Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, indicated that this change would particularly affect Indian companies with Overseas Direct Investment (ODI) structures involving Swiss subsidiaries, as Swiss dividend withholding tax would rise from 5% to 10% from January 1, 2025.
