The Swiss government has announced the suspension of the Most-Favoured-Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, a move that may increase taxes on Indian companies operating in Switzerland and affect Swiss investments in India.
According to a statement issued by Switzerland’s Finance Department on December 11, the suspension follows a ruling by India’s Supreme Court in 2023, which determined that the MFN clause in such agreements does not automatically apply when a country joins the Organisation for Economic Co-operation and Development (OECD), unless explicitly notified by the Indian government.
The ruling arose in a case involving Nestlé, headquartered in Vevey, Switzerland, and overturned a 2021 Delhi High Court judgment. The Supreme Court clarified that the MFN clause could not be invoked without formal notification under Section 90 of India’s Income Tax Act.
Switzerland had previously interpreted the MFN clause as enabling reduced tax rates when countries such as Colombia and Lithuania joined the OECD after India signed treaties with them. For instance, Switzerland believed that a 5% dividend tax rate should apply under its treaty with India, instead of the 10% rate outlined in the agreement.
With the MFN clause suspended, Switzerland will, from January 1, 2025, apply a 10% tax on dividends payable to Indian tax residents claiming Swiss withholding tax refunds, as well as to Swiss tax residents seeking foreign tax credits.
Tax experts have highlighted the significant implications of this decision. Sandeep Jhunjhunwala, Partner for M&A Tax at Nangia Andersen, described the suspension as a major shift in treaty dynamics. He noted that it may increase tax liabilities for Indian companies operating in Switzerland and emphasised the challenges of navigating evolving international tax frameworks.
Amit Maheshwari, Tax Partner at AKM Global, stated that reciprocity was a key factor behind Switzerland’s move. He pointed out that the suspension would now subject dividends to the original 10% withholding tax rate stipulated in the treaty, regardless of the MFN clause, potentially discouraging Swiss investments in India.
Maheshwari further observed that in August 2021, Swiss authorities had reduced the tax rate on dividends from qualifying shareholdings to 5% based on the MFN clause, retroactively effective from July 5, 2018. However, this interpretation was contradicted by the Indian Supreme Court ruling in 2023.
Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, noted that Indian companies with overseas direct investment structures in Switzerland would be particularly affected, as they would face a higher withholding tax rate of 10% on dividends from 2025 onwards.
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