Switzerland Removes MFN Status for India Following Supreme Court Ruling
New Delhi: In response to a recent ruling by India’s Supreme Court concerning Nestle, Switzerland has decided to withdraw the most-favoured-nation (MFN) clause in its double tax avoidance agreement with India. This change significantly impacts Indian businesses operating in Switzerland.
As of January 1, 2025, India will face a revised tax rate for dividends where the residual tax will be increased from 5% to 10%, according to a statement from the Swiss federal department of finance. The MFN clause, which was initially part of the agreement signed in 1994 and modified in 2000 and 2010, is meant to ensure countries treat each other fairly in terms of taxation.
Three years ago, Switzerland had interpreted that newer tax treaties signed by India with Colombia and Lithuania, both now part of the OECD, allowed for a 5% tax rate for dividends under the MFN clause. However, a ruling from the Supreme Court in 2023 stated that such a clause does not automatically apply when a country joins the OECD if a treaty was signed before the membership.
Following this ruling, Switzerland’s government indicated that its understanding of the agreement was not aligned with India’s stance. Consequently, they announced the removal of the MFN clause beginning in 2025, which means Indian companies will now face higher tax burdens.
This adjustment could put Indian companies at a disadvantage, making it harder for them to compete with businesses from countries that continue to benefit from MFN status. Ajay Srivastava of GTRI noted that the increased tax rate would directly affect the competitiveness of Indian firms.
Tax experts have suggested that this decision might encourage other countries to rethink their tax agreements with India. Amit Maheshwari, a tax partner at AKM Global, explained that Switzerland’s actions are based on a fundamental principle of reciprocity—ensuring that tax arrangements are equitable for both nations. He warned that more countries might take similar steps if they feel treated unfairly.
According to the Indian embassy, around 140 Indian companies have invested about $7.2 billion in Switzerland across various sectors, including information and communication technology, life sciences, engineering, and chemicals.
This development comes at a challenging time for India-Switzerland relations, especially as trade talks have shown promise recently. With India’s budget approaching, it remains uncertain if the government will propose changes to lessen the impact of the Supreme Court’s decision in the upcoming Finance Bill.
