In a move that could affect Swiss investments in India and lead to higher taxes for Indian companies operating in Switzerland, Switzerland has announced the suspension of the Most-Favoured-Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) with India.
Switzerland’s federal finance department said on Wednesday (December 11) that it was suspending India’s ‘most favoured nation’ (MFN) status under a treaty between the two countries on avoiding double-taxation. The decision was based on India’s failure to align with Switzerland’s interpretation of the MFN clause in the treaty.
This decision, which will take effect from January 1, 2025, follows a ruling by the Indian Supreme Court last year that determined the DTAA cannot be enforced unless it is notified under the Income-Tax Act.
According to the MFN clause, which was added to the 1994 treaty by an amendment in 2010, rates of taxation at source agreed to between India and a third OECD country on dividends, interest, royalties or fees for technical services that were lower than that mentioned in the 1994 treaty would apply between Switzerland and India as well.
The suspension is expected to impact Swiss companies like Nestlé, which will face higher taxes on dividends. The Supreme Court ruling overturned a previous Delhi High Court order that protected companies and individuals from double taxation while working for foreign entities. Tax experts warn that the suspension could lead to higher withholding taxes on dividends, potentially affecting the $100 billion investment commitment from the European Free Trade Association (EFTA), which includes Switzerland, in India over the next 15 years.
Swiss authorities explained that the suspension was due to a lack of “reciprocity” in the DTAA, as India’s interpretation of the agreement differs from Switzerland’s. As a result, income accruing from January 1, 2025, will be taxed in the source state at the rates specified in the original DTAA, regardless of the MFN clause.
Amit Maheshwari, tax partner at AKM Global, noted that Switzerland’s decision is a direct response to the 2023 Nestlé ruling, which clarified that the MFN clause is not automatically applicable and requires separate notification from India to grant lower tax rates. He warned that this could impact Swiss investments in India, as dividends will now be subject to higher withholding taxes.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, highlighted that this suspension marks a significant shift in the dynamics of the bilateral tax treaty between India and Switzerland. He pointed out that Swiss companies and Indian entities operating in Switzerland could face increased tax liabilities starting in 2025. This move also reflects a broader trend in international taxation, where countries like India are taking a stricter approach to interpreting tax treaties to protect domestic tax revenues.
The Supreme Court ruling had stated that a country can claim benefits under a DTAA only from the date of the treaty agreement, not from a later date when another country benefits from a new treaty. The case involved multinational companies, including Nestlé and Concentrix Services Netherlands, which had argued that they should be eligible for the reduced 5% withholding tax rate that applies to other OECD member countries like Slovenia, Lithuania, and Colombia.
This decision by Switzerland could have wide-reaching consequences, as it highlights the growing importance of reciprocity in international tax agreements and the potential for higher taxes on cross-border investments.
