News Brief
Switzerland Suspends 'Most Favoured Nation' Status To India— What It Means For Indian Entities' Tax Liabilities
Switzerland has announced its decision to suspend the Most Favoured Nation (MFN) clause in its Double Tax Avoidance Agreement (DTAA) with India
Switzerland has announced its decision to suspend the Most Favoured Nation (MFN) clause in its Double Tax Avoidance Agreement (DTAA) with India, effective 1 January 2025.
The move is expected to increase tax liabilities on dividend income for Indian entities operating in Switzerland.
This decision comes after the Supreme Court of India ruling in October 2023, related to the tax treaty's MFN clause in a case involving Swiss multinational Nestle.
The court held that the MFN clause under the DTAA does not automatically apply unless specifically notified under the Income Tax Act, 1961.
Based on this ruling, Swiss authorities acknowledged differing interpretations of the treaty with India.
"In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025," stated Swiss authorities.
Tax experts noted that this suspension could impact investment commitments exceeding $100 billion under the European Free Trade Agreement (EFTA) signed with India.
"This would especially impact Indian companies having overseas direct investment structures with subsidiaries in Switzerland and will raise the Swiss withholding tax on dividends from 5 per cent to 10 per cent from 1 January 2025," Kumarmanglam Vijay, partner, JSA Advocates & Solicitors told The Economic Times.
Experts emphasised that the decision signals a broader shift in tax treaty dynamics.
Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen, commented, that Switzerland's decision reflects the growing importance of reciprocity and mutual agreement in treaty interpretations, grounded in India's apex court's Nestle ruling, which rejected the automatic applicability of the MFN clause.
