The Swiss government has announced the suspension of the Most Favoured Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) with India. The decision, effective from January 1, 2025, is expected to impact Swiss investments in India and increase tax liabilities for Indian companies operating in Switzerland.
The Swiss Finance Department, in a statement dated December 11, 2024, cited a 2023 ruling by the Indian Supreme Court as the basis for its decision. The ruling determined that the MFN clause in India’s tax treaties does not automatically apply when a country joins the Organisation for Economic Co-operation and Development (OECD), unless explicitly notified by the Indian government.
India’s treaties with countries like Colombia and Lithuania, signed before their accession to the OECD, offer lower tax rates on certain types of income compared to OECD member countries. In 2021, Switzerland had interpreted the MFN clause to reduce the withholding tax on dividends in the India-Switzerland DTAA from 10 per cent to 5 per cent, aligning with the tax rates in the India-Colombia and India-Lithuania treaties.
However, the Indian Supreme Court, in a landmark ruling on October 19, 2023, reversed a Delhi High Court judgment in the Nestlé case, stating that the MFN clause is not applicable without explicit notification under Section 90 of the Income Tax Act. This ruling invalidated Switzerland’s 2021 interpretation, prompting the country to withdraw the MFN clause from the tax treaty.
From January 1, 2025, Switzerland will impose a 10 per cent tax on dividends paid to Indian tax residents seeking refunds for Swiss withholding tax and Swiss residents claiming foreign tax credits. This marks a return to the original rates outlined in the DTAA between the two nations.
Legal and tax experts have raised concerns about the potential fallout of this decision.
Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, described the suspension as a “significant shift in bilateral treaty dynamics.” He noted that it underscores the complexities of international tax treaties and the importance of aligning treaty interpretations to maintain predictability and equity.
Amit Maheshwari, Tax Partner at AKM Global, highlighted the principle of reciprocity as the driving force behind Switzerland’s decision. He explained that Swiss authorities had initially announced in 2021 a reduction in the dividend tax rate to 5 per cent, effective retroactively from July 2018, based on the MFN clause. However, the 2023 Supreme Court ruling contradicted this interpretation. Maheshwari added that the suspension might deter Swiss investments in India due to higher withholding taxes on dividends.
Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, emphasised the impact on Indian companies with Overseas Direct Investment (ODI) structures involving Swiss subsidiaries. He stated that the withholding tax on dividends from such entities will rise from 5 per cent to 10 per cent, increasing the tax burden on these companies.
This development also highlights the need for greater coordination between treaty partners to ensure consistency in interpreting tax provisions. Jhunjhunwala remarked that this decision reflects the evolving global tax landscape, necessitating robust frameworks for cross-border investments.
