Switzerland has announced the suspension of the Most Favoured Nation (MFN) clause in its Double Tax Avoidance Agreement (DTAA) with India, effective January 1, 2025. The decision is set to increase the withholding tax on dividends for Indian companies operating in Switzerland from 5% to 10%. This marks a significant shift in tax policy that may have far-reaching consequences for Indian investments in Switzerland, which exceed $100 billion under the European Free Trade Agreement (EFTA).
The Supreme Court Ruling That Changed the Dynamics
The decision stems from an October 2023 ruling by the Indian Supreme Court in a case involving Swiss multinational Nestlé SA. The court held that the MFN clause in India’s tax treaties does not automatically come into effect without explicit notification under the Income Tax Act, 1961.
Following the ruling, Switzerland acknowledged the differing interpretations of the MFN clause between the two countries. In a statement, Swiss authorities explained, “In the absence of reciprocity, we waive the unilateral application of the MFN clause with effect from January 1, 2025.”
Impact on Indian Companies
The suspension of the MFN clause means Indian companies with subsidiaries in Switzerland will face higher tax liabilities. Dividend income repatriated from Switzerland, previously taxed at 5% under the DTAA, will now be subject to a 10% withholding tax starting in 2025.
“This will particularly impact Indian businesses with overseas investment structures in Switzerland,” said Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors. “The increased tax burden may compel companies to reevaluate their investment strategies in the region.”
Income from Previous Years Exempt
The Swiss authorities clarified that income generated between 2018 and 2024 would not be affected by this change. However, experts suggest the broader implications may extend beyond immediate tax liabilities, potentially affecting the overall investment landscape between India and Switzerland.
Broader Economic Implications
Switzerland’s decision underscores the growing emphasis on reciprocity in international tax treaties. Experts believe it could set a precedent for other nations to reconsider their tax treaty provisions with India.
“Grounded in the Nestlé ruling, this move reflects a shift towards stricter interpretations of treaty clauses, emphasizing mutual agreement over unilateral application,” said Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen.
The suspension of the MFN clause comes at a time when India is actively negotiating trade agreements and investment partnerships with European nations, including the four-member European Free Trade Association (EFTA). The increased tax burden could influence India’s future negotiations and investment commitments in the region.
What Lies Ahead?
The suspension raises questions about the long-term implications for Indian companies and the bilateral economic relationship. Businesses are likely to seek clarity on the tax implications and explore alternative strategies to mitigate their financial impact.
This news report is curated with insights from multiple reliable news sources.
