NEW DELHI: In a retaliatory action, the government of Switzerland has withdrawn the application of the Most Favoured Nation (MFN) clause on Indian entities operating in the European country. The Swiss authorities took the action after the Supreme Court of India rejected automatic applicability of MFN clause under the bilateral tax treaty between the two countries in a case related to Swiss-based FMCG company Nestle. The decision would lead to increased tax liability for Indian companies operating in Switzerland.
A December 11 order, issued by the Federal Department of Finance, Switzerland, stated that on the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation on MFN clause under the Double Taxation Avoidance Agreement (DTAA) is not shared by the Indian side. Therefore, in the absence of reciprocity, it waives its unilateral application (of MFN clause) with effect from January 1, 2025.
Accordingly, income accruing on or after January 1, 2025, may be taxed in Switzerland at higher rates. The applicable residual rates on dividend paid by Indian companies in Switzerland would now be 10 percent instead of the existing 5 percent under the MFN clause.
The MFN clause provides for lower rate of taxation at source on dividends, interest, royalties, or fees for technical services (FTS) similar to concessions given to other countries with similar tax treaties.
“Switzerland’s decision to suspend the unilateral application of the MFN clause under its tax treaty with India, marks a significant shift in bilateral treaty dynamics. Grounded in the Indian Apex Court’s Nestle ruling, which rejected the automatic applicability of MFN clause, this move underscores the growing emphasis on reciprocity and mutual agreement in the interpretation of treaty provisions,” says Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen.
He further says that this suspension will lead to increased tax liabilities for Indian entities operating in Switzerland effective January 1, 2025, highlighting the complexities of navigating international tax treaties in an evolving global landscape.
Amit Maheshwari, Tax Partner, AKM Global, a tax and consulting firm, says that the fallout of this is that more countries may follow Switzerland after this.
“Essentially, Switzerland is of the view that it is not receiving the same treatment that India grants to other countries with more favourable tax treaties. Further, the main reason behind this is of reciprocity, which ensures that taxpayers in both countries are treated equally and fairly,” Maheswari said.