Switzerland has announced the suspension of the most favoured nation (MFN) clause under its Double Tax Avoidance Agreement (DTAA) with India, effective January 1, 2025. This move will allow income such as dividends and royalties to be taxed in the source state at rates specified in the DTAA.
The Swiss authorities cited India’s Supreme Court ruling from October 2023 as the trigger for this decision. The Court had clarified that the MFN clause in the DTAA does not automatically apply unless formally notified under the Income Tax Act, 1961.
The judgement, which dismissed Nestlé’s claim for a lower 5% withholding tax, also impacted similar petitions filed by Concentrix, Optum Global, and Steria.
Under the DTAA, the MFN clause allows treaty nations to avail of reduced tax rates on income such as dividends, royalties, or technical fees. However, Switzerland’s statement highlighted that its interpretation of the MFN provision was not reciprocated by India.
“In the absence of reciprocity, the Swiss competent authority waives its unilateral application with effect from 1 January 2025,” it stated.
As a result, withholding tax on dividends paid by Indian firms to Swiss parents, or vice versa, will increase to 10% post-2025. However, income earned between 2018 and 2024 will not be affected.
Tax experts warn that this suspension will likely raise tax burdens for Indian firms operating in Switzerland and Swiss companies in India, impacting bilateral business ties.