Switzerland has suspended the most favoured nation (MFN) status granted to India following an adverse court ruling against Nestle.
Tax implication for Indian entities
- Switzerland cited Indian SC ruling in a case relating to Nestle. In 2021, Delhi HC upheld applicability of residual tax rates after taking into account MFN clause in the double taxation avoidance treaty
- In 2023, SC reversed the decision, saying MFN clause “was not directly applicable in the absence of ‘notification’ in accordance with Section 90 of Income Tax Act”
- From Jan 1, 2025, Indian entities will be subject to higher withholding tax on income generated in Switzerland. Dividends earned by Indian entities in the country will be taxed at 10%
With this, Indian companies will be subject to a higher withholding tax on income generated in Switzerland from January 1, 2025.
In a statement, Switzerland announced suspension of the application of the MFN clause of the agreement between the Swiss Confederation and India for the avoidance of double taxation on income.
Switzerland cited a ruling by the Indian Supreme Court in a case relating to Vevey-headquartered Nestle for its decision to withdraw the MFN status.
This means that Switzerland will tax dividends that Indian entities will earn in that country at 10 per cent from January 1, 2025. Earlier, the tax rate was 5 per cent.
According to the statement, in 2021, the Delhi High Court in the Nestle case upheld the applicability of the residual tax rates after taking into account the most favoured nation clause in the double taxation avoidance treaty.
However, the Indian Supreme Court, in a decision on October 19, 2023, reversed the lower court’s decision and concluded that the MFN clause “was not directly applicable in the absence of ‘notification’ in accordance with Section 90 of the Income Tax Act”.
Commenting on the decision of the Swiss authorities, Nangia Andersen M&A tax partner Sandeep Jhunjhunwala, said the unilateral suspension of application of the MFN clause under its tax treaty with India, marked a significant shift in bilateral treaty dynamics.
“This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties in an evolving global landscape,” he said.
It also underscores the necessity of aligning treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity and stability in international tax framework, Jhunjhunwala said.
AKM Global, Tax Partner, Amit Maheshwari, said the main reason behind the decision to withdraw MFN was of reciprocity, which ensured that taxpayers in both countries were treated equally and fairly.
“The Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10 per cent to 5 per cent, effective retroactively from July 5, 2018. However, the subsequent Supreme Court ruling in 2023 contradicted the same,” Maheshwari said.
Overall, he added that this could impact Swiss investments in India as dividends would be subject to higher withholding tax now.