Following an adverse Supreme Court ruling against Nestle, Switzerland revoked the Most Favoured Nation (MFN) status granted to India. This action will have adverse tax ramifications for Indian businesses doing business in the European country.
Switzerland said in a statement that the MFN clause in the protocol to the agreement between the Swiss Confederation and the Republic of India to prevent double taxation about income taxes would no longer be applied.
Switzerland’s decision to revoke MFN designation was supported by a 2023 decision made by the Indian Supreme Court in a case involving Nestle, a company based in Vevey.
Impact on Indian businesses
Indian businesses operating in Switzerland will be subject to increased taxes on their earnings there, particularly on dividends, starting in January 2025. The removal of the MFN clause directly led to the 10% dividend withholding tax. Numerous Indian companies with substantial operations in Switzerland, such as those in the industrial, technological, and finance industries, are anticipated to be impacted.
On Friday, India said its double taxation treaty with Switzerland may require renegotiation in view of its trade pact with the member states of the European Free Trade Association (EFTA).
The remarks by the spokesperson of the Ministry of External Affairs (MEA) came after the Swiss government suspended the most favoured nation status (MFN) clause in the India-Switzerland Double Taxation Avoidance Agreement (DTAA).
“My understanding is that with Switzerland, because of EFTA, the double taxation treaty that we have; it’s going to be renegotiated. That is one aspect of it,” MEA spokesperson Randhir Jaiswal said.
India-Switzerland Double Taxation Avoidance Agreement
The India-Switzerland Double Taxation Avoidance Agreement, signed on November 2, 1994,was later revised in 2000 and 2010.
The agreement sought to reduce the dangers of double taxation to promote easier cross-border investment and trade.
One of the treaty’s most important provisions, the MFN clause, guarantees that nations treat investors from partner nations equally to those from any other third country.
For example, under the MFN provision, it was anticipated that Indian companies would receive additional benefits or lower tax rates if Switzerland provided them to another nation.