Switzerland has taken unilateral action following the Supreme Court of India’s ruling in the Nestle case, revoking India’s “Most Favoured Nation” (MFN) status under the Double Taxation Avoidance Agreement (DTAA).
This move marks a significant shift in bilateral treaty dynamics, which will substantially impact Indian companies operating in Switzerland and Swiss investments in India.
In an official statement issued on December 11, Switzerland’s finance department referenced the Supreme Court’s 2023 ruling as the basis for its decision to remove India’s MFN status. The court ruled that the MFN clause between two countries does not automatically apply when a nation joins the Organisation for Economic Co-operation and Development (OECD), mainly when India already had a tax treaty with the country before its OECD membership.
OECD Membership
The OECD, established in 1961 and headquartered in Paris, serves as a forum for data, analysis, and best public policy practices to build stronger, fairer, and cleaner societies. It works closely with policymakers, stakeholders, and citizens to establish evidence-based international standards and solutions to social, economic, and environmental challenges.
India had signed tax agreements with Lithuania and Colombia that offered lower tax rates on certain types of income compared to those provided to OECD countries. Both of these nations later became members of the OECD.
Under the OECD framework, the MFN clause obligates one country to provide its treaty partner with “more favourable” tax treatment.
Switzerland assumed that with Colombia and Lithuania joining the OECD, the 5 per cent dividend tax rate would apply to the India-Switzerland tax treaty under the MFN clause, replacing the previously agreed-upon rate of 10 per cent.
However, the Supreme Court’s ruling clarified that the MFN clause does not automatically apply when a country joins the OECD. Instead, the terms of the prior tax treaty take precedence unless the MFN clause is explicitly mentioned in a “notification” as per Section 90 of the Income Tax Act.