Switzerland has unilaterally decided to suspend the most favoured nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. The move comes after the Supreme Court of India’s ruling in the Nestle case. The move is expected to have a significant impact on the operations of Indian companies in Switzerland as well as Swiss investments in India.
Supreme Court’s ruling
In a statement released on December 11, the Swiss finance department cited the 2023 ruling of the Supreme Court as the reason to remove India’s MFN status.
In its ruling, the top court held that the MFN status between the two nations doesn’t apply automatically when a nation joins the Organisation for Economic Co-operation or OECD, especially when India already has a taxation treaty in place with that country.
History of the case
The case stems from Lithuania and Colombia joining the OECD grouping, nations with which India had signed tax agreements. Under the OECD, partner nations offer each other ‘more favourable’ tax treatment under the MFN clause.
Switzerland on the other hand made this assumption that 5 per cent rate for dividends would apply to the India-Switzerland tax treaty under the MFN clause, instead of the 10 per cent rate mentioned in the bilateral treaty. India’s Supreme Court in its ruling said that prior tax treaty should take precedence and not the MFN clause.
In October 2023, while ruling in a case brought against Nestle, the apex court noted that the MFN clause “was not directly applicable in the absence of ‘notification’ in accordance with Section 90 of the Income Tax Act”.
Now, in line with the Supreme Court’s order, Switzerland will start levying a 10 per cent tax (instead of the current 5 per cent) on dividends payable to Indian tax residents and entities who claim refunds for Swiss withholding tax and for Swiss tax residents who claim foreign tax credits.
(With inputs from agencies)