Switzerland has withdrawn the most Favoured Nation (MFN) status for India under their Double Taxation Avoidance Agreement (DTAA), effective January 2025.
This move stems from a 2023 Indian Supreme Court ruling involving Nestlé, a Swiss multinational, which clarified that MFN benefits under the treaty are not automatically triggered without proper notification by Indian authorities.
Let us look at the implications of revoking the most favoured nation status.
INCREASED TAX IMPLICATIONS FOR INDIAN BUSINESSES
The withdrawal of MFN status will raise the dividend withholding tax for Indian entities in Switzerland to 10%.
This change will particularly impact businesses in the industrial, technological, and financial sectors that have significant operations in Switzerland. Indian companies will now face higher tax burdens on earnings derived from their Swiss investments, starting January 2025.
CALL FOR TREATY RENEGOTIATION
In light of this development, the Ministry of External Affairs (MEA) has indicated that the India-Switzerland DTAA may need renegotiation. A spokesperson from MEA suggested the ongoing India-EFTA trade discussions could provide an avenue to revisit the treaty terms.
The European Free Trade Association (EFTA), which includes Switzerland, aims to enhance investments in India under a new free trade agreement, targeting $100 billion over the next 15 years.
This development reflects broader tax and trade complexities, underscoring the need for evolving agreements to align with global economic shifts. Indian businesses must prepare for increased tax liabilities while the two countries work toward renegotiating their treaty terms.
The India-Switzerland Double Taxation Avoidance Agreement (DTAA), originally signed on November 2, 1994, and revised in 2000 and 2010, aims to prevent double taxation and encourage smoother trade and investment between the two countries.
A key feature of this treaty is the most Favour Nation (MFN) clause. This clause ensures fair treatment for investors by granting them benefits or lower tax rates if such benefits are extended to another country. For instance, if Switzerland provides lower tax rates to a third country, Indian businesses are also entitled to enjoy the same advantage under the MFN provision.