Switzerland Withdraws MFN Status For India: What’s Next For Indian Businesses (Image Source: Pixabay)
New Delhi: Switzerland has decided to withdraw the Most Favoured Nation (MFN) status granted to India, leading to higher taxes for Indian businesses operating in the country. Starting January 1, 2025, Indian companies will face a 10 per cent withholding tax on dividends, marking a significant change in the tax landscape between the two nations. This decision follows a ruling by the Indian Supreme Court in October 2023 regarding a tax dispute involving Nestlé, the Swiss food giant.
Why Switzerland Withdrew The MFN Status?
The MFN clause in the tax treaty between India and Switzerland previously allowed Indian businesses to enjoy reduced tax rates based on Switzerland’s treaties with other countries. However, the Supreme Court ruled that such benefits could not be automatically extended to India without explicit notification under Indian tax laws.
Following this ruling, Switzerland’s Federal Department of Finance (DFF) announced the suspension of the MFN clause in its Double Taxation Avoidance Agreement (DTAA) with India. As a result, Indian entities will no longer benefit from the lower tax rates previously applied under the MFN provision.
Implications For Indian Businesses
The withdrawal of the MFN clause means Indian companies operating in Switzerland will face higher taxes on income earned in the European nation. For instance, the withholding tax on dividends will rise to 10 per cent, significantly impacting Indian firms in sectors such as finance, manufacturing, and technology.
Previously, the MFN provision allowed Indian businesses to benefit from tax rates as low as 5 per cent due to Switzerland’s agreements with countries like Colombia and Lithuania. With this provision removed, Indian businesses may need to adjust their tax planning strategies to offset the increased liabilities.
The Legal Backdrop
The issue stems from a tax dispute involving Nestlé, where the Delhi High Court initially ruled in favor of India benefiting from Switzerland’s treaties with other nations. However, the Supreme Court overturned this decision, clarifying that changes in tax rates under international agreements cannot be applied retroactively unless officially notified under Section 90 of India’s Income Tax Act.
This interpretation has led Switzerland to revoke its unilateral application of the MFN clause, thus ending the preferential tax treatment for Indian companies.
Economic And Trade Relations
The tax changes come at a time when India and Switzerland are strengthening trade ties. In 2023, India signed a Trade and Economic Partnership Agreement (TEPA) with the European Free Trade Association (EFTA), which includes Switzerland. The agreement focuses on boosting trade and investment in goods, services, and intellectual property.
While the withdrawal of the MFN status poses challenges, the broader opportunities under TEPA and India’s ongoing negotiations for a free trade agreement with the European Union may help Indian businesses navigate these changes.
What’s Next For Indian Companies?
With the new tax structure taking effect in 2025, Indian businesses are likely to reassess their strategies. Companies may explore alternative investment routes or renegotiate agreements with Swiss counterparts to reduce the tax burden.
Although the loss of MFN status adds short-term hurdles, experts believe that India’s broader trade engagements with Europe could pave the way for long-term economic growth and expanded opportunities for Indian businesses.