Switzerland withdrew the 'Most Favoured Nation' status granted to India, a 30-year old double taxation agreement between the two countries, in a move that would result in Indian entities operating in the European nation to pay higher taxes from January. The decision followed an adverse court ruling against Nestle.
The suspension of the MFN clause follows a 2023 Supreme Court ruling involving Nestlé SA, wherein the court stated that Switzerland's reduction of the tax rate on dividends for Indian entities does not need to be reciprocated by India without a specific government notification.
The move by Switzerland On Dec. 11 could significantly affect investments in India, as dividends may incur a higher withholding tax. From January 1, 2025, dividends from Swiss sources to Indian residents, and vice versa, will be taxed at the original rate of 10%.
"This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland," said Nangia Andersen's M&A Tax Partner Sandeep Jhunjhunwala.
"Once India provides the required notification, Switzerland can reactivate the treaty provision, allowing taxpayers to benefit from the advantages offered by the MFN clause," said EY India's National Tax Leader Sameer Gupta.
In 1994, India and Switzerland signed an agreement to avoid double taxation on income. Such agreements are signed to avoid multi-level taxation on the same income.
"DTAAs entered into by India with certain developed economies, in addition to providing tax concessions, contain a Most Favoured Nation clause, which enables the residents of such countries to enjoy any additional benefit extended to any third country," according to Lakshmikumaran And Sridharan Attorneys.
This original agreement with Switzerland was revised in 2010 to include a most favoured nation clause, which mandated that if India agreed to lower tax rates on dividends with any member state of the Organisation For Economic Cooperation And Development, those lower rates must apply to Switzerland too.
After Lithuania and Colombia joined the OECD by 2020, Switzerland, interpreting the MFN clause, reduced the tax rate on dividends for Indian entities from 10% to 5%, but India did not do the same for Swiss entities.
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