Switzerland has decided to withdraw the Most Favoured Nation (MFN) status granted to India, a move that will have significant tax implications for Indian companies operating in the European nation. This decision comes after an adverse ruling from the Indian Supreme Court regarding a tax dispute involving Nestlé, the Swiss food giant headquartered in Vevey. From January 1, 2025, Indian businesses in Switzerland will face higher withholding tax rates, particularly on dividend income, signalling a shift in the tax landscape for bilateral trade and investments.
The Withdrawal of MFN Status
Switzerland’s federal department of finance (DFF) announced that it would suspend the application of the MFN clause in the tax treaty between Switzerland and India, specifically within the context of the Double Taxation Avoidance Agreement (DTAA). The decision follows the Supreme Court’s October 2023 ruling, which effectively reversed a previous interpretation that allowed Indian entities to benefit from lower tax rates based on subsequent tax treaties between Switzerland and other nations.
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This ruling has led Switzerland to withdraw its unilateral application of the MFN clause. As a result, from January 2025, income generated by Indian entities in Switzerland will be subject to a higher withholding tax rate, specifically a 10% tax on dividends. Previously, the MFN clause allowed India to benefit from lower tax rates applied to dividends by Switzerland, particularly as a result of changes to tax treaties with countries like Colombia and Lithuania.
The Legal Backdrop
The controversy dates back to a case involving Nestlé, where Indian courts were asked to interpret the provisions of the double taxation agreement between the two countries. Initially, the Delhi High Court ruled in favour of extending the benefits of Switzerland’s subsequent treaties with other countries to India through the MFN clause. However, the Supreme Court overruled this decision in October 2023, stating that the benefit of lower tax rates in the Swiss-India treaty could not be automatically extended without a separate notification by India under the Indian Income Tax Act, specifically Section 90.
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This legal interpretation has significant implications for the application of tax treaties. The Supreme Court emphasized that any changes to tax rates stemming from international agreements could not be retroactively applied unless explicitly stated by the Indian authorities.
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