Switzerland Pulls Back Most Favoured Nation Status for India Following Supreme Court Ruling

India-Switzerland tax treaty faces disruption as the Supreme Court's Nestle ruling prompts a shift in bilateral dynamics.

December 14, 2024: Switzerland has revoked India's "Most Favoured Nation" (MFN) status under the Double Taxation Avoidance Agreement (DTAA), marking a significant shift in the two countries' treaty relationship. This move follows a 2023 Supreme Court ruling in the Nestle case, which clarified the limitations of the MFN clause's automatic applicability.

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The ruling concluded that the MFN clause would not automatically take effect when a nation joins the OECD unless explicitly notified under Section 90 of the Income Tax Act. Switzerland had argued for a reduced 5% tax on dividends under the MFN clause, consistent with agreements involving OECD members like Lithuania and Colombia. However, the Supreme Court upheld a 10% tax rate, ruling in favor of prior treaty terms over automatic adjustments.

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In response, Switzerland announced on December 11 that starting January 1, 2025, it will suspend the MFN clause application, effectively doubling the tax rate on dividends for Indian residents and entities operating in Switzerland. This decision impacts Swiss tax residents who claim foreign tax credits and Indian businesses with overseas investments in Switzerland.

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Tax experts have weighed in on the issue. Sandeep Jhunjhunwala of Nangia Andersen referred to Switzerland’s action as a unilateral move that could increase tax liabilities for Indian companies. Amit Maheshwari of AKM Global described it as a reciprocal measure to ensure equitable treatment between the two countries.

This development may challenge Swiss investments in India, as dividends will face a higher withholding tax rate from 2025 onward. Indian companies with Swiss subsidiaries are also expected to face greater financial hurdles.

Tags:
India-Switzerland relations, tax treaty dispute, OECD, DTAA, Most Favoured Nation clause, Supreme Court ruling, Nestle case, international tax law, withholding tax, overseas direct investment,