Key Points:
- Suspension of MFN Clause: Switzerland has halted the application of the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India.
- Tax Impact: Starting January 1, 2025, Indian entities earning dividends in Switzerland will face a 10% tax rate, compared to the previous 5% rate applied under MFN terms.
- Supreme Court Ruling Triggered Decision: The Swiss government’s move is based on a 2023 ruling by the Indian Supreme Court, which clarified that the MFN clause is not automatically applicable without explicit notification under Indian law.
- Economic Implications: This decision could increase tax liabilities for Indian companies operating in Switzerland and may affect Swiss investments in India.
- Global Tax Complexity: Experts emphasize the need for aligned treaty interpretations to ensure stability and predictability in international taxation frameworks.
Geneva/New Delhi: The Swiss government has announced the suspension of the Most Favoured Nation (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) with India, a decision that could lead to increased tax burdens for Indian businesses operating in Switzerland and affect Swiss investments in India.
The suspension, effective January 1, 2025, will see dividends earned by Indian tax residents in Switzerland taxed at a higher rate of 10%, compared to the 5% rate previously applied under MFN terms. This change also impacts Swiss residents claiming foreign tax credits.
Supreme Court Ruling Sparks Suspension
The Swiss Finance Department’s December 11 announcement follows a significant 2023 ruling by the Indian Supreme Court. The court determined that the MFN clause in India’s tax treaties is not automatically applicable when a country joins the Organisation for Economic Co-operation and Development (OECD) unless explicitly notified under Section 90 of the Income Tax Act.
This ruling overturned a 2021 Delhi High Court decision in a case involving Nestlé, headquartered in Vevey, Switzerland. The lower court had upheld the applicability of reduced tax rates under the MFN clause.
MFN Clause and Historical Context
The controversy centers on tax treaties India signed with Colombia and Lithuania, offering lower tax rates than those provided to OECD countries. When Colombia and Lithuania later joined the OECD, Switzerland interpreted the MFN clause to mean that its treaty with India would adopt the lower 5% tax rate on dividends. However, the Indian Supreme Court ruled otherwise, emphasizing the need for formal notification to enforce such changes.
In 2021, Swiss authorities had announced a retrospective reduction in the tax rate on dividends from qualifying shareholdings under the India-Switzerland DTAA. This decision has now been invalidated by the Supreme Court’s 2023 verdict.
For Indian businesses with significant operations in Switzerland, the next steps will likely involve recalibrating tax strategies to navigate this new landscape effectively.
