Switzerland has scrapped India’s ‘Most Favoured Nation’ (MFN) status under a treaty between the two countries aimed at preventing double taxation(DTAA). The move, which will impact Indian companies invested in the European nation, was announced by the country’s federal finance department on Wednesday (December 11). This decision follows the Supreme Court of India’s ruling related to Nestlé in 2023. The Apex court has ruled that MFN clause doesn’t automatically trigger when a country joins Organization for Economic Co-operation and Development (OECD) unless it is notified under the Income-Tax Act. As a result swiss companies such as Nestle faces higher taxes on dividends.

The 2023 Supreme Court ruling effectively overrode a Delhi court order that had protected companies and individuals from double taxation while working for or with foreign entities.

According to media reports, Swiss statement stated that “For dividends due from and including Jan 1, 2025, the residual tax rate in the source State is limited to 10%.” This means they will now have to pay a 10 percent tax on dividends and other income starting in January, up from the previous 5 percent.

What Does MFN Clause States?

Under the MFN clause of the treaty signed between India and Switzerland in 1994, and amended in 2010, rates of taxation at source agreed between India and an OECD country on dividends, fees, income, or royalties for technical services would be subject to a lower rate than those specified in the 1994 treaty which would apply between India and Switzerland. Later India signed Direct Tax Convention(DTC) with Lithuania and Columbia in 2011.

How Will This Impact On Indian Business?

Tax experts believe that the move by Switzerland’s federal finance department will affect investments in India, as dividends will now be subject to a higher withholding tax. According to a report by the Economic Times, think tank, Global Trade Research Initiative (GTRI) stated that the suspension of the MFN clause is a setback for Indian firms operating in Switzerland. GTRI also noted that with the reversion to a 10 percent residual rate starting January 1, 2025, these firms will face higher tax liabilities, which could reduce their competitiveness compared to businesses from countries still benefiting from MFN provisions.

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