Switzerland has suspended the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, effective January 1, 2025. This decision follows the Indian Supreme Court’s October 2023 ruling in the case of Assessing Officer v. Nestlé.
Source:- bbc news
In this case, Nestlé sought a reduced dividend tax rate of 5% under the MFN provision of the India-Switzerland DTAA, arguing that India offered lower rates to companies from OECD member countries like Colombia and Lithuania. The Supreme Court, however, determined that since Colombia and Lithuania were not OECD members when India signed its DTAAs with them, the MFN clause did not apply.
Source:- news 18
In response, Switzerland announced that, due to the lack of reciprocity, it would cease the unilateral application of the MFN clause, resulting in an increase in the withholding tax rate on dividends from 5% to 10% for Indian companies operating in Switzerland.
This development may have broader implications. Other countries with similar DTAAs could reconsider their MFN provisions, potentially leading to increased tax liabilities for Indian businesses abroad. Additionally, while the immediate impact on Swiss investments in India may be limited, concerns exist about the long-term effects on the investment climate.
To mitigate these consequences, India could issue a notification under Section 90(1) of the Income Tax Act to reduce the dividend tax rate for Swiss companies to 5%. However, this would require extending similar benefits to other OECD countries and could result in revenue losses. Policymakers must weigh the benefits of maintaining favorable international economic relations against potential fiscal implications.
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