Switzerland has suspended India's "Most Favoured Nation" (MFN) status under the Double Taxation Avoidance Agreement (DTAA), which will increase the dividend tax rate for Indian companies operating in Switzerland from 5% to 10%, effective January 1, 2025. This action comes amid tensions over the interpretation of the MFN clause and coincides with the ratification of the TEPA trade deal.
The DTAA between India and Switzerland, signed in 1994, was designed to eliminate double taxation on income and to ensure tax equity between the two nations. Under this agreement, any reduction in tax rates for one country would automatically extend the same benefit to the other country. However, the Swiss government recently argued that this MFN clause should apply to all countries that joined the OECD after 1994, while India contends that the clause only applies to OECD members at the time of signing.
The situation escalated with Nestlé’s legal challenge. The Swiss multinational, seeking reduced tax rates, contested India’s interpretation of the MFN clause after India signed tax treaties with Lithuania and Colombia, which provided lower dividend tax rates. The Delhi High Court ruled in favor of Nestlé, applying the MFN clause to include Lithuania and Colombia. However, India's tax authorities appealed, and on October 19, 2023, the Supreme Court ruled that the MFN clause applies only to OECD members as of 1994. This ruling excluded countries like Lithuania and Colombia, reversing the earlier decision.
The tax dispute between India and Switzerland, triggered by this interpretation of the MFN clause, has broader implications. It raises concerns over investor confidence, particularly in Swiss firms like Nestlé, which may now face higher taxes on dividends. This move also comes at a time when India is trying to finalize the TEPA trade agreement with Switzerland, further complicating the bilateral economic relationship.
Swiss investors and companies operating in India will need to navigate the new tax environment, while India's tax authorities may reconsider their stance on the MFN clause as the situation develops. The fallout of this ruling and Switzerland’s tax move will likely shape future India-Switzerland trade relations.
