Switzerland revokes MFN status to India due to Supreme Court Ruling

Switzerland has announced that it will revoke the Most Favoured Nation (MFN) status in taxation to India from 1 January 2025. In a statement, Switzerland cited the Supreme Court's judgement in the Nestle case in 2023 as the main reason for revoking the MFN status to India under the Double Taxation Avoidance Agreement (DTAA). The decision of Switzerland will raise the withholding dividend taxes on the Indian companies operating in Switzerland to 10 % and impact the Indian investment in Switzerland and Switzerland’s investment in India. 

About DTAA and MFN Status 

India and Switzerland signed the DTAA treaty on 2nd November 1994, which was amended in 2000 and 2010.

Under DTAA, if a company of India is operating in Switzerland and has earned income on its investment in Switzerland, then the income will be taxed either in India or Switzerland as per the DTAA agreement. Similarly is the case of the investment of Switzerland’s company in India.

The Favoured Nation clause in the DTAA means that if a country offers a concessional tax rate to a company of another country, then the same concession will be extended to other countries found in the same treaty. This ensures that no country’s companies are discriminated against or favoured.

Reason for Switzerland's Actions

In 2010, India and Switzerland signed a protocol to the DTAA. The protocol provided that if India signed a DTAA with a member of the Organisation for the Economic Cooperation and Development (OECD) and provided for a tax rate which was lower than that provided then in the  

India-Switzerland DTAA, then the lower tax rates will prevail.

Switzerland is a member of the OECD.

In 2011, India signed DTAA  with Lithuania and Colombia, which provided a withholding dividend tax of 5 per cent to both countries.

Lithuania joined the OECD in July 2018 and  Colombia in April 2020.

After joining Lithuania and Colombia in the OECD, Switzerland reduced the withholding tax on Indian companies to 5 %, effective in 2018, as per the provision of the India-Switzerland DTAA agreement.

Nestle Case 

Nestle is a Swiss-based company with a subsidiary in India. The Delhi High Court, in its judgement, upheld the provision of the DTAA agreement and favoured Nestle’s claim of a  5 % withholding dividend tax on its Indian business.

The  Supreme Court, in its judgement of 2023, reversed the Delhi High Court judgement and said that the MFN provision cannot be automatically applied without a notification issued by the Union Ministry of Finance under section 90 of the Income Tax Act 1961.

The Supreme Court also held that the MFN clause applied only to those countries that joined the OECD in 1994.

As the Union Finance Ministry had not issued the necessary notification and Lithuania and Colombia joined OECD in 2018 and 2020, respectively, the 5% withholding tax on Swiss companies operating in India is not applicable.

In reaction to the Supreme Court judgement, the Switzerland government has decided to apply a 10 % withholding tax on an Indian company's investment in Switzerland, reversing its earlier decision.

Impact on India- Switzerland Business ties 

The uncertainty in the taxation treaty will adversely affect the investment of Indian companies in Switzerland and Swiss companies in India.

It will reduce the profitability of these companies as they will have to pay more taxes.

Indian companies might reconsider their investment plan in Switzerland and vice versa.

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