Switzerland has decided to suspend the Most-Favoured Nation (MFN) status granted to India under the Double Taxation Avoidance Agreement (DTAA).
The MFN status, a key feature in international trade and tax treaties, ensures that countries extend the most favorable treatment or tax rates to each other, mirroring benefits provided to other nations under similar agreements. In the context of the India-Switzerland DTAA, the MFN clause was designed to provide lower tax rates applied to residents of other OECD member nations to the treaty partner as well. The OECD (Organisation for Economic Co-operation and Development), established in 1961, serves as a global forum for policy analysis and standards aimed at fostering sustainable and equitable development.
India and Switzerland signed their DTAA in 1994, with an amendment in 2010. The controversy began when Colombia and Lithuania joined the OECD after signing tax treaties with India that offered lower tax rates on dividends. In 2021, Switzerland argued that these developments should automatically extend a reduced 5% tax rate on dividends under the MFN clause in the India-Switzerland DTAA, replacing the 10% rate stipulated in the original agreement. This interpretation was initially upheld by the Delhi High Court, which ruled in favor of Switzerland’s position.
However, in a landmark decision on October 19, 2023, the Indian Supreme Court reversed the ruling in a long-standing case involving Nestle SA. The court concluded that the MFN clause does not automatically apply when a nation joins the OECD. Instead, the original terms of the tax treaty prevail unless explicitly altered through a notification under Section 90 of the Indian Income Tax Act. This ruling undermined Switzerland’s expectations regarding the tax treaty and led to the unilateral revocation of MFN status.
As a result, starting January 2025, Switzerland will impose a 10% tax on dividends paid to Indian tax residents, up from the current 5%, and apply the same rate to Swiss residents claiming tax credits on Indian earnings. The decision marks a significant shift in India-Switzerland economic relations and raises concerns over future tax treaty negotiations.
