Switzerland suspends MFN status for India following court ruling, raising tax liabilities for Indian entities

Switzerland suspends ‘Most Favoured Nation’ clause with India under tax treaty

Switzerland has announced the suspension of the Most Favoured Nation (MFN) status granted to India, effective from January 1, 2025. This move will lead to increased tax liabilities for Indian companies operating in Switzerland, particularly in relation to withholding taxes on income generated there. The decision follows an adverse court ruling in India and could significantly impact multinational corporations (MNCs) operating in both countries.

The suspension stems from a ruling by the Indian Supreme Court on October 19, 2023, which stated that the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland cannot be enforced unless it is explicitly notified under Section 90 of the Income Tax Act. This ruling has brought higher tax demands for companies like Nestle SA, the parent company of Nestle India, as well as other Swiss, Dutch, and French MNCs, on the dividends they pay to Indian shareholders.

In a statement issued by Swiss authorities, they acknowledged that their interpretation of paragraph 5 of the Protocol to the India-Switzerland DTAA was not aligned with the Indian side’s view. In response, Switzerland decided to suspend the MFN status, which will impact dividends due from January 1, 2025, onwards. Under the revised terms, the residual tax rate on dividends in the source state will be capped at 10%. However, the previous tax treatment, as outlined in the Swiss authorities’ statement from August 2021, will remain applicable to income earned during the 2018-2024 tax years.

Reacting to the development, External Affairs Ministry Spokesperson Randhir Jaiswal stated, “My understanding is that due to the European Free Trade Association (EFTA), the DTAA will be renegotiated, but I have no update on MFN.”

Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen, explained that starting January 1, 2025, Indian companies will face a significant increase in tax liabilities due to the suspension. He emphasized that this development reflects broader trends in international taxation, where countries like India are asserting stricter interpretations of treaty provisions to safeguard domestic tax revenues.

Amit Maheshwari, Tax Partner at AKM Global, noted that Switzerland’s decision stems from its view that it is not receiving reciprocal treatment under the DTAA. The principle of reciprocity ensures that taxpayers in both countries are treated equally, and Switzerland’s stance is based on the belief that India’s tax treaties with other countries offer more favorable terms.

Maheshwari warned that Switzerland’s move could set a precedent, with more countries potentially following suit and revising their tax treaties with India. This change could have significant implications for international businesses and investors engaged in cross-border operations.

For all the latest updates, download PGurus App.

The post Switzerland suspends MFN status for India following court ruling, raising tax liabilities for Indian entities appeared first on PGurus.