Switzerland has now decided to withdraw the ‘Most Favoured Nation’ status under its Double Taxation Avoidance Agreement (DTAA) with India, which will impose a 10% tax on dividends from Indian entities beginning January 1. The decision comes after a judgment by the Indian Supreme Court, which has sparked concerns about its association with a case involving Swiss multinational Nestlé.
On December 11, the finance department of Switzerland made a statement explaining why it was suspending the MFN clause. The move has been prompted by an important judgment delivered by the Supreme Court of India in 2023 that impacted the applicability of the MFN clause in India’s tax treaties with those countries that had become members of the Organisation for Economic Cooperation and Development (OECD). It took this step because India signed treaties with Colombia and Lithuania, two nations that eventually became members of the OECD.
It holds that the MFN clause is not automatically triggered upon accession to the OECD by a country if India had entered into the tax treaty with that country prior to the latter’s accession to the organization. Switzerland re-evaluated its position and concluded that the tax rate on dividends from India was 10% instead of the 5% tax rate applied previously.
Role Of India’s Supreme Court Ruling
The case that had to lead Switzerland to a conclusion was the Nestlé one-the Swiss-based food giant. The Supreme Court of India, in October 2023, overturned an earlier ruling by a lower court stating that the formal application of the MFN clause depends on the actual notice given as per Section 90 of the Indian Income Tax Act. Such cases, including tax disputes, between India and the Swiss company, played an essential role in this.
In its judgment, the Supreme Court clarified that the MFN clause could not automatically apply unless proper procedures were followed, which includes notifications as required by Indian law. This ruling directly affects the interpretation of tax treaties on dividends and tax rates, as applicable under India’s existing agreements.
In response to Switzerland’s suspension of the MFN clause, India’s Ministry of External Affairs (MEA) said that the existing tax treaty with Switzerland may have to be renegotiated. According to a spokesperson for the MEA, Randhir Jaiswal, India’s trade agreement with the European Free Trade Association (EFTA), which comprises Switzerland, Iceland, Norway, and Liechtenstein, may have implications in the renegotiation of the treaty.
However, it was emphasized that the new agreement under the EFTA, which aims to enhance closer economic ties and draw $100 billion in investments from these four countries to India over the next 15 years, may even require updates to existing tax treaties to ensure alignment with broader trade and economic goals.
EFTA Free Trade Agreement
India signed a free trade agreement with the four EFTA countries in March 2023. The agreement is expected to strengthen economic ties, especially in areas such as trade, investment, and technology. The tax treaty renegotiation is expected to reflect these new dynamics, and India’s attempt to adjust its tax structure is part of a broader strategy to attract foreign investments and strengthen its international economic position.
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