Switzerland Suspends India’s ‘Most Favoured Nation’ Status Over SC’s 2023 Nestle Verdict

Switzerland has revoked India’s ‘Most Favoured Nation’ status clause in the Double Taxation Avoidance Agreement (DTAA) between the two countries.

Switzerland revokes India’s MFN status.

Switzerland has suspended the ‘most favoured nation (MFN)’ status for India in the Double Taxation Avoidance Agreement (DTAA) between the two countries, a decision that would now levy higher taxes on Indian companies operating in the European Union. The Swiss government suspended the MFN status clause in the Double Taxation Avoidance Agreement (DTAA) citing the Supreme Court of India’s 2023 Nestle ruling.
With this, Switzerland will tax dividends that Indian entities will earn in that country at 10 per cent from January 1, 2025, a report in PTI stated. A statement from the Swiss finance department on December 11 stated that the move follows the Supreme Court of India last year ruling that the MFN clause doesn’t automatically trigger when a country joins the OECD if the Indian government signed a tax treaty with that country before it joined the organisation.
Notably, India inked tax treaties with Colombia and Lithuania leading to lower tax rates on certain types of income than the rates it provided to OECD countries. These countries later joined the OECD, the report added. Later, Switzerland in 2021 interpreted that Colombia and Lithuania joining the OECD meant a 5 per cent rate for dividends would apply to the India-Switzerland tax treaty under the MFN clause, instead of 10 per cent as stated in the agreement.

What the Swiss Finance Department Said

In its statement, the Swiss Finance Department announced the MFN status suspension between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on income.
The country cited a ruling of the Indian Supreme Court of 2023 in a case relating to Vevey-headquartered Nestle for its decision to withdraw the MFN status.
It added that in 2021, the Delhi High Court in the Nestle case upheld the applicability of the residual tax rates after taking into account the MFN clause in the double taxation avoidance treaty. However, the Indian Supreme Court, in its decision on October 19, 2023, reversed the lower court’s decision and concluded that, the applicability of MFN clause provided “was not directly applicable in the absence of ‘notification’ in accordance with Section 90 of the Income Tax Act”.
This means that from January 1, 2025, Switzerland will levy a 10 per cent tax on dividends due to Indian tax residents who claim refunds for Swiss withholding tax and for Swiss tax residents who claim foreign tax credits, the PTI report further mentioned.

DTAA Renegotiation: MEA Responds to Swiss Government Decision

Meanwhile, reacting to the decision of the Swiss government to suspend MFN status for India, the Minister of External Affairs (MEA) said that its double taxation treaty with Switzerland may require renegotiation in view of its trade pact with the member states of the European Free Trade Association (EFTA).
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