Swiss authorities have suspended the most favoured nation status (MFN) provision in the Double Taxation Avoidance Agreement (DTAA) with India, which could affect Swiss investments in India and raise taxes for Indian firms operating in Switzerland. This decision follows an Indian Supreme Court ruling from last year, which determined that the MFN clause does not automatically activate when a country joins the OECD if India had established a tax treaty before their OECD membership. This could have significant implications for both Swiss and Indian businesses operating in each other’s countries.
The MFN clause in the India-Switzerland DTAA allows for equal treatment of taxpayers in both nations, ensuring that they are not subject to discriminatory tax rates. However, the recent decision by the Swiss authorities to suspend this provision means that from January 1, 2025, Switzerland will impose a 10 per cent tax on dividends for Indian tax residents seeking Swiss withholding tax refunds and Swiss tax residents claiming foreign tax credits. This could result in higher tax obligations for Indian entities in Switzerland and could potentially discourage Swiss investments in India.
The Swiss finance department has officially announced the suspension of the MFN clause protocol between Switzerland and India regarding double taxation avoidance on income taxes. This decision is based on a 2023 Indian Supreme Court ruling in a case involving Nestle, a Swiss-based company. The court concluded that the MFN clause was not directly applicable without proper notification under Section 90 of the Income Tax Act. This ruling has led to the withdrawal of the MFN status by the Swiss authorities.
The suspension of the MFN clause could have a significant impact on the bilateral treaty dynamics between India and Switzerland. It highlights the challenges of managing international tax treaties in today’s global context, where different interpretations of treaty clauses can lead to conflicting decisions. This could potentially create uncertainty for businesses operating in both countries and could affect their tax planning strategies.
The decision to suspend the MFN clause is driven by the principle of reciprocity, aiming for equal treatment of taxpayers in both nations. The Swiss authorities had previously announced a reduction in dividend tax rates from 10 to 5 per cent, retroactive from July 5, 2018. However, the 2023 Supreme Court ruling contradicted this position, leading to the suspension of the MFN status. This could have a significant impact on Swiss investments in India, as they may now face higher dividend withholding taxes.
In conclusion, the suspension of the MFN clause in the India-Switzerland DTAA could have far-reaching implications for businesses operating in both countries. It highlights the need for treaty partners to agree on the interpretation and application of tax treaty clauses to ensure predictability and stability for taxpayers. The decision by the Swiss authorities could potentially affect Swiss investments in India and could result in higher tax obligations for Indian entities in Switzerland.