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Switzerland has withdrawn the most-favoured-nation clause to India under the double tax avoidance agreement, a move that will hit Indian companies invested in the European nation. This comes as a retaliation against a 2023 Supreme Court ruling related to Nestle. The ruling stated that the MFN clause does not automatically trigger when a country joins the OECD if the Indian government signed a tax treaty with that country before it joined the organisation.
The Swiss federal department of finance has announced that for dividends due from and including Jan 1, 2025, the residual tax rate in the source State will be limited to 10%, as opposed to the earlier 5%. This will result in higher tax liabilities for Indian companies invested in Switzerland, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions.
The India-Switzerland double tax avoidance agreement was originally signed in 1994 and the protocols were amended in 2000 and 2010. However, India signed tax treaties with Colombia and Lithuania that provided lower tax rates on certain types of income, which Switzerland interpreted as a 5% rate for dividends under the MFN clause. This decision was based on the fact that Colombia and Lithuania had joined the OECD, and therefore, were entitled to the same tax rates as OECD member nations.
Experts believe that more countries could follow Switzerland’s lead and withdraw the MFN clause, as it ensures equal and fair treatment for taxpayers in both countries. This move by Switzerland could have a significant impact on Indian companies invested in the country, as they will now face higher tax liabilities.
The decision by the Swiss government to withdraw the MFN clause is a result of the 2023 Supreme Court ruling, which stated that the clause does not automatically trigger when a country joins the OECD. This ruling contradicted the earlier interpretation by Swiss authorities, who had announced in Aug 2021 that the tax rate on dividends from qualifying shareholdings would be reduced from 10% to 5%, effective retroactively from July 5, 2018.
In conclusion, the withdrawal of the MFN clause by Switzerland will have a significant impact on Indian companies invested in the country. This move could also prompt other countries to follow suit, which could further affect the competitiveness of Indian businesses in the global market.