In a move that will affect Swiss investments in India and the tax obligations of Indian companies operating in Switzerland, the Swiss government has announced the suspension of the most-favoured nation (MFN) treatment in the Double Taxation Avoidance Treaty (DTAT) with India. The decision, which will come into effect on January 1, 2025, marks a significant change in international taxation between the two countries.

Let us examine the implications of this development and what it means for businesses on both sides.

What is the MFN clause and why is it important?

The MFN clause in a TDA ensures that tax benefits available to one contracting party are extended to the other if the latter has a more favourable tax treaty with a third country. For example, the ADT between India and Switzerland allowed Swiss companies to pay a reduced tax rate of 5% on dividends, taking advantage of India’s agreements with countries such as Slovenia and Lithuania.

However, a 2023 judgment by the Supreme Court of India clarified that the MFN clause is not automatic but requires formal notification under the Indian Income Tax Act. The judgment overturned the previous interpretation that allowed automatic application of MFN benefits.

Why did Switzerland withdraw the clause?

• The Swiss decision is based on a lack of “reciprocity.” The Swiss government believes that its taxpayers do not receive the same benefits that India offers to other nations through relevant treaties.
• The suspension comes after Switzerland’s announcement in 2021 of a reduced tax rate under the MFN clause, which a judgment by the Supreme Court of India later declared invalid. For Switzerland, this lack of a cooperation agreement makes the continued application of the MFN clause non-existent.

Key changes effective from 1 January 2025

Higher withholding tax on dividends
The suspension means that dividends paid by Indian companies to Swiss entities (and vice versa) will now attract a withholding tax of 10% instead of 5%.

Limited MFN benefits

• Income received on or after 1 January 2025 will be taxed at the normal rates of the DTAA, irrespective of the MFN clause.
• Increased tax liabilities for Indian companies in Switzerland
• Indian companies operating in Switzerland will face higher tax burdens, adding to the burden of cross-border operations.

Impact on investment

1. Impact on Swiss investment in India

Tax experts predict that high tax rates could make India an unattractive destination for Swiss investors. This could put at risk the $100 billion in investments made by the European Free Trade Association (EFTA), which includes Switzerland.

2. Difficulties for multinationals

Companies like Nestlé, which previously benefited from low tax rates, will now have to adapt to the DTAA measures. This adds to the financial and operational challenges for Swiss multinationals with significant interests in India.

3. Broader international tax regimes

The Swiss suspension reflects a global shift towards strict interpretation of tax treaties. Countries like India are using their jurisdiction over treaty provisions to protect domestic tax revenues.

Expert Opinion

Amit Maheshwari, Tax Partner, AKM Global
Maheshwari notes that the suspension is a direct response to the 2023 Supreme Court of India ruling, which rejected the automatic application of the MFN clause. He highlights that reciprocity and fair treatment of taxpayers are key to this decision.

Sandeep Jhunjhunwala, M&A Tax Partner, Nangia Andersen
Jhunjhunwala stresses the importance of aligning treaty partners on tax benefits to ensure stability and predictability. He warns that a higher tax burden on companies could complicate bilateral economic relations.

What companies should do next

Re-evaluate tax strategies: Companies should assess their exposure to higher tax rates under the revised DTAA regulations.

Plan for higher costs: Taking into account the increase in tax liabilities will be a requirement for long-term financial planning.

Monitoring treaty developments: Stay updated on changes in tax treaties between India and other nations as similar situations may arise.

Conclusion

Switzerland’s suspension of the MFN clause in its tax treaty with India highlights the evolving complexities of international taxation. While this move protects domestic tax revenues, it also raises concerns about cross-border investment flows and treaty stability. For businesses, adapting to these changes will be crucial to maintaining profitability in an increasingly uncertain global tax environment.