Switzerland Suspends MFN Clause in India Tax Treaty

On 11th December, 2024, Switzerland announced the suspension of the Most-Favoured-Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, citing a lack of reciprocity.

This development is expected to affect Swiss investments in India and increase tax liabilities for Indian companies operating in Switzerland.

Key Points

Suspension Announcement: Switzerland suspended the MFN clause in the DTAA due to a lack of reciprocity from India, impacting tax benefits for both nations.
Supreme Court Ruling: In 2023, the Indian Supreme Court ruled that the MFN clause is not automatic and requires specific notification under the Income-Tax Act, invalidating prior benefits.
Revised Tax Rates: Effective January 1, 2025, dividends will face a residual withholding tax rate of 10% in the source state, as per original DTAA terms.
Impact on Swiss Companies: Major Swiss firms like Nestlé face higher taxes on dividends, increasing operational costs in India.
Risk to Investments: The suspension could deter Swiss investors, jeopardizing the $100 billion investment commitment under EFTA's trade pact with India.
Reciprocity Concerns: Switzerland argues that Indian treaties with other countries offer more favorable tax terms, leading to perceived inequity in the bilateral agreement.
Global Implications: The move may prompt other countries to reevaluate their DTAA arrangements with India, affecting broader international taxation dynamics.