Switzerland withdraws MFN status from India

Switzerland cited a ruling by Indian Supreme Court in a case relating to Nestle for its decision to withdraw the MFN. File
| Photo Credit: Reuters

In a development that could hurt India’s investment climate and affect firms’ international taxation math, Switzerland has decided to suspend the Most Favoured Nation (MFN) treatment for India under the two countries’ 30-years old double-taxation avoidance agreement (DTAA), citing an October 2023 ruling against its validity by the Supreme Court on 11 petitions that were combined with a Nestle plea.

A statement by Swiss authorities dated December 11, said the MFN clause under the DTAA will no longer hold from January 1, 2025, considering that India’s apex court had said it does not get automatically triggered until notified under the Income Tax Act.

“On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para. 5 of the Protocol to the IN-CH DTA is not shared by the Indian side. In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January, 2025,” a Swiss government communiqué stated.

Terming this as a significant shift in bilateral treaty dynamics, Nangia Andersen’s tax partner Sandeep Jhunjhunwala said this would mean increased tax liabilities for Indian entities operating in Switzerland and increases the complexities of navigating international tax treaties in an evolving landscape.

“Previously, Indian companies benefited from a reduced tax rate of 5% on dividends and other incomes, thanks to Switzerland’s earlier application of MFN benefits. With the reversion to a 10% residual rate starting January 1, these firms face higher tax liabilities, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions,” reckoned Ajay Srivastava, director of the Global Trade Research Initiative (GTRI).

“Beyond its immediate fiscal impact, this development reflects broader trends in international taxation, with countries like India increasingly asserting stricter interpretations of treaty provisions to protect domestic tax revenues,” Mr. Jhunjhunwala noted, adding this underscores the need to align treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity, and stability in international tax framework.

Sameer Gupta, national tax leader at EY India, indicated that all may not be lost in this bilateral economic tangle. “As per the Court’s decision, the MFN clause will only take effect once both countries issue notifications… once India provides the required notification, Switzerland can reactivate the treaty provision,” he averred.

Mr. Srivastava, however, warned that this suspension not only brings tax challenges for Indian firms in sectors like financial services, pharmaceuticals, and IT, that have operations in Switzerland, but also introduces frictions with other trade and investment partners over the MFN clause interpretations that could hurt inbound and outbound investment flows. If disputes over reading MFN clauses persist, Indian businesses could face similar hurdles in other jurisdictions as well, he said.

“Proactive negotiations to clarify and harmonize interpretations of treaty provisions are essential to safeguard Indian firms’ interests abroad. Additionally, India must ensure that its treaty frameworks reflect contemporary business realities, particularly in the digital and service sectors, to reduce tax uncertainties and promote global competitiveness,” Mr. Srivastava underlined.