With effect from January 1, 2025, Switzerland has announced that India’s Most Favoured Nation (MFN) status under their Double Taxation Avoidance Agreement (DTAA) will be suspended. This decision comes after the Indian Supreme Court made a landmark decision in 2023 that made it clearer under what circumstances the MFN clause in tax treaties applies.
The 1994 DTAA between India and Switzerland included the MFN clause, which was later modified in 2010. It was intended to guarantee that Switzerland would likewise be subject to reduced tax rates if India and a third OECD nation reached an agreement. Switzerland regarded this as a lack of reciprocity from India with regard to the MFN provision, but the Supreme Court’s decision stated that such automatic modifications require written notification under Section 90(1) of the Indian Income Tax Act.
In its ruling, the Supreme Court made it clear that a country’s membership in the Organisation for Economic Co-operation and Development (OECD) did not automatically entitle it to the MFN clause in tax treaties, especially if India had already signed a tax treaty with that nation before joining the OECD. The decision underlined that the Indian government must provide clear notice under Section 90 of the Income Tax Act in order for any benefits under the MFN clause to be available.
One of the main justifications given by the Swiss finance department for suspending India’s MFN designation was the Supreme Court’s interpretation. The Court’s decision said:
After a tax treaty is concluded, nations that join the OECD are not immediately covered by the MFN clause.
Explicit notice is necessary to apply reduced tax rates that have been agreed upon with other nations.
Switzerland concluded that it could not apply the lower withholding tax rates that Indian firms had previously benefited from in the absence of this announcement.
Dividends issued to Indian tax residents will henceforth be subject to a 10% withholding tax instead of the current 5%. The tax obligations of Indian businesses doing business in Switzerland will rise dramatically as a result of this shift.
Under the current DTAA, Swiss companies that receive dividends from India will still be subject to a 10% withholding tax; however, Indian companies will now face a competitive disadvantage as a result of the higher taxation.
Given India’s commercial agreements with members of the European Free commercial Association (EFTA), which now enjoy differing tax treatment, the suspension might lead to a renegotiation of the tax treaty between India and Switzerland.
Given comparable legal views of reciprocity and treaty responsibilities, this ruling may prompt other nations to reconsider their own MFN provisions in treaties with India.
For Indian businesses doing business in Switzerland, the suspension of the Most Favoured Nation (MFN) status will have a big impact, especially on their tax obligations and general competitiveness.
The withholding tax rate on dividends and other revenue repatriated from Switzerland would increase from 5% to 10% for Indian firms as of January 1, 2025. Since these businesses will have to pay taxes on a bigger percentage of their profits rather of reinvesting or giving them to shareholders, the tax burden increase has a direct effect on their financial performance.
The higher tax rate makes Switzerland less appealing to Indian businesses as a place to do business, particularly when contrasted with businesses from nations that still enjoy reduced withholding rates as a result of MFN rules. This can cause Indian companies to reevaluate their business plans and perhaps move their capital to other countries with better tax laws.
Businesses may have to modify their pricing plans in Switzerland, which could reduce their ability to compete with regional businesses or those from nations with lower tax rates.
Jobs and project scopes in Switzerland may be impacted if businesses decide to move some activities or investments to other European nations with superior tax advantages.
Impact on expansion Sectors: Because of the increasing financial burden, there may be fewer opportunities for expansion in sectors like finance, IT, and pharmaceuticals, where many Indian enterprises have established a presence. This might also make it more difficult for these companies to recruit skilled workers or start new initiatives in Switzerland.
Future international tax treaties including India may be impacted by the precedent that the suspension of the MFN clause sets. Similar disagreements with other nations might make it harder for Indian companies to navigate complicated tax systems, which could discourage foreign investment and make doing business internationally more unpredictable.
In conclusion, Indian businesses doing business in Switzerland face serious difficulties as a result of Switzerland’s suspension of MFN designation. India’s international trade relationships may be affected more broadly as a result of the higher tax obligations and possible loss of competitive advantage, which call for strategic reevaluations.
The suspension of India’s MFN designation by Switzerland represents a substantial change in the two countries’ international taxation relationship. It emphasises how crucial explicit agreements and notifications between parties are for interpreting international treaties, particularly those pertaining to taxes. In order to re-establish advantageous conditions for both Swiss and Indian firms operating across borders, the impending changes may alter the dynamics of investment and call for diplomatic negotiations.
