Switzerland Suspends ‘Most Favoured Nation Status’ to India

December 14, 2024

Switzerland has announced the removal of the most-favored-nation (MFN) clause from its tax agreement with India. This decision follows a Supreme Court ruling in 2023 concerning Nestle, which clarified the applicability of the MFN clause. The change will affect Indian companies with investments in Switzerland.

Background of the Tax Agreement

India and Switzerland first established their tax agreement in 1994. The agreement underwent updates in 2000 and 2010 to adapt to evolving economic conditions. These updates aimed to facilitate smoother financial relations between the two countries.

Changes to Dividend Tax Rates

Starting January 1, 2025, the tax rate on dividends for Indian companies in Switzerland will increase to 10%. This is a notable rise from the previous rate of 5%. The change will raise tax liabilities for Indian firms, impacting their competitiveness in the Swiss market.

Supreme Court Ruling and Its Implications

The Indian Supreme Court ruled that the MFN clause does not automatically extend to countries that join the OECD after a tax treaty is signed. This ruling clarified that Switzerland’s previous interpretation of the MFN clause was inconsistent with India’s stance. Consequently, Switzerland acknowledged this discrepancy and opted to remove the MFN provision.

Impact on Indian Companies

The removal of the MFN clause will create a less favourable tax environment for Indian businesses in Switzerland. They will face higher tax rates compared to companies from countries that maintain the MFN status. This change could deter future investments from India into Switzerland.

Experts predict that Switzerland’s decision may influence other nations to reconsider their tax agreements. The focus on reciprocity suggests that countries are evaluating fairness in their tax dealings. This trend could lead to similar actions by other jurisdictions, reshaping international tax relations.

GKToday Facts for Exams:
MFN Clause: The most-favoured-nation clause ensures equal tax treatment for countries. Its removal by Switzerland signifies a shift in international tax relations affecting competitiveness.
OECD: The Organisation for Economic Co-operation and Development promotes economic growth and stability. It influences tax policies globally, impacting treaties like those between India and Switzerland.
Colombia: Colombia, a South American nation, has signed tax agreements with India. These agreements offer lower tax rates, enhancing investment opportunities and economic cooperation between the two nations.
Dividend Tax Rate: The dividend tax rate is the tax levied on dividends paid to shareholders. The increase to 10% for Indian companies in Switzerland raises their operational costs .

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