New Delhi: Switzerland has taken an independent stance following the Supreme Court of India’s verdict in the Nestle case. The country has withdrawn India’s ‘Most Favoured Nation’ (MFN) status under the Double Taxation Avoidance Agreement (DTAA). The decision marks a notable shift in the bilateral relationship and is expected to have far-reaching consequences for Indian companies with operations in Switzerland, as well as Swiss investments in India.
In an official statement released on December 11, Switzerland’s finance department referred to the Indian Supreme Court’s 2023 judgment as the reason for this move. The Supreme Court had clarified that the MFN clause in tax treaties does not apply automatically when a country joins the Organisation for Economic Co-operation and Development (OECD). This is particularly true if India had already signed a tax agreement with that nation prior to its OECD membership.
OECD: A global hub for policy collaboration
The OECD, established in 1961 and headquartered in Paris, describes itself as a platform for collaboration and knowledge-sharing on public policy. It aims to foster stronger, more equitable, and sustainable societies by providing evidence-based standards and addressing economic, social, and environmental challenges through partnerships with policymakers and stakeholders worldwide.
India’s tax agreements with Lithuania and Colombia offered lower rates on certain income types, which were assumed to apply under the OECD’s MFN clause after both nations joined the grouping. Switzerland expected a 5 per cent dividend rate, as per MFN terms, to replace the 10 per cent rate in its treaty with India. However, India’s Supreme Court ruled that MFN clauses do not apply automatically upon OECD membership, and prior treaties take precedence unless explicitly notified under Section 90 of the Income Tax Act.
Switzerland withdraws India’s MFN status
Switzerland has reacted by unilaterally withdrawing India’s MFN status, explicitly citing the Indian Supreme Court’s decision as the reason. Effective January 1, 2025, Switzerland will impose a 10 per cent tax on dividends paid to Indian residents and entities claiming Swiss withholding tax refunds, as well as Swiss residents claiming foreign tax credits. In its announcement, the Swiss Finance Department confirmed the “Suspension of the application of the MFN clause” in its tax treaty with India, referencing the Supreme Court’s 2023 Nestle-related ruling.
