Swiss Suspension of India's MFN Status: A Tax Treaty Dispute

The Swiss authorities have suspended the most favored nation (MFN) status in their Double Taxation Avoidance Agreement (DTAA) with India, citing an Indian Supreme Court ruling from 2023. This decision could significantly impact Swiss investments in India and raise taxes for Indian firms operating in Switzerland.

The dispute revolves around the interpretation of the MFN clause in tax treaties. India had established tax agreements with Colombia and Lithuania offering lower tax rates on specific income types before their OECD membership. When these countries joined the OECD, Switzerland interpreted that a 5% dividend rate should apply to the India-Switzerland tax treaty under the MFN clause, instead of the agreed 10%.

Following the suspension of the MFN status, from January 1, 2025, Switzerland will impose a 10% tax on dividends for Indian tax residents seeking Swiss withholding tax refunds and Swiss tax residents claiming foreign tax credits. This decision was officially announced by the Swiss finance department, which cited the 2023 Indian Supreme Court ruling in a case involving Nestlé as the basis for withdrawing the MFN status.

This move signifies a significant change in bilateral treaty dynamics, potentially increasing tax obligations for Indian entities in Switzerland and affecting Swiss investments in India. Experts emphasize the importance of treaty partners agreeing on the interpretation and application of tax treaty clauses for predictability and stability in international tax management.