Switzerland's Decision to Revoke MFN Status

In a retaliatory move against a 2023 Supreme Court ruling related to Nestle, Switzerland has withdrawn the most-favoured-nation clause to India under the double tax avoidance agreement. This decision, effective from January 1, 2025, will significantly impact Indian companies invested in the European nation. The Swiss federal department of finance announced that for dividends due from and including January 1, 2025, the residual tax rate in the source State is limited to 10%, up from the previous 5% tax.

India and Switzerland had originally signed the agreement in 1994, with protocols amended in 2000 and 2010. However, Switzerland interpreted that Colombia and Lithuania joining the OECD meant a 5% rate for dividends would apply under the DTAA to India, too, under the MFN clause. The Supreme Court's ruling last year, however, stated that the MFN clause doesn't automatically trigger when a country joins the OECD if the Indian government signed a tax treaty with that country before it joined the organisation.

Potential Impact on Indian Companies

Indian companies face a higher liability due to the decision. With the reversion to a 10% residual rate starting January 1, 2025, these firms face higher tax liabilities, reducing their competitiveness compared to businesses from countries still benefiting from MFN provisions, according to Ajay Srivastava of GTRI. Experts also warn that more countries could follow Switzerland's lead, further complicating the tax landscape for Indian businesses abroad.