Switzerland revokes India’s MFN status over Supreme Court ruling on Nestle case

PTC Web Desk: In a significant development, Switzerland has revoked India’s Most Favoured Nation (MFN) status under the Double Taxation Avoidance Agreement (DTAA) following the Supreme Court of India’s ruling in the Nestle case. This decision is expected to have a major impact on Indian companies operating in Switzerland and on Swiss investments in India.

What prompted the change?

On December 11, 2023, Switzerland’s finance department issued an official statement explaining that the revocation of India’s MFN status was a direct result of the Supreme Court’s verdict in the Nestle case. The court had ruled that the MFN clause in tax treaties does not automatically apply when a country joins the Organisation for Economic Co-operation and Development (OECD), unless specifically stated in the agreement.

The OECD’s role in tax treaties

The OECD, established in 1961, is an international body that promotes policies to improve economic and social outcomes globally. Its guidelines influence tax treaties between nations. Under the OECD framework, the MFN clause ensures that a country must provide more favourable tax treatment to its treaty partner, particularly in cases involving dividends or other forms of income.

India had entered into tax agreements with countries such as Lithuania and Colombia, which were later admitted to the OECD. Switzerland believed that the tax rates for dividends under the India-Switzerland tax treaty would drop from 10% to 5% following the membership of these countries in the OECD. However, the Supreme Court ruling clarified that the MFN clause does not automatically apply when a country joins the OECD and that prior tax agreements must take precedence.

Impact of SC ruling on Nestle case

The dispute began when the Delhi High Court upheld the MFN clause under the DTAA in a case involving Nestle. According to Switzerland, this ruling was in line with its interpretation of the tax treaty. However, the Supreme Court’s October 2023 judgment reversed the Delhi High Court’s decision, asserting that the MFN clause could only apply if it was explicitly mentioned in the agreement under Indian tax law.

Switzerland’s response

In response to the Supreme Court’s judgment, Switzerland has unilaterally withdrawn India’s MFN status. This means that from January 1, 2025, the tax rate on dividends payable to Indian tax residents will increase from 5% to 10%. This change will also affect Indian entities claiming refunds for Swiss withholding tax and Swiss residents claiming foreign tax credits.

Switzerland’s finance department pointed to the 2023 Supreme Court ruling as the basis for this move, stating that the MFN clause would no longer apply due to the court’s interpretation of the tax agreement. Experts believe Switzerland’s decision is a retaliatory move following the Supreme Court ruling. 

This change is expected to significantly impact Indian companies with investments or subsidiaries in Switzerland. The increase in Swiss withholding tax on dividends will make Swiss investments less attractive to Indian entities, raising the tax burden on dividend payments. It will also complicate the tax structure for Indian firms with Overseas Direct Investment (ODI) arrangements in Switzerland.