New Delhi: Switzerland, in a retaliatory action, has revoked India's Most Favoured Nation (MFN) status, resulting in higher tax implications for Indian enterprises operating in the central European nation.
The Swiss action came after India's Supreme Court rejected the automatic applicability of the MFN clause under the bilateral tax treaty in a case involving Swiss business Nestle.
The Swiss government stated in an order dated December 11 that the Supreme Court's decision demonstrates that the Indian side does not agree with Switzerland's interpretation of the MFN clause under the Double Taxation Avoidance Agreement. As a result, it declared that it will no longer unilaterally apply the MFN clause as of January 1, 2025, TNIE reported.
As a result, Switzerland may impose higher tax rates on income earned on or after January 1, 2025. Previously set at 5% under the MFN clause, the appropriate residual rates on dividends paid by Indian companies in Switzerland would now be 10%.
Similar to the concessions granted to other nations with comparable tax treaties, the MFN clause lowers the rate of taxation at the source on dividends, interest, royalties, or fees for technical services.
“Switzerland’s decision marks a shift in bilateral treaty dynamics... This move underscores the growing emphasis on reciprocity and mutual agreement in the interpretation of treaty provisions,” said Sandeep Jhunjhunwala, M&A tax partner, Nangia Andersen.
According to Amit Maheshwari, a tax partner at AKM Global, there is fear that other nations would do the same. “Switzerland is of the view that it is not receiving the same treatment India grants to other countries with more favourable tax treaties. The main reason is reciprocity, which ensures taxpayers in both countries are treated equally and fairly,” he said.