Switzerland Withdraws ‘Most Favoured Nation’ Status for India: Key Impacts on Businesses
In a significant shift in economic relations, Switzerland has announced it will withdraw India’s 'Most Favoured Nation' (MFN) status under their Double Taxation Avoidance Agreement (DTAA), effective January 1, 2025.
In a significant shift in economic relations, Switzerland has announced it will withdraw India’s ‘Most Favoured Nation’ (MFN) status under their Double Taxation Avoidance Agreement (DTAA), effective January 1, 2025. This decision is expected to have far-reaching implications for Indian businesses operating in Switzerland, particularly in sectors like technology, finance, and industry.
Table of Contents
Higher Dividend Taxes for Indian Companies
The most immediate impact of this move is the increase in dividend withholding taxes for Indian companies. Currently, under the MFN clause, Swiss tax rates on dividends from Indian businesses are lower. However, with the suspension of this clause, Swiss authorities will now impose a higher tax rate of 10% on dividends. This change will significantly raise the tax burden for Indian companies with operations or investments in Switzerland, particularly affecting profits derived from Swiss assets and subsidiaries.
This decision follows a 2023 ruling by the Indian Supreme Court in a case involving Nestlé, a Swiss multinational. The Court clarified that the MFN benefits under the India-Switzerland DTAA were not automatically triggered without proper notification by Indian authorities. As a result, Switzerland has opted to withdraw the MFN status, which has been a key element in fostering smoother trade relations between the two countries.
Renegotiation of the India-Switzerland DTAA Likely
The Ministry of External Affairs (MEA) of India has expressed concerns over the potential impact of this change and indicated that the India-Switzerland DTAA may need to be renegotiated. A spokesperson from the MEA suggested that the ongoing trade discussions between India and the European Free Trade Association (EFTA), which includes Switzerland, could present an opportunity to revisit and amend the terms of the treaty.
The EFTA is working on a new free trade agreement with India, aiming to boost investment flows and trade. The initiative targets $100 billion in trade over the next 15 years, and a renegotiated DTAA could help smooth the path for enhanced business cooperation between the two nations.
A Shift in Global Economic Landscape
This change in Switzerland’s approach highlights the evolving global tax and trade landscape. Indian businesses will need to adapt to these new tax liabilities while also keeping an eye on potential changes to the treaty terms. Companies in the industrial, technological, and financial sectors that have substantial operations in Switzerland will be particularly affected.
The India-Switzerland Double Taxation Avoidance Agreement, initially signed in 1994 and revised in 2000 and 2010, was designed to prevent the double taxation of income and encourage greater trade and investment between the two countries. One of its critical features, the MFN clause, allowed Indian businesses to benefit from favorable tax rates extended to other countries.
As both nations navigate this new development, businesses will need to prepare for the impending changes while keeping in mind the potential renegotiation of the treaty in the near future.
