Switzerland has decided to withdraw the Most Favoured Nation (MFN) status granted to India, a move that will have significant tax implications for Indian companies operating in the European nation. This decision comes after an adverse ruling from the Indian Supreme Court regarding a tax dispute involving Nestlé, the Swiss food giant headquartered in Vevey. From January 1, 2025, Indian businesses in Switzerland will face higher withholding tax rates, particularly on dividend income, signalling a shift in the tax landscape for bilateral trade and investments.
Switzerland Withdraws MFN Status From India
Why In News
- Switzerland has decided to withdraw the Most Favoured Nation (MFN) status granted to India, a move that will have significant tax implications for Indian companies operating in the European nation.
- This decision comes after an adverse ruling from the Indian Supreme Court regarding a tax dispute involving Nestlé, the Swiss food giant headquartered in Vevey. From January 1, 2025, Indian businesses in Switzerland will face higher withholding tax rates, particularly on dividend income, signalling a shift in the tax landscape for bilateral trade and investments.
Withdrawal Of MFN Status
- In a statement issued, the Swiss finance department explained that the decision follows a ruling by the Supreme Court of India last year.
- The court determined that the MFN clause does not automatically apply when a country joins the Organisation for Economic Cooperation and Development (OECD) after signing a treaty with India.
- India has tax agreements with countries such as Colombia and Lithuania, which provide lower tax rates on certain types of income than those applicable to OECD nations.
- Both Colombia and Lithuania later joined the OECD. In 2021, Switzerland interpreted that the MFN clause meant a 5% dividend tax rate would apply to its treaty with India, based on Colombia and Lithuania’s OECD membership, rather than the 10% rate specified in the original agreement.
- However, in October 2023, the Supreme Court of India overturned a lower court ruling, concluding that the MFN clause could not be automatically enforced without a formal ‘notification’ under Section 90 of the Income Tax Act. The case in question involved Nestlé, the Swiss multinational headquartered in Vevey.
Impact On Indian Businesses
- Tax experts said that the move by the Swiss could “impact investments” in India as dividends would be subject to “higher withholding tax”. This poses risk to the $100 billion investment commitment in India over a 15-year period by the four-nation European Free Trade Association (EFTA), an intergovernmental grouping of Iceland, Liechtenstein, Norway and Switzerland under a trade pact signed in March this year.
- This agreement aims to promote trade and investment between India and EFTA nations, focusing on goods, services, intellectual property, and investment cooperation.
- While the MFN withdrawal may create short-term challenges for Indian businesses, it should not overshadow the broader potential of the TEPA. Under this agreement, India stands to gain enhanced market access and foreign investments, which could offset the higher taxes imposed by Switzerland. Furthermore, India is also negotiating a separate free trade agreement with the European Union, which could provide additional avenues for economic growth.
Path Forward
- As Switzerland moves forward with the implementation of its new tax stance, it will be important for Indian companies to reassess their tax planning strategies. The removal of the MFN clause may encourage businesses to explore other investment routes or revise existing agreements with Swiss counterparts to mitigate the impact of the higher withholding tax.
- For the Swiss authorities, the decision to withdraw the MFN status is a necessary adjustment to align their tax treaties with the latest interpretations of international law. While the change may be unpopular with some Indian businesses, it underscores the complexities involved in international tax agreements and the importance of clear communication between treaty partners.
