Explained: How Switzerland's suspension of MFN status to India would affect Indian investors? All you need to know

The Swiss government has suspended the most favoured nation status (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland, potentially impacting Swiss investments in India and leading to higher taxes on Indian companies operating in the European nation.

Switzerland recently suspended its Most Favoured Nation (MFN) status for India, a move which has the potential to negatively impact Indian investors in IT, pharma and financial sectors as it severely disrupts the preferential trade framework previously enjoyed by India under the MFN principle of the World Trade Organization or WTO.

Why Switzerland suspended MFN status for India?

The Swiss government has suspended the most favoured nation status (MFN) clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland, potentially impacting Swiss investments in India and leading to higher taxes on Indian companies operating in the European nation.

As per a December 11 statement by the Swiss finance department, the move follows the Supreme Court of India last year ruling 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 organization.

India signed tax treaties with Colombia and Lithuania that provided tax rates on certain types of income that were lower than the rates it provided to OECD countries. The two countries later joined OECD.

Indian firms operating in Switzerland will now have to pay 10 percent tax on dividends and other incomes, up from the earlier 5 per cent, effective January 1, 2025.

How suspension of MFN status would impact Indian investors?

According to industry experts, the suspension of MFN status is major setback for Indian companies with operations in Switzerland as it introduces new tax challenges for these firms in the country, especially in the pharmaceuticals, IT, and financial services sectors.

Stock market analysts believe that Indian investors must "keep an eye on sectors like pharmaceuticals, IT, financial services, and engineering goods."

Commenting on the decision of Swiss authority decision, Nangia Andersen M&A Tax Partner Sandeep Jhunjhunwala, said the unilateral suspension of application of the MFN clause under its tax treaty with India, marks a significant shift in bilateral treaty dynamics.

"This suspension may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties in an evolving global landscape," he said.

It also underscores the necessity of aligning treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity, and stability in international tax framework, Jhunjhunwala said

Under WTO rules, MFN clause is regarded as a cornerstone of global trade as it mandates that equal treatment by nations for all trading partners. Countries enjoying MFN status enjoy a more favourable' tax treatment from each other under the treaty. Switzerland's suspension of MFN status to India means Indian firms will now have to face higher tariffs, additional trade barriers, and reduced access to the Swiss, as well as European Union markets.

The Nestle case

Switzerland cited a 2023 ruling by Indian Supreme Court in a case relating to Vevey-headquartered Nestle for its decision to withdraw the MFN status.

According to the statement, in 2021, the Delhi High Court in the Nestle case upheld the applicability of the residual tax rates after taking into account the MFN clause in the double taxation avoidance treaty. However, the Indian Supreme Court, in a decision dated October 19, 2023, reversed the lower court's decision and concluded that, the applicability of MFN clause provided "was not directly applicable in the absence of 'notification' in accordance with Section 90 of the Income Tax Act".

However, in a statement issued to India.com a Nestle India spokesperson said the issue is a "policy matter between India and Switzerland" and "not a Nestle specific issue". "The matter is not a Nestle specific issue but is a policy matter between India and Switzerland. We would like to inform you that Nestle India was/is deducting 10% withholding tax, and this has no impact on Nestle India," the spokesperson said.

 

(With inputs from agencies)