Explained | Supreme Court Nestle ruling behind Swiss government's suspension of MFN status for India

According to a December 11 statement by the Swiss finance department, the move follows the Supreme Court of India's ruling last year 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 organisation.

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.

What did the Swiss government say?

According to a December 11 statement by the Swiss finance department, the move follows the Supreme Court of India's 2023 ruling that the MFN clause isn't automatically triggered when a country joins the OECD (Organisation for Economic Co-operation and Development) if the Indian government signed a tax treaty with that country before it joined the organisation.

Switzerland, in 2021, interpreted that Colombia and Lithuania joining the OECD meant a five per cent rate for dividends would apply to the India-Switzerland tax treaty under the MFN clause, rather than 10 per cent as outlined in the agreement.

This is because India had earlier signed tax treaties with the two countries that provided tax rates on certain types of incomes that were lower than the rates provided to OECD countries.

But post suspension of the MFN status, Switzerland will, from January 1, 2025, levy a 10 per cent tax on dividends due to Indian tax residents who claim refunds for Swiss withholding tax and for Swiss tax residents who claim foreign tax credits.

What was the 2023 Supreme Court ruling?

Switzerland cited a 2023 ruling by the 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 Agreement.

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".

AKM Global, Tax Partner, Amit Maheshwari, said that the main reason behind the decision to withdraw MFN is of reciprocity, which ensures that taxpayers in both countries are treated equally and fairly.

"Swiss authorities announced in August 2021 that based on the MFN clause between Switzerland and India, the tax rate on dividends from qualifying shareholdings would be reduced from 10 per cent to 5 per cent, effective retroactively from July 5, 2018. However, the subsequent Supreme Court ruling in 2023 contradicted the same," PTI quoted Maheshwari as saying.

How will it impact India?

This move is likely have an impact on the Swiss investments in India and might lead to a higher taxes on Indian companies operating in Switzerland.

“Effective 1 January 2025, the beginning of the tax year in Switzerland, 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. Beyond its immediate fiscal impact, this development reflects broader trends in international taxation, with countries like India increasingly asserting stricter interpretations of treaty provisions to protect domestic tax revenues. It further underscores the necessity of aligning treaty partners on the interpretation and application of tax treaty clauses to ensure predictability, equity, and stability in the international tax framework,” Sandeep Jhunjhunwala, M&A Tax Partner at Nangia Andersen was quoted as saying by The Indian Express.

JSA Advocates & Solicitors Partner Kumarmanglam Vijay told PTI that this would especially impact Indian companies having ODI (overseas direct investment) structures with subsidiaries in Switzerland and will raise the Swiss withholding tax on dividends from 5 per cent to 10 per cent from January 1, 2025.

How did India react?

India on Friday said its double taxation treaty with Switzerland may require renegotiation in view of its trade pact with the member states of the European Free Trade Association (EFTA). "My understanding is that with Switzerland, because of EFTA, the double taxation treaty that we have; it's going to be renegotiated. That is one aspect of it," MEA spokesperson Randhir Jaiswal said.

(With PTI inputs)