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Switzerland has decided to suspend the "Most Favoured Nation" (MFN) status for India under their Double Taxation Avoidance Agreement (DTAA). This decision follows a significant ruling by the Indian Supreme Court, which affects tax rates on dividends. The change, set to take effect on January 1, 2025, could increase tax liabilities for Indian businesses operating in Switzerland.
What Is the MFN Clause?
The MFN clause in the DTAA allowed lower tax rates on certain types of income, including dividends, if India had similar agreements with other countries offering such benefits. For example, when Colombia and Lithuania became members of the Organisation for Economic Co-operation and Development (OECD), a 5% tax rate on dividends was applied under the India-Switzerland tax treaty.
However, the Indian Supreme Court's decision in 2023 has clarified how the MFN clause should be interpreted.
### Supreme Court Ruling
The Indian Supreme Court ruled that the MFN clause does not automatically apply when a country joins the OECD if the tax treaty with that country was signed before it became an OECD member. This overturned an earlier decision by the Delhi High Court, which had applied the 5% tax rate in such cases.
What Will Change?
Because of this ruling, Switzerland will impose a 10% tax on dividends earned by Indian entities in Switzerland, starting in 2025. This is double the previous 5% rate. The higher tax rate could increase costs for Indian companies with investments in Switzerland. It may also affect Swiss companies investing in India.
Implications
The suspension of the MFN status marks a shift in the tax relationship between India and Switzerland. It highlights how complex international tax treaties can be and how important it is to interpret them consistently.
While the decision could lead to higher tax liabilities for Indian businesses, it also reflects the need for clear tax policies in a global economy. Indian companies operating in Switzerland are likely to review their tax strategies to manage the higher tax burden.
This move is a reminder of the importance of carefully aligning tax treaties with international standards to avoid disputes and ensure mutual benefits for both countries.
