In a significant move, Switzerland has suspended the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. This decision, which will take effect on January 1, 2025, is set to raise the tax rate on dividends paid to Indian tax residents in Switzerland and Swiss tax residents in India from 5% to 10%.

The suspension follows a 2023 ruling by the Supreme Court of India, which clarified that the MFN clause does not automatically apply to countries that joined the Organisation for Economic Co-operation and Development (OECD) after India’s tax treaty with them was signed. The Swiss Federal Department of Finance referenced this ruling, particularly in a case involving Nestlé, to justify the suspension of the MFN clause in its December 11 statement.

India’s tax treaties with Colombia and Lithuania, signed prior to their OECD memberships, provided reduced tax rates on specific types of income. In 2021, Switzerland interpreted these developments to mean that the dividend tax rate under the India-Switzerland tax treaty should drop to 5% under the MFN clause. However, the Indian Supreme Court overruled this interpretation, stating that an official notification under Section 90 of the Indian Income Tax Act was necessary for the MFN clause to apply.

This decision marks a major shift in the bilateral tax relationship between the two nations. Sandeep Jhunjhunwala, Partner at Nangia Andersen, noted, “This may lead to increased tax liabilities for Indian entities operating in Switzerland, highlighting the complexities of navigating international tax treaties.”

The suspension of the MFN clause is expected to impact both Swiss investments in India and Indian companies with subsidiaries in Switzerland. Kumarmanglam Vijay, Partner at JSA Advocates & Solicitors, explained, “Companies with Overseas Direct Investment (ODI) structures in Switzerland will face higher withholding taxes on dividends starting in 2025.”

Amit Maheshwari, Tax Partner at AKM Global, emphasized that the move is driven by reciprocity to ensure equitable treatment for taxpayers in both countries. He added that income accrued from January 1, 2025, will now be taxed at the original treaty rates, without the benefits of the MFN clause.