The Crossbill News Desk
Switzerland’s Federal Finance Department on Wednesday (December 11), announced the suspension of India’s ‘Most Favoured Nation’ (MFN) status under a bilateral treaty on avoiding double taxation.
The decision follows Switzerland’s determination that India does not share its interpretation of the MFN clause within the agreement.
The MFN clause, introduced via a 2010 amendment to the 1994 treaty, stipulates that if India agrees to lower rates of taxation at source for dividends, interest, royalties, or technical service fees with a third OECD country, those lower rates would also apply between India and Switzerland.
However, a September 2023 ruling by the Indian Supreme Court, in a case involving Nestlé, clarified that such MFN benefits would require notification under Section 90(1) of the Income Tax Act to take effect.
The court further noted that the MFN clause could only apply to agreements with countries that were OECD members at the time the agreements were signed.
Citing the Supreme Court ruling, the Swiss Finance Department acknowledged that India does not share its interpretation of Paragraph 5 of the Protocol to the India-Switzerland Double Taxation Agreement (DTA).
In light of this lack of reciprocity, Switzerland will suspend the unilateral application of MFN benefits starting January 1, 2025.
This decision will effectively increase the tax rates at source for Indian entities in Switzerland from 5% back to 10%. The 5% rate had been applied since 2021 after Switzerland observed that India had signed agreements with Lithuania and Colombia at that rate in 2011. Both countries later became OECD members in 2018 and 2020, respectively.
However, as the Supreme Court ruled that Lithuania and Colombia were not OECD members at the time of the agreements, Switzerland’s earlier interpretation was rendered invalid.
In response to queries during a weekly briefing, External Affairs Ministry spokesperson Randhir Jaiswal stated, “My understanding is that with Switzerland, because of EFTA [European Free Trade Association], the double taxation treaty we have is going to be renegotiated. Regarding the MFN issue, we will provide updates as more details emerge.”
The decision follows Switzerland’s determination that India does not share its interpretation of the MFN clause within the agreement.
The MFN clause, introduced via a 2010 amendment to the 1994 treaty, stipulates that if India agrees to lower rates of taxation at source for dividends, interest, royalties, or technical service fees with a third OECD country, those lower rates would also apply between India and Switzerland.
However, a September 2023 ruling by the Indian Supreme Court, in a case involving Nestlé, clarified that such MFN benefits would require notification under Section 90(1) of the Income Tax Act to take effect.
The court further noted that the MFN clause could only apply to agreements with countries that were OECD members at the time the agreements were signed.
Citing the Supreme Court ruling, the Swiss Finance Department acknowledged that India does not share its interpretation of Paragraph 5 of the Protocol to the India-Switzerland Double Taxation Agreement (DTA).
In light of this lack of reciprocity, Switzerland will suspend the unilateral application of MFN benefits starting January 1, 2025.
This decision will effectively increase the tax rates at source for Indian entities in Switzerland from 5% back to 10%. The 5% rate had been applied since 2021 after Switzerland observed that India had signed agreements with Lithuania and Colombia at that rate in 2011. Both countries later became OECD members in 2018 and 2020, respectively.
However, as the Supreme Court ruled that Lithuania and Colombia were not OECD members at the time of the agreements, Switzerland’s earlier interpretation was rendered invalid.
In response to queries during a weekly briefing, External Affairs Ministry spokesperson Randhir Jaiswal stated, “My understanding is that with Switzerland, because of EFTA [European Free Trade Association], the double taxation treaty we have is going to be renegotiated. Regarding the MFN issue, we will provide updates as more details emerge.”
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