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Switzerland Suspends MFN Treatment for India
Context
Switzerland has announced that it will suspend the most favoured nation (MFN) clause in its double taxation avoidance agreement (DTAA) with India, starting from January 1, 2025. This decision follows a ruling by the Indian Supreme Court, which declared that the MFN clause does not automatically trigger without a specific notification under the Income Tax Act.
What is the MFN clause?
- The MFN clause is a principle found in international treaties, including tax agreements that ensures equal treatment for all parties involved.
- If one country offers favourable tax rates or conditions to another, it must extend those same benefits to all other countries covered by the treaty.
- In simple words, the MFN clause ensures equal treatment for all parties involved.
- This clause is designed to guarantee that no country is treated less favourably than any other in trade or taxation matters.
- Impact of the suspension of MFN
- Higher tax liabilities for Indian companies: Indian companies receiving dividends from Switzerland will face an increased tax burden, as the withholding tax on those dividends will rise to 10 per cent from 5 per cent.
- Effects on Swiss investments in India: Swiss companies that receive dividends from Indian subsidiaries will continue to face a 10 per cent withholding tax, as this tax rate has always applied under the India-Switzerland DTAA.
- EFTA investments unaffected: Switzerland's decision is also unlikely to impact investments into India from the European Free Trade Association (EFTA), as these investments are already subject to the 10 per cent withholding tax rate.
- No change for other DTAA benefits: Indian companies operating in Switzerland will still be able to avail themselves of the other benefits provided under the India-Switzerland DTAA, such as tax relief on royalties and fees for technical services.
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