Switzerland's suspension of the Most-Favored-Nation (MFN) status under its tax treaty India, effective January 2025, will raise withholding tax on dividends from 5% to 10%. Exnote the move could affect cash flow for Indian businesses but emphasize that tax credits under the Double Taxation Avoidance Agreement (DTAA) will mitigate financial impact offering India an opportunity to reassess its tax strategies.
In a significant development for India-Switzerland tax relations, Switzerland has decided to suspend the Most-Favoured-Nation (MFN)status under the India-Switzerland tax treaty, effective January 1, 2025.This follows the Supreme Court ruling in India regarding the interpretation of the MFN clause. The move is expected to impact dividend taxation, foreign investment flows, and business operations in both countries.
Switzerland has suspended the unilateral application of the MFN clause with India under the Double Tax Avoidance Agreement (DTAA). Under this treaty, Switzerland had reduced the withholding tax on Indian entities operating in that country from 10% to 5%.
The Swiss authorities cited India’s Supreme Court ruling in the case on Nestle from October 2023 as the trigger for this decision. The Supreme Court reversed a Delhi High Court judgment that favoured Nestle, stating that the MFN clause could not be automatically applied without formal notification under Section 90 of the Indian Income Tax Act. This clarification led Swiss authorities to reconsider the unilateral reduction of the withholding tax rate.
Switzerland views this as a breach of reciprocity, as they believe taxpayers in both countries should be treated equally. This has led them to suspend the application of the MFN clause and revert to the previous10% withholding tax rate. This situation could have several implications for bilateral trade and business relations. Indian companies operating in Switzerland and vice versa will face a higher tax burden, potentially impacting their competitiveness.
According to experts, the suspension of the MFN status by Switzerland introduces new challenges but also provides an opportunity for India to reassess its tax treaties and investment strategies. While Swiss companies operating in India may face higher taxes on dividends, the overall impact on business relations may be less severe if India takes proactive steps to engage with Switzerland and reinforce its economic position.
while this does have an impact, it is primarily a timing issue. Under the Double Taxation Avoidance Agreement (DTA), Indian companies can still avail of tax credits, mitigating the immediate effects, opined experts.
Experts predict the increased withholding tax will affect cash flow for Indian companies, but the overall financial impact will be mitigated by foreign tax credits.
For Indian businesses operating in Switzerland, the MFN suspension adds complexity to the tax landscape. The increased withholding tax rate could affect the profitability of Swiss subsidiaries of Indian companies. However, Indian companies can still avail tax credits under the Double Taxation Avoidance Agreement (DTAA), experts said.
From a broader perspective, tax on dividend income earned by an Indian company from the Switzerland entity is higher than the debatable tax rate of 5% or 10%, which is further supported by FTC benefit in India; such a unilateral move by Swiss authorities is likely to have a limited impact on tax residents of India
Avnish Arora, Executive Director, Direct Tax at Forvis Mazars in India
As both nations navigate these changes, their strategic relationship, particularly in trade and investment, will depend on careful negotiation and the ability to adapt to evolving global tax standards.
With the suspension of the MFN status, Indian taxpayers receiving dividends from Swiss companies will now face a higher withholding tax rate of 10%, up from the previous 5% under the MFN clause.
In view of the suspension of the MFN status by the Swiss Government, Indian taxpayers who receive dividends from Switzerland now will have to face a higher withholding tax of10% as against 5% allowed based on Swiss Government’s interpretation of MFN under the DTAA. However, this will not have any impact on Swiss taxpayers receiving dividends from their investment in India, as India has always maintained that the applicable tax rate is 10% until both governments bilaterally negotiate the MFN clause and the stand of the Indian tax authorities finds favour from the Supreme Court of India
Gopal Bohra, Partner at N A Shah Associates LLP
The increased withholding tax will affect cash flow for Indian companies, but the overall financial impact will be mitigated by foreign tax credits.
The Indian government will have to give a higher foreign tax credit. Earlier, the Indian government would have given 5%,but now they’ll be able to give 10%, so the final tax outgo in the hands of the Indian entity will be reduced. The cost of repatriating dividends will be higher, but the group overall is not impacted. It’s mainly a cash flow issue
Prashant Bhojwani, Partner at BDO India
Swiss investments in India could see a decline in the near future, as the suspension of the MFN clause introduces an element of unpredictability and increases the tax burden on dividends.
The suspension of the MFN clause by Switzerland is likely to impact Swiss investments in India, particularly by increasing the tax burden on dividend repatriations. Swiss companies, which previously benefited from reduced withholding tax rates(as low as 5%), will now face the original 10% rate, which could make India less attractive
Rakesh Nangia, Founder and Managing Partner at Nangia & Co LLP,
To mitigate this, Rajat Mohan, Senior Partner at AMRG & Associates, suggests India could work to strengthen bilateral ties with Switzerland.
India should proactively engage Switzerland in bilateral negotiations to clarify investment security and trade continuity. This could include enhanced protection under the India-Switzerland Bilateral Investment Treaty (BIT)
Rajat Mohan, Senior Partner at AMRG & Associates
For Indian businesses operating in Switzerland, the MFN suspension adds complexity to the tax landscape. The increased withholding tax rate could affect the profitability of Swiss subsidiaries of Indian companies. However, Indian companies can still avail tax credits under the Double Taxation Avoidance Agreement (DTAA).
Indian companies in Switzerland will no longer benefit from the preferential treatment under the MFN clause. While this does have an impact, it is primarily a timing issue. Under the Double Taxation Avoidance Agreement (DTA), Indian companies can still avail of tax credits, mitigating the immediate effects. The key challenge will lie in navigating the changes in the tax framework, but the DTA provisions provide a safeguard against significant financial setbacks
Hemen Asher, Partner at Bhuta Shah & Co LLP
Long-Term Effects on Swiss Investment in India Remain Uncertain Swiss investors may explore alternative destinations for investment due to the increased tax burden, but the long-term effects on Swiss investments in India remain uncertain.
From a flow of investment perspective, there may not be a significant impact as the flows are mainly driven by various factors such as market opportunities and the geopolitical environment, which remains conducive from India’s perspective
Maulik Doshi, Managing Director at Nexdigm
India's appeal, driven by a vast consumer base, cost-effective labour, and strategic location, could continue to attract Swiss investments despite the higher tax burden.
Alternative Markets for Swiss Investment: Southeast Asia and Africa as Potential Destinations
While Switzerland may explore alternative markets for trade and investment, the potential risks of shifting focus away from India are significant. Southeast Asian countries like Vietnam, Indonesia, and Bangladesh, as well as African nations like Kenya, may offer emerging market opportunities, but they come with their own set of challenges.
Countries like Vietnam, Indonesia, and Thailand offer growing economies and favourable investment climates while Latin American countries like Mexico and Chile offer stable economies and skilled workforces. However, shifting focus from India carries its own risks. Emerging markets can be volatile and susceptible to economic fluctuations. Some countries might have less stable political environments run predictable regulatory frameworks
Yeeshu Sehgal, Head of Tax Markets at AKM Global
While this may be considered commercially and necessary adjustments may be made in relation to calculations regarding return on investment, it is unlikely to impact the investments flowing into India from Switzerland. Investments from Switzerland into India are primarily strategic in nature and made not only due to the lower rate of tax on dividend income
Kumarmanglam Vijay, Partner at JSA
India's Strategy to Mitigate MFN Suspension Impact: Strengthening Bilateral Relations
India can take several steps to mitigate the negative impact of the MFN suspension and maintain its position as an attractive investment destination for Swiss investors. Rajat Mohan emphasizes the importance of strengthening bilateral ties: “India should proactively engage Switzerland in bilateral negotiations to clarify investment security and trade continuity.”
In addition, India could offer sector-specific incentives, especially in high-value areas such as pharmaceuticals, fintech, and precision manufacturing, to attract Swiss investors. Furthermore, India’s domestic market offers ample growth opportunities that Swiss companies may find compelling, especially in the context of initiatives like "Make in India" and production-linked incentives (PLIs).
Rajesh Nangia underscores the potential of these domestic measures: “India remains one of the world’s fastest-growing economies, offering a vast consumer base, diverse investment opportunities, and a strategic role in global supply chains.”
The bone of contention
The Most-Favored Nation (MFN) clause in tax treaties ensures a country provides equal or better tax treatment to residents of one country as it does to residents of any third country which has entered into DTAA afterwards. India’s DTAAs with Switzerland include this clause, where the benefit of a lower rate, if extended to another OECD member country, would also apply between India and Switzerland.
On 13 August 2021, the Swiss had unilaterally extended the beneficial rate of 5% (as available in the treaty India has with Lithuania and Colombia). It is to be noted that Lithuania and Colombia became members of the OECD at a later point in time and were not OECD members when the treaty was signed with these countries. Such a reading was applicable only if India reciprocated with a similar interpretation.
The Indian Supreme Court in the case of Nestle S.A. held that the benefit of a lower rate of tax to another country would not be read into the MFN clause just by another country becoming a member of the OECD (where it was not a member of the OECD when the treaty was entered into with that country). Since the Indian Supreme Court didn’t provide any reciprocity to the Swiss interpretation of the MFN clause, the Swiss Government deemed it fit to suspend the benefit granted, but prospectively from 1 Jan 2025.
Please note that it is not the suspension of the MFN clause by the Swiss Government, but rather that the MFN clause still remains, but it cannot be applied in treaties entered into with countries that became OECD members after the signing (i.e., Lithuania and Colombia).