The decision follows India’s Supreme Court ruling in October 2023 in a case involving Swiss multinational Nestle SA.
The court had held that the MFN clause under the DTAA does not get automatically triggered until notified under the Income Tax Act, 1961. “On the basis of the Indian Supreme Court ruling, the Swiss competent authority acknowledges that its interpretation of para 5 of the Protocol to the IN-CH DTA is not shared by the Indian side,” said a recent statement issued by the Swiss authorities. “In the absence of reciprocity, it therefore waives its unilateral application with effect from 1 January 2025.”
Switzerland said, however, that income accruing during the 2018-2024 tax years will not be impacted by this change. Experts said the move has implications for investment commitments of over $100 billion made under the four-nation European Free Trade Agreement (EFTA) inked with India in March. “This would especially impact Indian companies having overseas direct investment structures with subsidiaries in Switzerland and will raise the Swiss withholding tax on dividends from 5% to 10% from January 1, 2025,” said Kumarmanglam Vijay, partner, JSA Advocates & Solicitors.
BROADER IMPACT
Experts said the suspension may not only lead to increased tax liabilities for Indian entities operating in Switzerland but may have a broader impact. “Switzerland’s decision to suspend the unilateral application of the MFN clause under its tax treaty with India, marks a significant shift in bilateral treaty dynamics,” said Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen.“Grounded in the Indian apex court’s Nestle ruling, which rejected the automatic applicability of MFN clause, this move underscores the growing emphasis on reciprocity and mutual agreement in the interpretation of treaty provisions.”