Switzerland suspends Most Favoured Nation (MFN) Clause in Tax Treaty with India over Nestle ruling

Posted 16 Dec 2024

2 min read

Starting from January 1, 2025, Switzerland will suspend MFN clause in its Double Taxation Avoidance Agreement (DTAA) with India.

The decision is followed by Supreme Court ruling in 2023, determining that MFN clause isn't automatically triggered when a country joins OECD if Indian government signed a tax treaty with that country before it joined the organisation.
SC said that DTAA cannot be enforced unless it is notified under Income-Tax Act, 1961.
India-Switzerland DTAA was entered into force in 1994 for the avoidance of double taxation with respect to taxes on income.

Impact of suspension of MFN

Higher tax liabilities for Indian companies: More tax burden, as withholding tax on dividends from Switzerland will rise to 10% from 5%.
Effects on Swiss investments in India: Swiss companies that receive dividends from India will continue to face a 10% withholding tax, as per India-Switzerland DTAA.
Re-evaluation of MFN clauses by other countries: This could prompt other nations to reconsider how MFN clause is applied in their own tax treaties with India.
No change for other DTAA benefits or European Free Trade Association (EFTA) investments will remain unaffected.

Definition: MFN principle requires that any favourable trading terms granted by one WTO member to another must be extended to all other WTO members.
Purpose: Promote equality in international trade by preventing discrimination and ensuring that all members are treated equally.
MFN is a priority in General Agreement on Trade in Services (GATS) (Article 2) and Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4).