Switzerland to Suspend Most Favored Nation (MFN) Clause for India

Switzerland has announced the suspension of the Most Favored Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, effective January 1, 2025. This decision, made public on December 11, 2024, marks a significant shift in the tax landscape for Indian companies operating in Switzerland, as they will face increased tax liabilities on income derived from Swiss investments.

Key Details of the MFN Suspension

The Swiss government cites a ruling by the Indian Supreme Court in October 2023 as a pivotal factor behind this decision. The court clarified that benefits under the MFN clause require explicit notification from the Indian government under the Income Tax Act. This ruling introduced complexities regarding how tax treaties are implemented and interpreted between countries. Consequently, Switzerland has opted to suspend its unilateral application of the MFN clause due to a lack of reciprocal acknowledgment from India.

Starting January 1, 2025, Indian companies will see their withholding tax on dividends from Swiss entities increase from 5% to 10%. This change directly impacts Indian firms that have previously benefited from lower tax rates due to the MFN clause. The higher tax burden is expected to affect various sectors including IT, pharmaceuticals, and financial services, where Indian firms have substantial operations.

Despite the immediate tax implications, Swiss officials have stated that this suspension is unlikely to affect the broader investment commitments made under the recent Trade and Economic Partnership Agreement (TEPA) between India and the European Free Trade Association (EFTA), which includes Switzerland. The TEPA is expected to facilitate up to $100 billion in foreign direct investment over the next 15 years.

Commerce Secretary Sunil Barthwal emphasized that while the MFN suspension may create short-term challenges for Indian businesses, it should not undermine the long-term economic cooperation and investment goals established under the TEPA.

As Indian companies prepare for these changes, they may need to reassess their tax planning strategies and consider alternative investment routes or adjustments to existing agreements with Swiss counterparts. The shift underscores the importance of clear communication and mutual understanding in international tax agreements to maintain stability and predictability in cross-border investments.

Why Switzerland has suspended India’s MFN status

Switzerland cites a 2023 Indian Supreme Court ruling, involving Nestle SA and others, as the basis for this change. The Court had clarified in its judgment that the benefits under the MFN clause require explicit notification by the Indian government under the Income Tax Act, introducing procedural complexities to treaty implementation.

Given the Swiss government’s differing interpretation of the DTAA’s Protocol between the two nations, it announced it would suspend unilateral implementation of the MFN clause in the absence of reciprocal acknowledgment.

With this decision, Indian entities operating in Switzerland will pay higher taxes from January 1, 2025, onwards. The MFN clause between India and Switzerland was introduced as part of the Protocol to the DTAA signed between the two countries in 1994.

Switzerland’s suspension of the Most Favored Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India, effective January 1, 2025, is not expected to adversely impact the recently signed Trade and Economic Partnership Agreement (TEPA) between India and the European Free Trade Association (EFTA).

Impact on the EFTA Agreement

India’s Commerce Secretary, Sunil Barthwal, has stated that the Swiss decision to withdraw the MFN status will not affect the $100 billion investment commitment made by EFTA countries under the TEPA. He emphasized that this investment commitment is viewed as a separate issue from the MFN clause suspension and remains intact despite the change in tax treatment for Indian firms operating in Switzerland.

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The TEPA, signed in March 2024, aims to facilitate foreign direct investment (FDI) of up to $100 billion over the next 15 years from EFTA nations, which include Switzerland, Iceland, Norway, and Liechtenstein. This agreement is expected to create approximately one million jobs in India and enhance trade relations across various sectors such as pharmaceuticals, manufacturing, and technology.

While the MFN clause suspension may increase tax burdens on Indian companies in Switzerland—particularly affecting sectors like IT and pharmaceuticals—India retains options for remedial actions under the TEPA. Should EFTA members fail to meet their investment commitments, India can consider partial withdrawal of tariff concessions granted under the agreement.

While Swiss firms may face higher taxes on their earnings from Indian investments due to the MFN withdrawal, this development is not anticipated to derail the broader objectives of economic cooperation and investment outlined in the EFTA trade agreement. The commitment from EFTA nations remains robust, focusing on long-term economic growth and mutual benefits.

While the suspension of Switzerland’s MFN status for India introduces new tax challenges for Indian businesses, it does not appear to jeopardize broader economic ties or investment commitments between India and Switzerland.

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