Switzerland has announced the suspension of the Most Favored Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. The official announcement came on December 11, 2024, with the suspension taking effect from January 1, 2025. This development represents a significant shift in the India-Switzerland tax framework, especially for Indian companies that have investments or business interests in the Swiss market.
Under the current DTAA, the MFN clause allows Indian firms to benefit from reduced tax rates if Switzerland offers more favorable tax treatment to another country. By removing this clause, Switzerland has made it clear that Indian businesses will now be subject to standard Swiss tax rates, which may increase their financial liabilities.
Indian Supreme Court ruling on MFN clause prompts Swiss withdrawal
Switzerland’s decision follows a key legal interpretation in India. In 2023, the Indian Supreme Court delivered a verdict involving Nestlé SA and other foreign entities. The Court ruled that MFN benefits under any DTAA cannot apply automatically. Instead, such benefits require formal notification from the Indian government under the Income Tax Act.
This legal clarification introduced a new procedural requirement. In Switzerland’s view, India has not provided the necessary reciprocal acknowledgment. Therefore, Swiss authorities concluded that continuing the unilateral implementation of the MFN clause was no longer practical or legally justified.
Government officials in Bern described the decision as a technical and legal step, not a reflection of strained diplomatic ties with India. They emphasized that this change was due to a lack of procedural alignment, not a withdrawal from broader cooperation.
Indian businesses now face higher tax costs on income from Swiss investments
With the MFN clause suspended, Indian firms that earn income in Switzerland—such as dividends, interest, or royalties—will likely face higher withholding tax rates. In the past, Indian businesses could take advantage of lower rates when Switzerland signed better treaties with other nations. Without the MFN clause, this flexibility disappears.
This change adds a financial burden, especially for sectors like pharmaceuticals, information technology, and manufacturing—industries that often have cross-border income streams linked to Switzerland. Many of these companies will now need to re-evaluate their international tax strategies and possibly revise existing agreements or investment models.
Tax advisors and corporate legal teams are expected to take a more cautious approach moving forward. They will likely conduct in-depth analyses of treaty benefits and realign business structures to minimize potential losses.
TEPA agreement and $100 billion FDI commitment remain unchanged
Although the MFN clause has been suspended, India’s economic partnership with Switzerland remains strong. Commerce Secretary Sunil Barthwal clarified that this tax-related decision will not affect the broader Trade and Economic Partnership Agreement (TEPA) signed between India and the European Free Trade Association (EFTA) countries.
Under TEPA, EFTA nations—including Switzerland—have committed $100 billion in foreign direct investment over the next 15 years. Barthwal reassured stakeholders that this commitment is strategic and long-term. He called the MFN clause issue a technical matter that should not interfere with economic cooperation or growth plans.
The TEPA agreement focuses on boosting trade, innovation, technology transfer, and business development across sectors. With this broader vision in mind, both sides appear committed to keeping investment flows stable and growing, despite the temporary tax challenges.
Swiss companies may face reciprocal tax changes in India
The MFN clause suspension may also have repercussions for Swiss companies doing business in India. If India revises its stance on the treaty, Swiss investors could lose favorable tax treatment on their Indian income. Though Indian authorities have not announced any direct countermeasures, experts warn that reciprocity is common in international tax negotiations.
To avoid economic disruption, tax departments in both countries are expected to engage in negotiations. These talks could lead to new treaty adjustments or clarifications aimed at preventing double taxation and safeguarding business confidence.
Industry leaders have already urged both governments to maintain a stable tax environment. Most observers agree that this episode will push both nations toward clearer frameworks that balance legal interpretations with economic goals.
Long-term bilateral trade and investment ties remain strong despite tax challenges
Despite this tax dispute, India and Switzerland continue to enjoy a robust trade and diplomatic relationship. Bilateral trade in goods and services has grown steadily over the years, supported by partnerships in finance, pharmaceuticals, machinery, IT, and clean energy.
Officials from both countries have emphasized that the MFN clause issue will not derail broader cooperation. As long-term partners, India and Switzerland have shown resilience in managing policy differences without letting them harm strategic goals.
Investment inflows from Switzerland to India have remained steady and diversified, and Indian companies continue to explore opportunities in the Swiss market. Both countries also collaborate in research, higher education, and sustainable development, adding more depth to their relationship.
MFN clause suspension is a legal recalibration, not a setback
Switzerland’s decision to suspend the MFN clause in its DTAA with India marks an important legal development in international tax policy. For Indian companies, this means higher tax exposure in Switzerland starting January 2025. However, the strategic goals of economic growth and partnership under TEPA remain untouched.
Both countries have reaffirmed their desire to move forward through dialogue, clarification, and continued investment in bilateral growth. The MFN clause suspension is not a rejection of cooperation—it is a step toward modernizing treaty terms and aligning legal interpretations for the future.
With strong foundations in place, India and Switzerland appear ready to adapt, evolve, and strengthen their relationship, even as they navigate the complexities of global tax frameworks.
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