Switzerland withdraws Most Favoured Nation status from India, cites Nestle verdict

In retaliation, Switzerland has withdrawn India’s Most Favoured Nation (MFN) status, resulting in higher tax implications for Indian enterprises operating in the central European country.

The Swiss move came after India’s Supreme Court rejected the automatic application of the MFN clause under the bilateral tax treaty in a case involving Swiss firm Nestle.

In an order dated December 11, the Swiss government stated that the Supreme Court’s decision shows that the Indian side does not share Switzerland’s interpretation of the MFN clause under the Double Taxation Avoidance Agreement. As a result, it announced that it would waive its unilateral application of the MFN clause beginning January 1, 2025.

As a result, income earned on or after January 1, 2025, may be subject to higher Swiss tax rates. The applicable residual rates for dividends paid by Indian enterprises in Switzerland would now be 10% rather than 5% under the MFN clause.

The MFN clause allows for a reduction in the rate of taxation at source on profits, interest, royalties, or fees for technical services, similar to concessions granted to other nations with comparable tax treaties.

“Switzerland’s decision represents a shift in bilateral treaty dynamics…” This move highlights the growing emphasis on reciprocity and mutual agreement in the interpretation of treaty provisions,” said Sandeep Jhunjhunwala, M&A tax partner at Nangia Andersen.

Tax professional expressed fear that more countries may follow similar.

“Switzerland believes that it is not receiving the same treatment from India as other nations with more favourable tax treaties. “The main reason is reciprocity, which ensures that taxpayers in both countries are treated equally and fairly,” he explained.