Why has Switzerland suspended ‘Most-Favoured Nation’ standing to India?

In a transfer set to have far-reaching affect on Indian corporations working in Switzerland and Swiss investments in India, Switzerland has introduced it can droop the Most-Favoured Nation (MFN) standing with India, efficient January 1, 2025.

This unilateral motion from the European nation stems from a double taxation avoidance settlement (DTAA) between the 2 international locations.

On December 11, the Swiss finance division issued an official assertion, pointing to a 2023 ruling by the Supreme Courtroom of India within the
Nestle case as the rationale for this important resolution.

However what precisely does the Most-Favoured Nation standing imply? Why has Switzerland determined to revoke it? And the way will this affect Indian companies? Let’s take a more in-depth look.

What’s the MFN standing between India and Switzerland?

The Most-Favoured Nation (MFN) standing is a time period generally utilized in worldwide commerce agreements to make sure that a rustic extends the very best remedy or tariff charges to at least one nation, which it presents to others below related circumstances.

In tax treaties, such because the Double Taxation Avoidance Settlement (DTAA) between India and Switzerland, the MFN clause ensures that the decrease tax charges utilized to residents of different OECD international locations are prolonged to the treaty associate as properly.

The OECD, or Organisation for Financial Co-operation and Growth, was established in 1961 in Paris. It serves as a discussion board and information hub for information, evaluation, and greatest practices in public coverage, aiming to construct stronger, fairer, and cleaner societies- serving to to form higher insurance policies for higher lives.

The OECD collaborates intently with policymakers, stakeholders, and residents to create evidence-based worldwide requirements and deal with social, financial, and environmental challenges.

India and Switzerland initially signed the DTAA in 1994, with amendments made in 2010.

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Background

India had beforehand signed tax agreements with Lithuania and Colombia, which set decrease tax charges on sure sorts of revenue in comparison with these provided to OECD international locations. Each of those international locations later grew to become members of the OECD.

In 2021, Switzerland interpreted that the accession of Colombia and Lithuania to the OECD meant {that a} 5 per cent tax fee on dividends would apply to the India-Switzerland tax treaty below the MFN clause, as an alternative of the ten per cent fee specified within the settlement.

Nonetheless, a Supreme Courtroom ruling throughout a long-standing case between AO v. Nestle SA over the interpretation of the MFN standing in the end resulted in a call that went towards Switzerland’s expectations.

What was the Supreme Courtroom’s ruling?

In keeping with the assertion by Switzerland’s finance division, in 2021, the Delhi Excessive Courtroom whereas listening to the case towards Nestle, upheld the applicability of the residual tax charges after taking into consideration the MFN clause below the double tax avoidance treaty.

This was in keeping with how Switzerland had interpreted it and ensured that corporations and people weren’t topic to double taxation whereas working in or for international entities.

Nonetheless, the Indian Supreme Courtroom, in a call dated October 19, 2023, reversed the decrease court docket’s resolution and concluded that the MFN clause between two nations doesn’t routinely apply when a rustic joins the OECD. It added that the prior tax treaty takes priority in such instances until the MFN clause is particularly talked about in a ’notification’ in accordance with Part 90 of the Revenue Tax Act.

Switzerland opposes SC ruling, revokes MFN standing

Switzerland has responded to the state of affairs by unilaterally revoking India’s MFN standing, explicitly citing the “Indian Supreme Courtroom” as the rationale for its resolution.

Which means that beginning January 1, 2025, Switzerland will impose a ten per cent tax (up from the present 5 per cent) on dividends payable to Indian tax residents and entities searching for refunds for Swiss withholding tax. The identical will apply to Swiss tax residents claiming international tax credit.

In an official assertion, the Swiss Finance Division cited the “2023 ruling by the Indian Supreme Courtroom” and introduced the “Suspension of the appliance of the MFN clause of the protocol to the settlement between the Swiss Confederation and the Republic of India for the avoidance of double taxation with respect to taxes on revenue.”

How will it affect companies?

Switzerland’s resolution to revoke India’s MFN standing is seen by consultants as a retaliatory step following the Supreme Courtroom ruling, whereas others interpret it as a measure of reciprocity.

Nangia Andersen M&A Tax Associate, Sandeep Jhunjhunwala, described the unilateral suspension of the MFN clause as a big shift in bilateral treaty dynamics.

“This suspension could result in elevated tax liabilities for Indian entities working in Switzerland, highlighting the complexities of navigating worldwide tax treaties in an evolving international panorama,” he instructed PTI.

He additional emphasised the significance of treaty companions aligning on the interpretation and software of tax clauses to make sure “predictability, fairness, and stability within the worldwide tax framework.”

AKM World Tax Associate, Amit Maheshwari, identified that reciprocity is the first cause for Switzerland’s resolution.

“Swiss authorities introduced in August 2021 that primarily based on the MFN clause between Switzerland and India, the tax fee on dividends from qualifying shareholdings can be lowered from 10 per cent to five per cent, efficient retroactively from July 5, 2018. Nonetheless, the next Supreme Courtroom ruling in 2023 contradicted this,” Maheshwari instructed PTI.

He added that this transformation may affect Swiss investments in India, as dividends will now face increased withholding tax charges. From January 1, 2025, revenue earned could also be taxed at charges outlined within the authentic double taxation treaty, whatever the MFN clause.

JSA Advocates & Solicitors Associate, Kumarmanglam Vijay, highlighted that this may notably have an effect on Indian corporations with abroad direct funding (ODI) constructions involving subsidiaries in Switzerland. The Swiss withholding tax on dividends will enhance from 5 per cent to 10 per cent beginning January 1, 2025.

With enter from businesses