Double Tax for Indians: Switzerland Removes Most Favoured Nation Status for India

Switzerland has suspended the "Most Favoured Nation" (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. This move could impact Swiss investments in India and increase taxes for Indian companies operating in Switzerland.

A statement released by the Swiss Finance Department on December 11 states that this decision is in line with a decision made by the Indian Supreme Court last year, which held that if India had a tax treaty in place prior to joining the OECD, the MFN clause would not automatically take effect.

What does it Mean?

The dividend tax rate for Indian businesses operating in Switzerland will rise to 10% on January 1, 2025. Compared to the prior rate of 5%, this represents a double increase in taxation. The modification will increase Indian companies' tax obligations, which will affect their ability to compete in the Swiss market.

Why did Switzerland Took Away MFN Status from India?

The Indian Supreme Court ruled that the MFN clause does not automatically apply to countries that join the OECD after a tax treaty is signed. This decision highlighted that Switzerland’s earlier interpretation of the MFN clause did not align with India’s position. As a result, Switzerland recognized this difference and decided to suspend the MFN provision.

How will Indian Companies be Affected?

Indian companies operating in Switzerland will face a less favorable tax environment as a result of the MFN clause's elimination. Companies of Indian businessman will have to pay higher taxes in comparison to businesses from nations that retain MFN status. This change in the status might discourage further Indian investments in Switzerland.

What Happens Now?

According to experts, Switzerland's decision of revoking MFN status might persuade other countries to reevaluate their tax arrangements with India. The recent trend in focusing on reciprocity shows that now nations are assessing how equitable their taxation is. This pattern may cause other jurisdictions to follow suit, changing the nature of international taxation.

The tax pact between Switzerland and India was originally signed in 1994. In 2000 and 2010, the agreement was updated to reflect changing economic circumstances. The goal of these modifications was to let the two nations' financial connections run more smoothly.

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