Switzerland cancels MFN status to India, raising taxes on Indian firms

BERN: Switzerland has suspended the Most Favoured Nation (MFN) status under the Double Taxation Avoidance Agreement (DTAA) with India, a move that could result in higher taxes for Indian companies operating in Switzerland and potentially affect Swiss investments in India.

In a statement, the Swiss Finance Department explained that the decision follows a 2023 ruling by the Supreme Court of India, which clarified that the MFN clause does not automatically apply when a country joins the OECD [Organisation for Economic Co-operation and Development] if India had signed a tax treaty with that country before its OECD membership.

The controversy arose when India signed tax treaties with Colombia and Lithuania, offering lower tax rates on certain income types. After these countries joined the OECD, Switzerland argued that the MFN clause should apply, reducing the tax rate on dividends between India and Switzerland from 10% to 5%. However, following the suspension of the MFN status, Switzerland will revert to the 10% tax rate on dividends, effective January 1, 2025.

The move means that Indian tax residents who claim refunds for Swiss withholding tax and Swiss tax residents who claim foreign tax credits will face the higher tax rate of 10% on dividends. This development could disrupt the tax benefits previously available to Indian firms and investors in Switzerland, leading to potential financial implications for both countries’ business dealings.