MFN clause freeze won’t hit investments in India: Switzerland

Switzerland’s decision to suspend the Most Favoured Nation (MFN) treatment for India under the two countries’ 30-years old double-taxation avoidance agreement (DTAA) from January 1 will neither affect the free trade deal recently reached between the European Free Trade Association (EFTA) nations nor affect Swiss investments into India, the country’s officials told The Hindu.

While Indian officials said they will go into the details of the Swiss move, they indicated that double taxation treaty with the EFTA-bloc nation is going to be renegotiated in light of the EFTA-India Trade and Economic Partnership Agreement (TEPA) agreed upon this year.

In a statement dated December 11, Swiss authorities had announced that the MFN clause under the DTAA was being suspended, as India’s apex court had held that it does not get automatically triggered until it is notified by the government under the Income Tax Act of 1961. Indian companies operating in Switzerland currently benefit from a reduced tax rate of 5% on dividends and other incomes, but will be liable to pay 10% tax from the coming year.

The TEPA signed with the four-nation EFTA bloc is a unique free trade agreement, as it includes a binding commitment of $100 billion investment and the creation of one million direct jobs in India by companies from those four countries over the next 15 years.

Asked if the MFN clause suspension could dent the TEPA pact hopes, a Swiss embassy official in New Delhi said there is no direct impact on the EFTA-India TEPA. “In particular, this week’s decision does not negatively affect investment from Switzerland to India,” the official said.

“The question of the interpretation by Switzerland and India of the most-favoured-nation clause concerns the residual tax rate applicable to dividends based on the double taxation agreement paid by a company of one contracting state to a resident of the other contracting state. However, the change in this residual rate has no impact on the validity of the double taxation agreement as such, or on any other treaties under international law concluded between Switzerland (independently or under the EFTA framework) and India,” the official emphasised to The Hindu.

India’s External Affairs Ministry spokesperson Randhir Jaiswal said the double taxation treaty with Switzerland is to be renegotiated because of the TEPA deal with EFTA nations.

The suspension of the MFN clause by Switzerland was triggered by an October 2023 ruling against its validity by the Supreme Court on 11 petitions that were combined with a plea by Swiss major Nestle SA.

“This suspension basically adapts the Swiss interpretation of the most favoured nation clause to the one taken by India and confirmed by its Supreme Court,” explained a Swiss trade expert.

While Switzerland had, in 2021, granted the 5% residual tax rate for Indian firms retroactively with effect from July 2018, the Indian competent authority, on the other hand, did not grant reciprocity in applying the MFN clause towards Switzerland, and this decision was upheld by the apex court last year, he pointed out.