Swiss Authorities suspend MFN Status for India after SC ruling in Nestle Case

Recently, the Swiss authorities suspended the Most Favoured Nation (MFN) status granted to India, following an adverse ruling by the Supreme Court of India in a Nestle case. This decision, which impacts the taxation of dividends and income generated by Indian entities in Switzerland, underscores the complexities in interpreting international tax treaties. The court observed that the MFN clause could only be directly applied with proper notification under Section 90 of the Income Tax Act.

In 2021, the Delhi High Court upheld the application of residual tax rates under the MFN clause in the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland. However, the Supreme Court of India reversed this ruling in October 2023, holding that the MFN clause required formal notification to be enforceable. This decision directly affected the tax treatment of dividends earned by Indian entities in Switzerland, prompting the Swiss authorities to reassess the application of the MFN clause.

The petitioner’s counsel argued that the MFN clause in the DTAA automatically granted Indian entities reduced tax rates without requiring additional notification, ensuring equitable treatment for taxpayers. Conversely, the respondent’s counsel maintained that the absence of a formal notification under Section 90 of the Income Tax Act rendered the MFN clause inapplicable, as it failed to meet procedural requirements for enforcement.

The Supreme Court provided a detailed interpretation of the MFN clause’s application. It observed that the clause “was not directly applicable in the absence of notification” as required under Section 90 of the Income Tax Act. The court clarified that tax treaties must be read in conjunction with domestic laws, and any treaty benefit, including the MFN clause, requires explicit recognition through a notification. Without such procedural compliance, relying on the clause for automatic application could lead to inconsistent and unintended outcomes.

The Court further noted that the MFN clause’s purpose is to ensure uniformity and equity in tax treatment across treaty partners, but this objective must align with domestic legislative processes. It held that the absence of a notification reflected a lack of actionable intent by the authorities to implement the clause, thereby invalidating its operational status. The judgment highlighted that unilateral interpretation of tax treaty provisions could undermine the stability and predictability essential in international agreements.

The Court ruled that the MFN clause could not be enforced without the requisite notification under Section 90 of the Income Tax Act. By overturning the Delhi High Court’s decision, the court reaffirmed the importance of procedural compliance for treaty provisions. Following this decision, Switzerland announced the suspension of the MFN status for India, increasing withholding tax rates on dividends earned by Indian entities in Switzerland from January 1, 2025, from 5% to 10%.

The suspension of the MFN clause signifies a shift in bilateral treaty dynamics, as noted by tax experts. Indian entities will face higher tax liabilities, potentially affecting cross-border investments and business operations in Switzerland. Experts also underscored the importance of aligning treaty interpretations to maintain stability, predictability, and equity in international taxation frameworks. The decision serves as a reminder of the complexities involved in navigating international tax treaties amidst evolving legislative landscapes.