Starting January 1, 2025, Switzerland will suspend the Most Favoured Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. The decision follows a 2023 ruling by the Indian Supreme Court on the enforceability of MFN clauses.

What is the Most Favoured Nation (MFN) Clause?

Definition: The MFN principle mandates that any preferential trading terms granted by one World Trade Organization (WTO) member to another must be extended to all WTO members.

Objective: Promotes equality in international trade, preventing discrimination and ensuring fair treatment among nations.

Relevance in Trade Agreements: MFN is a cornerstone of international trade agreements, including

• General Agreement on Trade in Services (GATS) – Article 2.
• Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) – Article 4.

Background of the India-Switzerland MFN Clause Suspension

Supreme Court Ruling (2023): Determined that the MFN clause is not automatically applicable when a country joins the Organisation for Economic Co-operation and Development (OECD), if the tax treaty with that country predates its OECD membership. Ruled that a DTAA clause can only be enforced if explicitly notified under the Income-Tax Act, 1961.

India-Switzerland DTAA: Signed in 1994 to prevent double taxation on income. Includes the MFN clause, which is now suspended following the court’s clarification.

Implications of the Suspension of the MFN Clause

For Indian Companies

Increased Tax Burden: Withholding tax on dividends from Swiss entities will rise from 5% to 10%, leading to higher tax liabilities.

For Swiss Investments in India

No Tax Reduction for Swiss Companies: Swiss firms receiving dividends from India will continue to face a 10% withholding tax, as per the DTAA terms.

Potential Global Repercussions

Reassessment by Other Countries: Other nations may reconsider the application of MFN clauses in their tax treaties with India.

Limited Scope of Impact

No Changes for EFTA Investments: Investments under the European Free Trade Association (EFTA) and other DTAA provisions will remain unaffected.