Switzerland suspends MFN for India citing lack of reciprocity

Switzerland has suspended the most favoured nation (MFN) clause in a bilateral tax treaty with India following the Indian Supreme Court's decision last year, adding an extra procedural layer and making the applicability of the provision non-automatic, in a tax dispute involving Nestle SA.

- Gireesh Chandra Prasad

An order from the Swiss government showed that cross-border dividend payments would be subject to 10% tax at source from 1 January, as per the bilateral tax treaty between the two nations, rather than a 5% rate that the Swiss competent authority had said would apply in August 2021.

However, for the tax years between 2018 and 2024, the 5% tax would apply, and the increase applies from next year, the Swiss government order said. This means the tax rate on dividends received by Indian investors from Swiss entities would go up from January. As far as the tax rate on the dividends issued by Indian entities to their Swiss investors is concerned, there won't be any change as the Indian position has been that the 10% rate specified in the tax treaty was the applicable rate, experts explained.

That is, the proposed change in tax rate could hurt India's investments in the European nation, while the Supreme Court ruling last year may have delivered a similar impact on inbound investments from Switzerland, although such changes would only be visible over a period of time, experts said.