 "Displeased with India’s decision regarding Nestlé, Switzerland took a big decision, know who will be affected by it")
After the Supreme Court of India’s verdict on the famous Swiss company Nestlé, Switzerland has suspended the Most Favored Nation status granted to India. Switzerland has cited a Supreme Court ruling in 2023 in a case involving Nestlé as the reason for its decision to withdraw MFN status. Countries with Most Favored Nation status give each other special concessions in trade. Switzerland’s finance ministry issued a statement on December 11, saying the move follows a Supreme Court ruling in India last year, which said that if the Indian government had a tax treaty with a country before it joined the OECD. If the agreement is concluded, the MFN chapter does not apply.
What will be the impact of removal of MFN status: Indian companies will have to pay higher taxes in Switzerland due to cancellation of this status. India signed tax treaties with Colombia and Lithuania, under which tax rates on certain types of income were lower than those offered to OECD countries. Both countries later joined the OECD. In 2021, Switzerland explained that the accession of Colombia and Lithuania to the OECD meant that a 5 percent rate would apply to dividends on the India-Switzerland tax treaty under the MFN clause, instead of the 10 percent stipulated in the agreement.
After the suspension of MFN status, the effect of this decision will be that Switzerland will impose a 10 percent tax on dividends received by Indian companies from January 1, 2025. Indians claiming refund for Swiss withholding tax will have to pay this. In the statement, the Swiss Department of Finance announced the suspension of MFN status under the Protocol to the Agreement between the Swiss Confederation and India for the avoidance of double taxation with respect to taxes on income.
What was the decision of the Supreme Court of India against Nestlé?
In a case involving Vevey-headquartered Nestlé, the Supreme Court of India had ruled on October 19 last year that the DTAA cannot be implemented unless it is notified under the Income Tax Act. The effect of this was that Swiss companies such as Nestlé would have to pay higher taxes on dividends.
What do experts say about Switzerland’s decision?
According to Sandeep Jhunjhunwala, tax partner at Nangia Andersen M&A, a unilateral suspension would actually have a negative impact on the bilateral treaty. This will increase the tax liabilities for Indian companies operating in Switzerland, he said.