The Suspension of the MFN Clause Explained
Switzerland’s recent decision to suspend the Most-Favoured-Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India is a result of a 2023 ruling by the Indian Supreme Court. The court declared that the provisions of the DTAA could not be enforced unless formally incorporated into India’s Income-Tax Act.
This suspension, effective from January 2025, means that Swiss companies operating in India will no longer receive the preferential tax treatment they previously enjoyed. The MFN clause had ensured that Swiss investors were not subject to double taxation, a status now at risk.
Impact on Nestlé and Other Swiss Companies in India
Swiss corporations, including Nestlé, are set to face higher tax obligations on dividends following the suspension. Nestlé, with a substantial presence in India, will likely see its financial performance affected due to increased tax rates on its Indian profits.
This shift is part of a broader trend where Swiss investors may feel discouraged from further investing in India due to the uncertain tax environment. The potential for increased tax burdens could lead Swiss companies to reevaluate their strategic positioning in India.
Indian Firms Now Face Higher Taxes in Switzerland
The suspension of the MFN clause also brings challenges for Indian companies in Switzerland. IT giants, pharmaceutical firms, and manufacturers will face increased taxes on royalties, interest, and dividends starting January 2025.
This will raise operational costs and could reduce the profitability of Indian companies that rely on Switzerland as a base for European operations. The change may cause businesses to reconsider their Swiss operations or seek more favorable tax jurisdictions.
Will the $100 Billion Investment Plan Be Affected?
The timing of Switzerland’s decision to suspend the MFN clause could have significant consequences for the $100 billion investment commitment between India and the European Free Trade Association (EFTA). With Swiss companies being the main contributors to this investment plan, there is growing concern that the suspension of favorable tax treatment could lead to delays or reductions in investments.
Swiss officials have already signaled that tax issues must be addressed to protect long-term economic cooperation between India and Switzerland. The future of this historic investment deal will depend on how quickly the two nations can come to an agreement on the tax issues at hand.
India and Switzerland: Where Do They Go From Here?
Both India and Switzerland will need to engage in discussions to resolve the tax uncertainties created by the suspension of the MFN clause. As the global business environment continues to evolve, it will be essential for both countries to find a way to balance taxation fairness with promoting trade and investment.
For India, the priority will be to maintain its attractiveness as an investment hub, while for Switzerland, it will be vital to ensure that its firms can continue to operate competitively in the Indian market.
Conclusion
Switzerland’s suspension of the MFN clause will have profound effects on both Swiss investments in India and the operations of Indian firms in Switzerland. With a potential threat to the $100 billion investment agreement, both nations must act swiftly to address the taxation issues and restore investor confidence.
