The Supreme Court’s judgment in the Nestle case is directly linked to Switzerland revoking India’s Most Favoured Nation (MFN) status. In 2023, the Supreme Court ruled that a Double Taxation Avoidance Agreement (DTAA) cannot be given effect to by a court, authority, or tribunal unless it has been notified by the Central Government under Section 90 of the Income Tax Act. This ruling came in a case involving Nestle, a Swiss company, which had sought a refund of withholding tax paid on dividends.
The MFN clause in the India-Switzerland DTAA provided for lowering of rate of taxation at source on dividends, interest, royalties, or fees for technical services. However, the Supreme Court held that the application of the MFN clause could not be automatically applied without formal notification under Section 90 of the Indian Income Tax Act. This clarification led Swiss authorities to reconsider the unilateral reduction of the withholding tax rate.
As a result, Switzerland decided to suspend the MFN clause, which will increase the dividend withholding tax rate for Indian residents and companies with Swiss investments from 5% to 10%. This move will have adverse tax implications for Indian entities operating in Switzerland, including Indian companies receiving dividends from Switzerland.
The suspension of the MFN clause is effective from January 1, 2025, and will also impact Swiss investments in India, although investments from the European Free Trade Association (EFTA) are unlikely to be affected. The decision highlights the importance of mutual agreement and clarity in interpreting international tax agreements.
