Switzerland- India relations

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The Nestle case, 2021, 2023: a backgrounder

Dec 15, 2024: The Times of India

Background : The IndiaSwitzerland Tax Treaty


The Double Taxation Avoidance Agreement (DTA) between India and Switzerland, signed on November 2, 1994, was created to eliminate the risk of double taxation on cross-border income and promote investment between the two nations. The treaty was amended in 2000 and 2010, with the latter amendment including a Most Favoured Nation (MFN) clause.


The MFN clause ensures that if either country grants a lower tax rate to a third country that is an OECD member, the same lower rate automatically applies to the other country. For example, if India agrees to a 5% tax rate with another OECD country, Switzerland should benefit from the same rate.


Key Issue: Diverging Interpretations Of MFN Clause


The dispute arose from differing interpretations of the MFN clause:


Switzerland’s View: The MFN clause should apply automatically to countries that join the OECD after 1994. Based on this, Switzerland unilaterally reduced the tax rate on dividends for Indian firms from 10% to 5%, citing treaties India signed with Lithuania and Colombia, which became OECD members in 2018 and 2020, respectively. India’s View: The MFN clause applies only to countries that were OECD members in 1994, when the treaty was signed. India also argued that MFN benefits are not automatic and require explicit notification under Section 90 of India’s Income Tax Act.


 Nestle’s Role: Landmark Case


Nestle, a Swiss multinational, became the central player in this dispute when it challenged India’s interpretation of the MFN clause.


Delhi High Court Ruling (2021): The court ruled in favour of Nestlé, allowing the 5% tax rate on dividends, citing the MFN clause as applicable due to Lithuania and Colombia’s treaties with India. 
Supreme Court Ruling (October 2023): India’s tax authorities appealed the case, leading to a landmark ruling by the Supreme Court of India, which:


Rejected the automatic application of the MFN clause, stating that it required explicit notification.


Limited the scope of the MFN clause to countries that were OECD members in 1994, excluding Lithuania and Colombia.
The Supreme Court overturned the lower court’s ruling, dealing a significant blow to Nestle and other Swiss companies operating in India.


Switzerland’s Response 


Following the Supreme Court ruling, Switzerland deemed India’s stance a lack of reciprocity and announced it would suspend the MFN clause in its treaty with India.


Effective January 1, 2025, Swiss firms operating in India and Indian firms operating in Switzerland will no longer benefit from the reduced 5% tax rate on dividends.


The tax rate will revert to the original 10% residual rate, increasing the tax burden on cross-border investments.


Implications For Businesses


For Indian Firms in Switzerland: Indian businesses, particularly in sectors like IT, pharmaceuticals, and financial services, will face higher tax liabilities, reducing their competitiveness.


For Swiss Firms in India: Companies like Nestle will need to factor in the higher tax rate when calculating their returns on Indian investments. Claims for refunds or credits under treaty provisions will become more complex. 
TNN