New Implications for Swiss Investments in India
What Led to Switzerland’s Suspension of the MFN Clause?
On December 11, 2024, Switzerland made the significant decision to suspend the Most-Favoured-Nation (MFN) clause in its Double Taxation Avoidance Agreement (DTAA) with India. The suspension follows a 2023 Supreme Court ruling in India, which held that the DTAA provisions cannot be enforced unless formally notified under the Income-Tax Act.
This ruling disrupted the tax framework for Swiss companies operating in India, including industry leaders like Nestlé, who will now face higher taxes on dividends from Indian operations. The MFN clause, which previously offered tax advantages, has been suspended, leaving Swiss firms at a disadvantage starting in 2025.
Impact of the Supreme Court’s Ruling on Swiss Companies
The Indian Supreme Court’s ruling has far-reaching consequences for Swiss businesses in India. Previously, the MFN clause ensured that Swiss companies would not face double taxation, allowing them to benefit from a lower tax burden on income derived from India.
However, the new legal landscape means that Swiss firms, including Nestlé, will be taxed at a higher rate on dividends and other income generated in India. This significant shift in tax policy could deter Swiss companies from making further investments or expanding their operations in India. It also raises concerns about the future profitability of Swiss companies with large operations in the Indian market.
Potential Consequences for Swiss-Indian Trade Relations
The suspension of the MFN clause has the potential to strain the broader economic relationship between Switzerland and India. For decades, Switzerland has been a reliable source of foreign investment in India, with numerous Swiss multinational companies, including Nestlé, Novartis, and ABB, running major operations in the country.
With the new tax rules in place, Swiss companies may reconsider their Indian market strategies. If the tax burden becomes too high, many firms may redirect their investments to other regions with more favorable tax environments, potentially diminishing the level of foreign direct investment flowing into India.
Can the $100 Billion Investment Plan Survive?
The timing of Switzerland’s MFN clause suspension is particularly concerning for India, as it coincides with a major $100 billion investment deal signed with the European Free Trade Association (EFTA) in March 2024. The deal, which involves substantial Swiss investment in India over the next 15 years, could now be jeopardized by the sudden shift in tax policy.
Swiss companies may now be hesitant to follow through on their commitments to the investment plan, especially given the increased tax burden. As a result, the $100 billion deal could face delays, renegotiations, or a reduction in the scope of investment if Switzerland’s companies decide to cut back on their exposure to the Indian market.
Looking Ahead: The Future of Switzerland-India Business Ties
As the situation unfolds, both India and Switzerland will need to find a way to resolve the current tax dispute. Diplomatic negotiations will likely be required to address the concerns of Swiss businesses and protect the $100 billion investment deal.
For India, retaining investor confidence is key. For Switzerland, it will be essential to strike a balance between protecting its tax interests and maintaining its position as a key investor in India’s rapidly growing economy. The outcome of these discussions will determine the future of the bilateral trade relationship.
Switzerland’s suspension of the MFN clause could create significant challenges for Swiss businesses operating in India, particularly those with substantial investments like Nestlé. The shift in the tax landscape threatens to undermine the $100 billion investment deal between India and the European Free Trade Association, raising questions about the future of Swiss-Indian trade relations.
