As per the recent report, Switzerland has announced the suspension of the most favoured nation (MFN) clause under its Double Tax Avoidance Agreement ( DTAA ) with India. This suspension will be  effective from January 1, 2025. This move will allow income such as dividends and royalties to be taxed in the source state at rates specified in the DTAA. The Swiss authorities stated that India’s Supreme Court ruling from October 2023 as the trigger for this decision.

In the said ruling, the Court had clarified that the MFN clause in the DTAA does not automatically apply unless formally notified under the Income Tax Act, 1961. DTAAs not to be Enforced without Central Govt. Notification u/s 90 of Income Tax Act: Supreme Court in MFN A  two-judge bench of Justice Ravindra Bhat and Justice Dipankar Datta of Supreme Court has held that a Double Taxation Avoidance Agreement ( DTAA ) cannot be given effect to by a court, authority or a tribunal unless it has been notified by the Central Government under Section 90 of the Income Tax Act, 1961. The bench observed that “the issue of treaty interpretation and treaty integration into domestic law is driven by constitutional and political factors subjective to each signatory. Therefore, domestic courts cannot adopt the same approach to treaty interpretation in a black letter manner, as is required or expected of them, while construing enacted binding law.

The role of practice which is, as the previous discussion demonstrates, not bilateral or joint practice, but practice by one, accepted generally by the international community as operating in that particular sphere, which is relevant, and at times determinative.” Become a PF & ESIC expert with our comprehensive course – Enroll Now The judgement impacted similar petitions filed by Concentrix, Optum Global, and Steria. Under the DTAA, the MFN clause allows treaty nations to avail of reduced tax rates on income such as dividends, royalties, or technical fees.

However, Switzerland’s statement highlighted that its interpretation of the MFN provision was not reciprocated by India. In the absence of reciprocity, the Swiss competent authority waives its unilateral application with effect from 1 January 2025. Due to the suspension, the withholding tax on dividends paid by Indian firms to Swiss parents, or vice versa, will increase to 10% post-2025. However, income earned between 2018 and 2024 will not be affected. The CNBC news report also pointed out the observation of Tax experts that “this suspension will likely raise tax burdens for Indian firms operating in Switzerland and Swiss companies in India, impacting bilateral business ties.”